Sunday, August 20, 2006

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.

6 comments:

Richard Schwartz said...

You may have demonstrated that Krugman is wrong in his analysis, or at very least incomplete in his argumentation, but you have not shown one bit of evidence how his own experience as a member of the upper 1% class should suggest anything whatsoever.

Andrew Samwick said...

Krugman's argument is roughly:

If a person is in the top 1 percent, then his or her gains relative to the population over the last 25 years are mainly due to the workings of the dominant political ideology.

Krugman's own experience is a contradiction to this argument, except insofar as his keen ability to criticize that ideology has widened his audience considerably. But I don't think that's the mechanism he had in mind.

So the suggestion is merely that he test out his arguments on cases he knows best--his own, presumably--before he makes such an argument, and in so doing craft a better argument.

matt said...

I like how Krugman pointed out that Bill Clinton was bogged down with congressional "hard-line right-wingers." Presumably, because of this, Clinton was unable to stop Krugman's suggestion that "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."

OK, fine. But that movement must have gotten off to a bad start for Reagan seeing how he never had a Republican congressional majority in both Houses... Bush 41 never had a majority in either House. But at least Carter did... for all four years of his presidency...

I guess the Democratic majorities in Congress in the last 25 years were the hard-line right wingers?

Jonah B. Gelbach said...

Andrew

I'm afraid I have to join Mark Thoma:

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.

So, first, let me apologize for my mistake. I will say, though, that it was an easy mistake to make -- I had to re-read your previous post more than once to convince myself that I had, indeed, misconstrued it. More precisely, I should say that I had to re-read it to convince myself that the most reasonable interpretation of your post suggested misconstruction -- I don't think it was the clearest thing you've written (and you usually write with admirable clarity). Either way, my bad.

That said, what you were actually doing -- using Krugman's personal experience as a way to illustrate the supposed ridiculousness of his claims -- seems to me to be a pretty questionable line of attack. First, you are making an N=1 argument (all a skeptic needs to do to counter your argument in this sense is find a single counter-example). Second, I can't imagine that you really think education has anything to do with Krugman's probable outpacing of so many of his (our!) economist peers, for the very simple reason that we all have PhDs. Clearly the story has to be about skill rather than education per se -- whatever it is that Krugman and the rest of us do, he is getting paid more to do it (I'll grant you that he writes pop books and many of the rest of us don't, but again, that has nothing to do with returns to education -- rather it has to do with returns to writing ability or skill at polemicization, or whatever).

I read Krugman's article in Friday's times with about the same amount of skepticism that DeLong expressed yesterday. But even if Krugman is painting with too broad a brush on the political-primacy front, it seems to me that there is still a lot to be said for his criticism of Paulson's (and many others') suggestion that getting more education will somehow put a big dent in the extreme-right-tail sort of inequality growth witnessed over the last couple decades. It just strikes me as ridiculous to suggest that the typical kid considering dropping out of high school would have a decent shot (say, probability=0.01) of winding up in his cohort's top 1% if only he finished school and got a BA. (See my post from the other day for a bit more on this issue.)

None of that is to say that growing-returns-to-skill is a bad explanation for much of the spread in (labor) income inequality. But there can be a growing-returns-to-skill-driven widening of the income distribution even while "People at the bottom should get more education" is not particularly useful policy advice for those who are worried about income inequality. This question is really about how effective education is in transmitting the relevant skills to people situated differently in what we might call the "underlying ability distribution" (though even that term is insufficiently rich, since it doesn't capture the idea that people's "underlying ability" could have both a levels and interaction-with-education component). Given that so much of the spread in US labor income inequality seems to be driven by people within the top part of the distribution, for whom I doubt educational differences are an important distinguishing variable, I am pessimistic that education is the answer.

For the record, I would love to find that I am wrong: then we will just have to argue about whether to pursue policies to increase educational attainment and thus reduce inequality.

Jonah

Andrew Samwick said...

I appreciate your willingness to re-read the post on my behalf.

In fairness to Paulson, he did not suggest "that getting more education will somehow put a big dent in the extreme-right-tail sort of inequality growth witnessed over the last couple decades." He talked about the HS/no-HS gap, which has widened over this period and which would be made less consequentlial by having more people become highly educated. It was Krugman who interpreted inequality to be the top 1 percent versus the rest.

I think Krugman took a cheap shot at Paulson and didn't back it up. So I viewed my N=1 argument, non-generalizable as it was, as an improvement over Krugman's line of reasoning.

Jonah B. Gelbach said...

Andrew

I haven't read Paulson's speech, so I will just stipulate to your point.

I have to say, though, that you have a lot more to say on this issue than just to make a self-consciously non-generalizable, arguably cheap, and as I noted, not particularly compelling, point in response to what you perceive to be someone else's cheap shot. Cheap shot for cheap shot just leaves everyone cheap, in my book.

Personally, I do think that *both* the growth in the HS/no-HS gap and the growth in extreme-right-tail-type inequality are important socioeconomic phenomena that I would prefer be addressed somehow (what that how is, is of course the $64k question). I think the basic facts of what's gone on in -- and within the top 1% over the last 20 years has been truly stunning. I recognize that not everyone is bothered by the massive concentration in income and wealth that has resulted, but plenty of people are.

Anyhow, I'm glad you're writing on this issue -- I think it's a good thing for this debate to happen in the open among reasonable and reasoning economists of all political and empirical stripes.

Jonah