Krugman on Paulson's Speech

The last post was focused on Krugman's status in the top 1 percent of the income distribution and what it implies about the quality of his argument. Some readers, including Mark Thoma at Economist's View, misconstrued it as suggesting that if Krugman is in the top 1 percent, then he is being dishonest if he advocates policies that would reduce the income of the top 1 percent.

Obviously, I don't believe that. As just one example, consider that I am in the group that would bear the full brunt of the tax increases in the Liebman-MacGuineas-Samwick plan to reform Social Security. As PGL points out at Angry Bear, I am not calling Krugman dishonest. I am saying that his own experience should suggest to him how silly his argument is.

Krugman begins by criticizing Treasury Secretary Paulson for "falsely implying that rising inequality is mainly a story about rising wages for the highly educated." You can read the full text of Paulson's speech to determine whether Krugman excerpted him accurately. (The relevant passage starts with "The final challenge I will touch on today ...")

In order for Krugman to validate that criticism, he has to show us that "rising inequality is mainly a story about ... something else." His choice for that something else is a thesis that "it matters a lot which political party, or more accurately, which political ideology rules Washington." So he's got to show us how the political ideology ruling Washington over the last 25 years has generated the following outcomes:

Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent — people with incomes of more than $277,000 in 2004 — rose 135 percent.

Here is what he says about that 25-year period:

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.

By the way: Yes, Bill Clinton was president for eight years. But for six of those years Congress was controlled by hard-line right-wingers. Moreover, in practice Mr. Clinton governed well to the right of both Eisenhower and Nixon.

Now, this chronology doesn’t prove that politics drives changes in inequality. There were certainly other factors at work, including technological change, globalization and immigration, an issue that cuts across party lines.

But it seems likely that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

It is only in the last paragraph that he describes any specific mechanisms whereby ideology might drive the outcomes. He mentions the level of the minimum wage and the tacit support for union-busting. Let's just grant him that those are relevant for the 1 percent decline in real wages in manufacturing.

But what is the mechanism for ideology driving outcomes in the top 1 percent? The only factor he mentions is tax rates for the rich, but that won't work here. His evidence for widening inequality was the growth in real income, not (from his description) real after-tax income. And if he is suggesting lower tax rates generated the boom in the top 1 percent's real income, then he's more of a supply sider than he lets on. (There may be some relation between capital gains realizations and lower tax rates, but Krugman would have to acknowledge that this reflects not differences in inequality but differences in the importance of including realized versus accrued capital gains.)

So he cites no evidence to link the policies of the ruling political ideology to the income gains for the top 1 percent. And for that, I'm supposed to accept his claim that the Treasury Secretary made false implications, by saying:

But we must also recognize that, as our economy grows, market forces work to provide the greatest rewards to those with the needed skills in the growth areas. This means that those workers with less education and fewer skills will realize fewer rewards and have fewer opportunities to advance. In 2004, workers with a bachelor's degree earned almost $23,000 more per year, on average, than workers with a high school degree only. This gap has grown more than 60 percent since 1975.

This trend dates back many years, and was evident in the recovery of the 1990s. It is simply an economic reality, and it is neither fair nor useful to blame any political party. It stems from a number of factors, including technology and U.S. integration with the global economy. Rather than playing the blame game, we must focus on helping workers move up the economic ladder.

In the race between these two arguments, Paulson is way out in front of Krugman. In my post, I suggested that Krugman's own experience would suggest how invalid his thesis is compared to Paulson's. Krugman is a perfect example of someone whose real income is high because the returns to being educated are higher, not because the dominant political ideology has conspired to increase his earnings capacity in some pernicious way.

Mark Thoma, ghost-writing a response on Krugman's behalf, suggests the following:

I'm sure that I earn a lot more than James Tobin did (I use him as an example because of how modest his lifestyle was), but it's not because I'm a better economist; it's the system that has changed.

And what I'm talking about is the system, not whether individuals have earned their places in it. Why is that so hard to understand?

Fair enough, but in order for that to support Krugman's thesis rather than Paulson's, Mark would have to tell us how the dominant political ideology, rather than simply a higher return to education, has changed that system. That's the part where Krugman needs some real ghost-writing help.

UPDATE: Related commentary by Brad DeLong and Greg Mankiw.