Thursday, September 25, 2003

Republishing from the SemiDaily Journal

A very strong essay by Paul Krugman. Too bad this is not how he writes for NYT .

An Unequal Exchange

Paul Krugman

To a naive reader , Edward N. Wolff's Top-Heavy: A study of
the increasing inequality of wealth in America
might seem unlikely
to provoke strong emotional reactions. Wolff , a professor of
economics at New York University, provides a rather dry matter
of fact summary of trends in wealth distribution, followed by
a low-key case for a modest wealth tax. Although Wolff has done
a commendable technical job in combining data from a number of
sources to produce a fuller picture-in particular his book tells
us more about both long term trends and international comparisons
that has previously been available-the rough outlines of this
story have been familiar and uncontroversial among economists
for at least the past five years.

And yet Wolff's book was the target of an astonishing barrage
of conservative attacks: multiple op-eds in the Wall Street Journal,
hostile book reviews, and so on. Why should such a mild-mannered
little volume provoke such rage?

The answer is that this is the subject on much many conservatives
are unable to hold a rational discussion. Make a mere statement
of fact-say, for example, that the top 20 percent of households
in the United States hold 85% of the marketable wealth , and
conservatives will insist that you rephrase it as " 20 percent
of the households have created 85% of the wealth. " try
to assess long-term trends in income distribution using the standard,
apolitical device of comparing incomes at the same stage of successive
business cycles, such as 1973 and 1989, and you'll be accused
of an outrageous attempt to distort Ronald Reagan's record by
mixing in the Carter years.

Conservatives are wrong about wealth inequality, but they
are not irrational. There is a method and political purpose
to their maddened reaction-a determination to deny the facts
that is dramatically illustrated by House Majority Leader Richard
Armey's new book, the Freedom Revolution. Put simply, conservatives
don't want the public to know too much because they fear it would
hurt them politically.

To understand the significance of Wolff's book, consider this
simple parable : there are two societies. In one everyone makes
a living at some occupation-say, fishing-in which the amount
people earn over the course of the year is fairly closely determined
by their skill and effort. Incomes will not be equal in this
society-some people are better at fishing than others, some people
are willing to work harder than others, but the range of incomes
will not be that wide. And there will be a sense that those
who catch a lot of fish have earned their success.

In the other society, the main source of income is gold prospecting.
A few find rich mother lodes and become wealthy. Others find
smaller deposits, and many find themselves working very hard
for very little reward. The result will be a very unequal distribution
of income. Some of this will reflect effort and skill: those
who are especially alert to signs of gold, or willing to put
in longer hours prospecting, will on average do better than those
who are not . But there will be many skilled, industrious prospectors
who do not get rich and a few who become immensely so .

Surely the great majority of Americans , no matter how conservative,
instinctively feel that a nation that resembles the second imaginary
society is a worse place than one that resembles the first.
It is also no question that our nation today is much less like
the benign society of fishermen-and much more like the harsh
society of prospectors-than it was a generation ago. The evidence
is overwhelming, and it comes from many sources-from government
agencies like the Bureau of the Census, from Fortune's annual
survey of executive compensation, and so on. And, of course,
there is the evidence that confronts every one with open eyes.
Tom Wolfe is neither an economist nor a liberal, but he is an
acute observer. When he wanted to portray what was happening
to American society, he wrote the bonfire of the vanities.

Here's a rough ( and reasonably certain) picture of what has
happened: the standard of living of the poorest 10 percent of
American families is significantly lower today than it was a
generation ago. families in the middle are , at best, slightly
better off. Only the wealthiest 20 percent of Americans have
achieved income growth anything like the rates nearly everyone
experience between the 40's and early 70's. Meanwhile the income
of families high in the distribution has risen dramatically with
something like a doubling of real incomes of the top 1%.

These widening disparities are often attributed to the increasing
importance of education. But while it's true that, on average,
workers with a college education have done better than those
without, the bulk of the divergence has been among those with
similar levels of education. High-school teachers have not done
as badly as janitors but they have fallen dramatically behind
corporate CEOs, even though they have about the same amount of

Also, the growth of inequality cannot be described simply
as the rise of some group, such as the college-educated or the
top 20%, compared with the rest; the top 5 percent have gotten
richer compared with the next 15, the top 1 percent compared
with the next four, the top 0.25% compared with the next 0.75,
and onwards all the way up to Bill Gates. The important contribution
of Wolff's book is that it reinforces the evidence that much
of the important action in American inequality has taken place
way up the scale, among the extremely well-off.

Wolff focuses on wealth rather than income-on assets rather
than cash flow. This has some advantages over annual income
as an indicator of a family's economic position, especially among
the rich. Someone with a very high-income may be having an unusually
good year, while it is not unheard of for wealthy families to
have negative income if they make a bad investment; in each case
their assets will be a better clue to where they really fit into
the rankings. More important, however, wealth is in some ways
a better indicator than income data of what is happening to the
very successful-simply because it is so narrowly held: in 1989,
the top 1 percent of families owned 39% of the wealth but received
only ( a still impressive) 16% of the income.

A particularly striking statistic in Wolff's book should put
an end to the still widespread tendency to discuss the growth
of inequality in America by tracking the fortunes of the top
20 percent, or of college-educated workers. Between 1983 and
1989, while the wealth share of the top 20 percent of families
rose substantially, the share of percentiles 80 to 99 actually
fell. In other words when we say that America's rich have gotten
richer, by the " rich " we did not mean the garden
variety yuppies-we mean true plutocrats.

Many conservatives have probably stopped reading by now, or
at least stopped being able to respond to this article with anything
other than blind anger, but for those who are still with me let
me make a crucial point about the statistics: they say nothing
about who, if anyone, is to blame. To say that America was a
far more unequal society in 1989 than it was in 1973 is a simple
statement of fact, not an attack on Ronald Reagan. Think about
the parable of the fishermen and prospectors: the greater inequality
of the latter society did not come about because it has worse
leadership but because it lives in a different environment.
And changes in the environment--in world markets or in technology--might
change a society of middle-class fishermen into a society with
dismaying extremes of wealth and poverty, without necessarily
being the result of deliberate policies.

In fact, it's pretty certain that this is what is happening
in the United States . Ronald Reagan did not single-handedly
cause the incomes of the rich to soar and those of the poor to
decline. He did cut taxes at the top and social programs at
the bottom, but most of the growth in inequality to place in
the marketplace, in the pre-tax incomes of families. ( there
is a wide range of opinion as to just what happened with the
markets, though clearly technology and the changing international
trade scene played key roles. ) furthermore, the upward trend
in inequality began in the 70's under Nixon, Ford, and Carter
and continues in the nineties under Clinton; similar trends,
if not so dramatic, are visible in many other countries.

Yet income distribution is a politicized subject all the same.
The reason is obvious: the question of inequality is relevant
for policy-making. In the fisherman society, for example, people
might feel that only invalids, widows, and orphans deserve public
support. In the vastly unequal prospecting world, however, it
is easy to imagine a broad public demand that those who have
been lucky enough to find gold be required to share a significant
fraction of their winnings with those who have not. Indeed it
is hard to see how such a redistributionist program would not
be popular--if the public understood just what was going on.

It is in the light of this possibility--that a redistributionist
policy would have broad support if people understood reality--that
we should consider Armey's The Freedom Revolution. It
is not, to say the least, a carefully written or argued book
; it consists largely of standard conservative bromides, backed
by number of unsupported assertions. But despite the book's
sloppiness, it is an important document, because of what it says
about the majority leader's intellectual processes. Armey ,
a former economics professor, could've made the case that there's
nothing that can or should be done about growing inequality.
But instead he tries to claim, in essence, that nothing has
happened -that we really are still a society of middle-class

First, Armey denies that the 80's were a period in which the
rich got richer and the poor got poorer. " the statisticians,
" he writes, " break the population into five income
groups, called quintiles . During the eighties they gained in
average real income as follows:

  • Lowest quintile--up 12.2%.
  • Second-lowest--up 10.1%
  • Middle--up 10.7%
  • Second-highest--up 11.6%.
  • Highest--up 18.8%"

The source of the data, not cited, is the Bureau of the Census's
Current Population Report. This is helpful to know, because
if you check Armey's facts you will find he is fibbing a bit.
These figures are not income gains for all of the eighties, but
only from 1983 to 1989. Immediately preceding that recovery,
the economy experienced a savage recession, the worst since the
Great Depression, that affected the poor more severely than the
rich. The first column of the table below gives the percentage
changes for the slump years from 1979 to 1983.

Percentage Income Change by Income Bracket for
the Periods 1979-1983 and 1973-1989

Income Bracket 1979-1983 1973-1989
Lowest quintile -14.2% -3.6%
Second lowest -8.1% 3.1%
Middle -6.2% 9.0%
Second highest -2.9% 14.8%
Highest -1.4% 26.0%

Conservatives will say, "The recession was Carter's fault,
while the recovery proved the success of Reagan's policies."
But put politics aside for a moment and accept this simple fact:
At the end fo the 1983 to 1989 recovery, the bottom quintile
was still worse off than it was in 1979, while the only really
large gains over the decade went to the top quintile. If one
takes the long view, as in the second column of the table (which
measures from the business cycle peak in 1973), one sees an overwhelming
picture of radically growing inequality. And one might correctly
suspect that the pattern continued inside the top quintiles,
i.e., that the top 5 and the top 1 percent did better still.

When Armey (with his Ph.D. in economics) wrote this passage,
he must have had the same table in front of him that I am looking
at now. He must therefore have known that he was, strictly speaking,
lying when he described his data as being what happened during
the "eighties," and could not have failed to notice
that, even at the end of his carefully selected period, incomes
were far more unequal than they had been in the seventies. In
other words, the passage is a deliberate attempt to mislead the

It gets even better. Armey cites a study that shows that there
is huge income mobility in America. The message here is simple:
Don't worry that some people find gold and some don't--next year
you may be the winner. He gives numbers saying that fewer than
15 percent of the "folks" who were in the bottom quintile
in 1979 were still there in 1988. He then asserts that it was
more likely that someone would move from the bottom quintile
to the top than he would stay in place. Again, he doesn't cite
the source, but these are familiar numbers. They come from a
botched 1992 Bush Administration study, a study that was immediately
ridiculed and which its authors would just as soon forget.

This is why: The study tracked a number of people who had
paid income taxes in each of the years from 1979 to 1988. Since
only about half the working population actually paid taxes over
the entire period, this meant that the study was already biased
towards tracking the relatively successful. And these earners
were then compared to the population at large. So the study showed
that in 1979, 28 percent of this studied population was in the
bottom 20 percent of the whole population; by 1988 that figure
was only 7 percent.

This means, Armey asserts, that someone in the lowest quintile
would be more likely to move to the highest than stay in place.
Put kindly, it's a silly argument. For subjects of the study
who moved from the bottom to the top, the typical age in 1979
was only 22. "This isn't your classic income mobility,"
Kevin Murphy of the University of Chicago remarked at the time.
"This is the guy who works in the college bookstore and
has a real job by the time he is in his early thirties."

In reality, moves from the bottom to the top quintile are
extremely rare; a typical estimate is that only about 3 percent
of families who are in the bottom 20 percent in one year will
be in the top 20 percent a decade later. About half will still
be in the bottom quintile. And even those 3 percent that move
aren't necessarily Horatio Alger stories. The top quintile includes
everyone from a $60,000 a year regional manager to Warren Buffett.

Armey is no fool. He cannot be unaware that he is fudging
his numbers. Possibly he regards a small fib as justifiable in
the service of a higher truth. Or possibly he has managed to
achieve a state of doublethink, in which the distinction between
what is politically convenient to believe and the objective facts
no longer exists. The end result is the same: His book is an
effort to obscure the stark realities of growing inequality.

And that is no surprise. After all, the success of free-market
conservatives in seizing the mantle of populism in America, despite
the growing gap between the broad public and a small minority
possessing astonishing wealth, is inherently vulnerable. It took
a combination of brilliant political leadership on the right
and an awesome mixture of political ineptitude, personal arrogance,
and cultural elitism on the part of liberals to give Armey and
their allies their current position of power. (I sometimes think
that the Renaissance Weekend killed the Clinton Administration.)

But despite the triumph of 1994, there is always the risk
that someone will point out that there are now quite a few men
in America who each make more money every year than the entire
House of Representatives, and that it is these men who will be
the most conspicuous beneficiaries of the new majority's politics.

As far as Armey and his allies are concerned, the answer to
this risk is simple: The public must not know how well the rich
have done compared with the rest. If a new study points out just
how much income and wealth have become concentrated, deploy the
forces of the conservative media to attack the data with every
spurious argument imaginable. There are always plenty of places
to publish such attacks and people to write them because the
rich are different from you and me: They have (a lot) more money.
In particular, they own magazines and newspapers, and readily
support think tanks staffed with people whose job, whatever its
formal description, is to support the interests of their donors.
As H.L. Mencken once pointed out, it is difficult to get a man
to understand something when his income depends on his not understanding

The uneasy politics of free-market populism are also probably
a major reason why the Republican majority in Congress seems
determined to mount an assault on economic analysis in general--not
only to eliminate the President's Council of Economic Advisors,
but to eliminate all National Science Foundation funding for
the field, and to slash the budget of the Bureau of Economic
Analysis (which provides the basic data on national income).

The irony is that much of this research provides support for
Republican free market ideology. But the motivation for cutting
the funding is easy enough to understand: If your doctrine depends
on a view of the economy that is flatly contradicted by reality,
then the fewer facts, the better.

Edward Wolff has written a good book, while Richard Armey
has written a terrible one. The real message, however, comes
from the contrast between them--between the mildly liberal economics
professor who is disturbed by the trends in our society and would
like to make a small effort to ameliorate them, and the tough-talking
conservative who is determined to deny the reality of these trends
and to smash anyone who reports on them.

May the better man win.

*Who does, however, still need to profoundly apologize for various unfair comments made about the very, very capable Laura D'A. Tyson in 1992-1993.


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