Description

This paper explores the presence of political cycles that are contingent on inequality. I claim that high inequality leads to high policy uncertainty as pressures for redistribution increase at the same time that the richest become politically more powerful. This higher policy uncertainty harms the economy through channels already studied by the literature. Using data for the US from 1947 to 2014 I find supporting evidence for this mechanism. Only when inequality is sufficiently high, policy uncertainty spikes during an election and GDP falls below its trend thereafter.