Friday, August 18, 2006

Paul Krugman on Inequality

Paul Krugman, a highly educated man, leaves himself out of his own column today in "Wages, Wealth, and Politics." The excerpt:

But he [Treasury Secretary Paulson] quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that “it is simply an economic reality, and it is neither fair nor useful to blame any political party.”

History suggests otherwise.

I’ve been studying the long-term history of inequality in the United States. And it’s hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington.

Since the 1920’s there have been four eras of American inequality:
  • The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.
  • The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.
  • Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.
  • The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. 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.
What’s noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen.
I'll forgive him the odd switches between real wages and real wages in manufacturing, as well as the comparisons of wages for one group with income for another group. I'll even agree with him about his (later) discussions of where Republican Eisenhower and Democrat Clinton fit in their respective eras. I'll even forgive him the seemingly obvious point that in the "New Gilded Age," the income gains do seem to be at the high end, refuting his critique of Paulson's first point (under the very reasonable assumption that the top 1 percent is on average "highly educated.")

What always puzzles me about Paul Krugman and his claims about inequality is why he doesn't seem to realize how silly he sounds when he refuses to acknowledge, and take some pride in the fact, that he is part of that top 1 percent. I find it hard to imagine that Paul Krugman's income in 2004 wasn't above $277,000, between his income from his university, his speaking engagements, his books, his columns, and his investments.

Now, does Paul Krugman think that he was just a tool of the "New Gilded Age" politicos? Does he owe his income gains to the people he despises, those nasty Republicans and that ridiculously centrist Clinton? I'd like to know. I suspect that if you asked him why his income grew to the point where he's in the top 1 percent, he would give some long answer, the shorter version of which is that he's "highly educated" and he's not lazy.

And the salient fact about this explanation is that it is accurate. Krugman's about as highly educated as you can get. He's got plenty of skills and occasionally (though not here) a good argument. People like what he does and he gets paid for it. Good for him. But good for Secretary Paulson as well, since Paul Krugman's own experience supports both parts of Paulson's assertion.

20 comments:

Andrew Samwick said...

Bibamus will now tell me I'm being silly.

eightnine2718281828mu5 said...

---
under the very reasonable assumption that the top 1 percent is on average "highly educated.")
---

Compare the top 0.1% vs the top 5%; I doubt you'll see much difference in education levels. In fact, I'd guess that there may be an actual decline in education levels.

One potential reason for my expectation is that we're social critters, and personal/family contacts provide a very valuable form of 'capital' not available to those further down the food chain. (Social Darwinist reference intentional)

There's no reason for Paris Hilton to get a PhD, and you could look in the oval office for additional support of this theory.

I would also anticipate that Krugman would admit to a certain amount of luck in his situation. In our 'winner-take-all' system, luck has a not insignificant influence on outcomes.

Anonymous said...

A dollar an hourincrease in the present federal minimum wage would improve the well-being of a very large number of American wage earners. And, I doubt very much if the relative income of the top 20 percent of Americans would be adversley impacted.

Lord said...

I think Krugman would be more than willing to admit personality, connections, and luck played more than a minor role, and probably much more than education and hard work. If you want to see what hard work brings, just examine the life of any minimum wage worker.

Jonah B. Gelbach said...

Andrew

I think you're entitled to the "Good for the top 1%" part of your argument -- there's no arguing with preferences over inequality (and, to the extent that it holds, preferences over the tradeoff between equity and efficiency).

But I found your personal criticism of Krugman quite odd. You are vexed by Krugman's simultaneous (a) being part of the top 1% and (b) criticizing the GOP for pursuing policies that further the gains of the right tail, at least some extent at the expense of others with lower incomes.

But why? What problem do you really have with someone who has benefited from -- in his view -- wrongheaded policies making a point of criticizing those policies? Surely you don't expect Krugman to quit his activities or donate his proceeds just to avoid doing well himself. His point is not that it is unpleasant to be very well off, but rather about the social costs he perceives to be associated with the underlying trends that have made him so well off.

Whether or not you agree with him about the existence or extent of such costs, I don't see why you aren't willing to grant him the right to criticize policies that have benefited him. In fact, I think his willingness to advocate raising taxes on top earners -- even though he'll be one of the people paying -- is rather laudable. (Compare, for instance, the emphasis on personal-responsibility of folks like Claude Allen -- now there is a hypocrite.)

I'd have expected you to credit him for consistency that comes at a cost, rather than calling him out for living his economic life subject to the budget constraint created by both markets and policy while also pressing his views regarding better economic policy.

Jonah

Anonymous said...

.... since you're saying it matters, what exactly is your annual income, Andrew? Not trying to be rude, but since Krugman's income is apparently worth mentioning, why shouldn't yours, or mine for that matter, be known?

eightnine2718281828mu5 said...
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eightnine2718281828mu5 said...

Jonah:

You don't get it do you?

The well-to-do can't criticize these policies without being branded hypocrites, and the less well-off fall prey to charges of petty jealously.

Heads I win, tails you lose.

Richard Schwartz said...

The top 1% of your students get citations. (I presume that is still done, as it was in my time.) If those citations were now redeemable for a large cash reward, would the students have reason for additional pride, above and beyond that of students who got the citations in past times when they were worth only a pat on the back?

And consider the 1% at the top of the Dartmouth graduating class. As an alumnus, I know that some of them will take high paying positions that put them in the top 1% income bracket, but some will not. Those who choose lower-compensated paths are still highly accomplished -- and it is evident to me that many of them have greater reason to be proud of the path they have chosen than their more highly-compensated classmates.

Asking Krugman why his income grew to the top 1% may elicit the response you suggest, but that's the wrong question.

And since I'm sure you know that it's the wrong question, I have to wonder why, besides taking a gratuitous dig at Krugman, you would ask it.

Ask him instead why his top 1% income is, in absolute terms, so much higher than the top 90% income of a nearly as well credentialed colleague. And to address the point he is actually making, ask him instead why the absolute difference between his top 1% and his colleague's top 90% income is so much greater (constant dollar adjusted, of course) than it would have been 25 years ago.

Michael Darnton said...
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Michael Darnton said...

Andrew, Just to be perfectly clear here, fully 1/3 of your piece is devoted to a strictly ad hominem accusation. Is that the best you can do?

And then, to make things worse, most of the rest of you accept this as a legitimate point, and respond to it. No wonder things are a mess!

Anonymous said...

The question I keep asking is: When will Fox News punditry and smear replace science itself?

Movie Guy said...

If only you fellows would stop playing tag with one another and discuss current as well as developing economic situations.

We should be discussing the impact of the new federal pension legislation signed into law last week, or Ford Motor Company's announcement on Friday.

There are better subjects, Andy.

MG

>>

Buce said...

"What always puzzles me about Paul Krugman and his claims about inequality is why he doesn't seem to realize how silly he sounds..."

What's interesting about this argument is not just that it's a bad one, but that the author seems sincere. His view seems to be that no one with an income over $277,000 a year would ever support anything but the most regressive sort of policy. Might be true in his circle, butg if so, he needs to get out more.

eurozone said...

I agree it isn't logical to assume just becaues Krugman is rich that he wouldn't support progressive policies.

It says something that Samwick allows criticism against him on his blog. DeLong would have deleted it all by now.

Anonymous said...

I agree 100 percent with Jonah B. Gelbach.

Yes, we can disagree about the importance of inequality in our society. We can also have a debate on the driving factors of inequality and government policy might only play a minor role as compared to, say, technological change.

But what is wrong about criticizing government policy, even if you benefit personally from it?

Andrew Samwick said...

Some have criticized this post for being an ad hominem attack. I do not believe that it is.

Suppose that Brad DeLong had written the NY Times column instead of Paul Krugman. I might have commented to Brad that Krugman is an example of someone in the top 1 percent who has not arrived there as a tool of the dominant political ideology. Brad would have had to acknowledge that I provided a counterexample to his theory. It is no less valid to cite Krugman as a counterexample to discredit the theory if he is the one who wrote the NY Times column.

Providing a counterexample is an attack on the soundness of an argument, not the person making the argument. But that's not to say that I don't make judgments about Krugman in the post. I clearly do.

If Brad had written the column, I wouldn't have deemed him "silly" for failing to realize that Krugman's personal experience was inconsistent with his theory. But I did so for Krugman, because I do regard it to be silly to propose theories which one's own experience serves to discredit, at least without explaining why such a seemingly obvious counterexample is atypical.

Anonymous said...

Mr. Samwick, are you really an economist? Since when a single example proves a trend? You criticize Krugman for minor inconsistencies in his data and then bravely refute it by a statistics of one. I see... Let me suggest a counterexample of my own, Bill Gates, probably the richest man in the world, is _not_ highly educated.

More interestingly, in a typical american fashion, both Paulson and you confuse correlation with causation, the fact that educated people tend to be richer does not necessarily lead to a conclusion that they are richer _because_ they are better educated, it might well be that the opposite is the case, like richer people are getting better education (especially when it's not free, like in USA), or, believe it or not, even something else, like belonging to a ruling elite might facilitate both income _and_ good education. These kinds of fallacies are known to everybody who attended a logics course. Well, so much for good education of our economics professors...

Another implicit assumption in this discussion is the availability of education for everybody, so Paulson's argument is really about some people being lazy, or stupid, or irresponsible, etc. Well, one doesn't need to be an economist to see that this assumption is obviously false, just ask how much a year in Dartmouth cost...

Now about "economic reality", which is supposed to explain away this correlation, by some kind of natural law, like gravity or 2x2=4. Well, there is no such law, and there are examples when better education does not necessarily lead to better income, like Russia, etc.

All this is trivial, of course, although not as interesting as counting Mr. Krugman's money. By the way, isn't it supposed to be poor people's favorite pastime? Why in the world an esteemed professor would sink so low? Well, there are reasons for this, of course, and very serious ones. Dr. Samwick's invective against Dr. Krugman is not a personal attack, of course, it's more like a thinly disguised threat, like, boss is paying you all this money and expects something in return, and what the heck are you doing biting the hand that feeds you and risking not only your own stature, but also that of the whole profession. This is intended for Krugman himself, and for the greater public the point is to discredit him, like, Krugman is posing as one of you when in fact he is one of us, why would you want to believe him, etc. Do they teach these tricks in ecomomics classes? I wonder...

Andrew Samwick said...

Krugman argues that rising inequality is better explained by the political ideology ruling Washington than Paulson's contention that rising inequality is a matter of higher wage growth for the highly educated.

You should acknowledge that Krugman presents no evidence of any consequence in his article to support his argument. With that low standard of proof as a starting point, I provide one data point that favors Paulson's explanation over Krugman's. It is an improvement.

And, yes, they do teach that in economics classes, among other helpful tools that Krugman could have used to make his point.

Anonymous said...

Don’t believe one optimistic word from any public figure about the economy. They are all part of the problem. Its like a game of Monopoly. The richest 1% of Americans now hold more than 1/2 OF ALL UNITED STATES WEALTH. That is more than the upper, middle, and lower classes combined. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the state of our economy. Now, a recession is inevitable. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. But the rich won’t stop. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. This is going to end just like a game of Monopoly. A total collapse of the US economy. Probably within a decade. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. So Don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street. Remember: They are filthy rich EVEN AFTER their tax deductable contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. Crime, poverty, and suicide will skyrocket. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that simple equation at the top of this entry. Anyway, they are all related. If it weren’t for the OBSCENE distribution of wealth within our country, then the middle class would have had a much better bottom line over recent years. There never would have been such a market for sub-prime. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. Anyway, the credit industry has been endorsed by people like Oprah, Ellen, Dr Phil, and many other celebrities. So don’t fall for their ‘humanitarian’ BS. ITS A SHAM. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. God help us.