Unequal Incomes, Ideology And Gridlock: How Rising Inequality Increases Political Polarization

John Voorheis

University of Oregon – Department of Economics

Nolan McCarty

Princeton University – Woodrow Wilson School of Public and International Affairs

Boris Shor

Georgetown University, Department of Government

August 21, 2015

Abstract:

Income inequality and political polarization have both increased dramatically in the United States over the last several decades. A small but growing literature has suggested that these two phenomena may be related and mutually reinforcing: income inequality leads to political polarization, and the gridlock induced by polarization reduces the ability of politicians to alleviate rising inequality. Scholars, however, have not credibly identified the causal relationships. Using newly available data on polarization in state legislatures and state-level income inequality, we extend previous analyses to the US state level. Employing a relatively underutilized instrumental variables identification strategy allows us to obtain the first credible causal estimates of the effect of inequality on polarization within states. We find that income inequality has a large, positive and statistically significant effect on political polarization. Economic inequality appears to cause state Democratic parties to become more liberal. Inequality, however, moves state legislatures to the right overall. Such findings suggest that the effect of income inequality impacts polarization by replacing moderate Democratic legislators with Republicans.

Unequal Incomes, Ideology And Gridlock: How Rising Inequality Increases Political Polarization – Introduction

Political polarization is one of the most widely discussed transformations of the American political economy. The ideological distance between the two major political parties has risen substantially since the 1970s. This rise has coincided with a dramatic rise in income inequality over the same period. Because in the American system polarization tends to lead to gridlock and a decrease in the legislative capacity, the rise in political polarization has been blamed for a decline in the ability of governments to respond to the observed increase in inequality. Thus polarization may contribute to the propagation of inequality over time, even as polarization itself may itself be partly caused by increases in inequality.

Previous analyses of the potential relationship between income inequality and political polarization have credibly identified causal effects in either direction, despite the fact that there is a wealth of theory suggesting that there should be a causal relationship. Use of newly available data on state-level income inequality (Voorheis, 2014), state legislative political polarization (Shor and McCarty, 2011), and an under-utilized identification strategy (a variation of Boustan et al. 2013) allows us to identify the causal effect of state income inequality on state legislative political polarization.

We find that income inequality has a statistically significant, positive, and quantitatively large causal effect on political polarization. We find substantial heterogeneity in this main effect, however. Previous work has documented that polarization in the US Congress is strongly asymmetric in the postwar era; the median of the Republican party has moved further to the right than the median of the Democratic party has moved to the left.1 In contrast, we find evidence for a different asymmetry: within-state inequality has a statistically significant effect on the median position of the Democratic party, but we find weaker evidence of an effect on the Republican party median. We explain this seemingly counter-intuitive result by extending the analysis to consider how income inequality affects the partisan balance of the legislature. We find that income inequality shifts the median ideology within state legislatures to the right, and increases the share of seats held by Republicans. This is consistent with the effect of income inequality on polarization working primarily through a composition effect, where moderate Democrats are replaced by Republicans, resulting in a more liberal Democratic party.

We supplement our state-level analysis by investigating the cross-sectional correlation between individual legislator ideology and income inequality at the state legislative district level and the correlation between legislator ideology and inequality across state legislative districts. Using estimates of within-district and between-district income inequality from the one-year files of the American Community Survey (ACS) from 2005-2011, we find that greater within-district income inequality seems to push Republican legislators to the right, while greater between-district inequality seems to push Democratic legislators to the left.

Section 2 briefly surveys the relevant literature on inequality and polarization. Section 3 describes our data and identification strategy for estimating causal effects of state-level income inequality on legislative polarization. We present and discuss our empirical results as well as a series of robustness checks, in Section 4. Section 5 turns to the question of whether income inequality correlates with legislator ideology at the individual level. We conclude with directions for future research and some potential policy implications.

Income Inequality

Income Inequality

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