Redistribution, Polarization, and Ideology

Why doesn’t rising inequality encourage income redistribution? The standard model posits that the more concentrated are income and wealth, the more the median voter values redistribution. Yet despite the marked increase in U.S. inequality, redistribution has barely changed. I approach this puzzle from a fresh angle by considering the role and nature of polarization for the politics of redistribution. While inequality increases voting elasticity with respect of redistribution, polarization has the opposite effect, thus reducing parties' accountability towards voters. But without further structure, inequality and polarization’s effects on redistribution cannot be determined. I demonstrate that for polarization to discourage redistribution, ideology must be a ``normal good'', i.e. its importance for the voters needs to rise with income. Using data from the American National Election Study and the Census, I verify that this is indeed the case. Armed with this result, I use the model to assess the effects of inequality and polarization on redistribution within no-inequality and no-polarization counterfactuals. Effects of ``income elastic'' ideology can account for the stability of redistribution policy, and shed light on the economic implications of political extremism. - Highlight the role of ``ideological salience'' (= importance that voters place on ideology); develop a model of party competition where voters are heterogenous in: 1. income, 2. ideology, 3. ideological salience to analyze the effect of income inequality and party polarization on redistribution. The results depend on the sign of the correlation between income and ideological salience - Validate the model: use survey data to estimate correlation between income and ideological salience via maximum simulated likelihood - Counterfactual analysis: calibrate the model to decompose effects of inequality and polarization - Model: 1. Inequality and polarization push redistribution in opposite directions 2. Sign of effects depends on which group (richer or poorer voters) cares more about social issues (has higher ideological salience) - Empirical analysis: income and ideological salience are positive correlated. In terms of the model, this implies that inequality increases redistribution, while party polarization decreases it - Counterfactual analysis: 1. Estimates of ideological salience, plus contemporaneous increase in inequality and polarization in 1980-2008, can account for stability of redistribution 2. Larger effect for Republican party