Krugman's Money Talks: When Education Doesn't Pay

Paul Krugman responds to comments on his column Graduates Versus Oligarchs:

When Education Doesn't Pay, by Paul Krugman, Money Talks, NY Times: ... Paul Krugman: Several people have asked whether the surge in incomes at the very top might be to a large extent a statistical illusion, due to lower marginal tax rates. The idea is that great fortunes went "underground" when top tax rates were high, and resurfaced when rates fell under Reagan and Bush.

It's a good question, and has been studied by economists. Let me give you a quick explanation of why I think it's a fairly minor factor. The kind of income we'd expect to see surging if wealth was hidden would be from capital — dividends, interest, etc. But the big gains have, in fact, come in high-level compensation — C.E.O. paychecks and such. In fact, the growth numbers in my article referred to wage and salary income.

Now, we can be reasonably sure that in 1970 the C.E.O. of General Motors wasn't receiving huge hidden compensation equal to several times his reported income. (C.E.O. compensation has gone from about 40 times average wages to about 400 times.) So the increase in incomes at the top is mainly a real phenomenon, not a story about tax avoidance.

One other point: a few people have asked whether there are graduates and graduates — whether serious tech degrees have paid off more than liberal arts or whatever. The answer is, not dramatically. Having an engineering degree has no more been a ticket to big income gains than being at the 90th percentile.

Comments

[calmo]

I appreciate the feedback function here that is so important in distinguishing himself from the central blowhorn.
This bit about graduates and then other graduates needs more attention.
Let's distinguish between getting an education so you can appreciate the world you live in, and getting a training that will provide you with the skills employers are looking for, so they can exploit those educated dummies who wouldn't recognize an opportunity cost if it hit them over the head. [Are you educated enough to make this distinction?] (Can you pay for that education flipping burgers?)

[Mark Thoma]

Calmo:

Good point. The role of universities and the point of an education (perhaps more than just training people for a particular job?) needs more attention in these discussions. The idea that education is a waste if it doesn't pay off financially is implicit in much that is written.

[dryfly]

The idea that education is a waste if it doesn't pay off financially is implicit in much that is written.

A lot of that has to do with the cost. Private institutions were always expensive but major state uni's weren't too bad in the past - not so anymore.

In the 70s I was able to 'cash flow' my way through the U of Minnesota... a decent part-time school year job & full time summer work back then paid enough to cover student slum housing & tuition & a trip somewhere (say backpacking though occasionally I had to hitchhike to get there).

Not so anymore. A kid would have to work full-time year around & still couldn't cover tuition and room & board at the U of MN now. When do you go to school if you work all the time??? Student indebtedness is skyrocketing as a result.

It is one thing to learn for the 'good of it' but if you come out an indentured servant then maybe 'the good' isn't so great.

[calmo]

Those people who went to school and learned how to read and write (not so much the ones that learned the skills to transform an invention/discovery into a marketable product/service) were better prepared to make political decisions and initiate political actions to defend the interests of the public than those who went to work and came home to watch TV and have those decisions made for them. [Not as over-stated as it sounds.]
Those public school charts showing our poor international standing in science and math do not mention the other aspects of education that have contributed to what some (not only international observers) claim to be a poorly educated, uncritical and easily manipulated public.

[dryfly]

Those people who went to school and learned how to read and write (not so much the ones that learned the skills to transform an invention/discovery into a marketable product/service) were better prepared to make political decisions and initiate political actions to defend the interests of the public than those who went to work and came home to watch TV and have those decisions made for them. [Not as over-stated as it sounds.]

The only question I would ask calmo is where are they now? Because when I went to school in the 70s there were a whole lot more of the former (liberal arts types who could read & write) than the latter (we 'injuneers')... Even I started out in the College of Liberal Arts then switched over to the 'Institute'.

As far as I can tell those CLA types are as silent as anyone today. In fact the biggest 'hell raisers' I know are disenfranchised techies who have seen their jobs off-shored... mad as hell & not taking it anymore. Vader & I know more than a few of those.

I'd like to think the liberal arts teach people to think... but having been in both worlds I just haven't seen the results as promised. Not worse mind you, just not better.

But then maybe you have a different perspective. Love to hear it.

[calmo]

I suppose the boomers who secured well enough paying jobs/positions and pensions to be comfortable with their retirement prospects were/are too complacant to respond to political situations with what I might call an educated, informed perspective.
That material security meant they would not rock the boat, march or participate in any dissent like the old days.
This is the core of that under-education: the best educated generation in history was still no match in the end for a lopsided interest in personal financial security at the expense of most social and many moral considerations. The Free Love was not the enduring sort.
I prefer to hammer away at a demographic slice than wade into a discussion about whether CLA or Science or Engineering types contributed unevenly to this sad level of education. The boomers self importance and self confidence that showed so much promise in the 60s and 70s, has shrivelled to self interest and maybe just plain selfishness as they approach retirement.
Yes, I want to lay this miseducation at the boomer's doorstep. Those guys who made such a fuss about the Viet Nam War. Those guys who impeached a president. Those guys who were once real citizens who could stand up and defend what they thought was right --against the status quo.
Those guys who are not standing up for much lately and grooming the less educated for their own ends.

[Lord]

Comfortable, secure, and complacent or uneasy, insecure, and impotent?

[MikeB]

Not to change the subject, but...
Since the growth in upper income share is so amazingly concentrated in the tippy-top, there is anothe aspect worth pursuing. This is the rate of turnover within that group. Are we talking about an "oligarchy" of people who spend their lives consistently earning in the top 1%, or is the typical 1%er there only for a few years, then he/she descends from Olympus (continuing to do very nicely on the interest income, thank you)
If the latter, it isn't nearly as much like an "oligarchy" the way a Latin American today or Jack London yesterday would understand it.
Does anyone know?

[anne]

The rule in endowments is that the income from a gift can be taken as 5% forever; a useful conservative rule. So, a million dollars will yield a perpetual income of $50,000 and $10 million will yield $500,000. This is quite conservative since the Vanguard high yield tax free bond fund has a yield of 4.1%, while the REIT index has an adjusted dividend of 3.7% before any capital gains. If you are wealthy and reasonably prudent, you will stay wealthy. If you are very wealthy, though there can be the spectactular exception which is of no general account, you will easily stay very wealthy.

[Mark Thoma]

Mike B:

Good question. I don't know offhand, but will keep my eyes and ears opne for the answer. Maybe we'll get lucky and someone will know and leave a comment.

[anne]

http://www.nytimes.com/2006/01/29/national/29rich.html?ex=1296190800&en=784822e4b0735ee5&ei=5090&partner=rssuserland&emc=rss

January 29, 2006

Corporate Wealth Share Rises for Top-Income Americans
By DAVID CAY JOHNSTON

New government data indicate that the concentration of corporate wealth among the highest-income Americans grew significantly in 2003, as a trend that began in 1991 accelerated in the first year that President Bush and Congress cut taxes on capital.

In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. The top group's share of corporate wealth has grown by half since 1991, when it was 38.7 percent.

In 2003, incomes in the top 1 percent of households ranged from $237,000 to several billion dollars.

For every group below the top 1 percent, shares of corporate wealth have declined since 1991. These declines ranged from 12.7 percent for those on the 96th to 99th rungs on the income ladder to 57 percent for the poorest fifth of Americans, who made less than $16,300 and together owned 0.6 percent of corporate wealth in 2003, down from 1.4 percent in 1991.

The analysis did not measure wealth directly. It looked at taxes on capital gains, dividends, interest and rents. Income from securities owned by retirement plans and endowments was excluded, as were gains from noncorporate assets such as personal residences.

This technique for measuring wealth has long been used in standard economic studies, though critics have challenged that tradition.

Among them is Stephen J. Entin, president of the Institute for Research on the Economics of Taxation in Washington, which favors eliminating most taxes on capital and teaches that an unintended consequence of the corporate income tax is depressed wage rates. Mr. Entin said the report's approach was so flawed that the data were useless.

He said reduced tax rates on long-term capital gains may have prompted wealthy investors to sell profitable investments. That would show up in tax data as increased wealth that year, even though the increase may have built up over decades.

Long-term capital gains were taxed at 28 percent until 1997, and at 20 percent until 2003, when rates were cut to 15 percent. The top rate on dividends was cut to 15 percent from 35 percent that year.

The White House said it did not believe that the 2003 tax cuts had much influence on wealth shares. It also said that since wealth is transitory for many people, a more important issue is how incomes and wealth are influenced by the quality of education....

[anne]

http://www.nytimes.com/2005/06/06/opinion/06herbert.html?ex=1275710400&en=c03b1056decb6b77&ei=5090&partner=rssuserland&emc=rss

June 6, 2005

The Mobility Myth
By BOB HERBERT

The war that nobody talks about - the overwhelmingly one-sided class war - is being waged all across America. Guess who's winning....

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000."

The social dislocations resulting from this war that nobody mentions have been under way for some time....

[anne]

http://www.thenation.com/doc.mhtml?i=20040105&s=krugman

January 5, 2004

The Death of Horatio Alger
By PAUL KRUGMAN - Nation

The other day I found myself reading a leftist rag that made outrageous claims about America. It said that we are becoming a society in which the poor tend to stay poor, no matter how hard they work; in which sons are much more likely to inherit the socioeconomic status of their father than they were a generation ago.

The name of the leftist rag? Business Week, which published an article titled "Waking Up From the American Dream." The article summarizes recent research showing that social mobility in the United States (which was never as high as legend had it) has declined considerably over the past few decades. If you put that research together with other research that shows a drastic increase in income and wealth inequality, you reach an uncomfortable conclusion: America looks more and more like a class-ridden society.

And guess what? Our political leaders are doing everything they can to fortify class inequality, while denouncing anyone who complains--or even points out what is happening--as a practitioner of "class warfare."

Let's talk first about the facts on income distribution. Thirty years ago we were a relatively middle-class nation. It had not always been thus: Gilded Age America was a highly unequal society, and it stayed that way through the 1920s. During the 1930s and '40s, however, America experienced what the economic historians Claudia Goldin and Robert Margo have dubbed the Great Compression: a drastic narrowing of income gaps, probably as a result of New Deal policies. And the new economic order persisted for more than a generation: Strong unions; taxes on inherited wealth, corporate profits and high incomes; close public scrutiny of corporate management--all helped to keep income gaps relatively small. The economy was hardly egalitarian, but a generation ago the gross inequalities of the 1920s seemed very distant.

Now they're back. According to estimates by the economists Thomas Piketty and Emmanuel Saez--confirmed by data from the Congressional Budget Office--between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent. Meanwhile, the income of the top 1 percent rose by 148 percent, the income of the top 0.1 percent rose by 343 percent and the income of the top 0.01 percent rose 599 percent. (Those numbers exclude capital gains, so they're not an artifact of the stock-market bubble.) The distribution of income in the United States has gone right back to Gilded Age levels of inequality.

Never mind, say the apologists, who churn out papers with titles like that of a 2001 Heritage Foundation piece, "Income Mobility and the Fallacy of Class-Warfare Arguments." America, they say, isn't a caste society--people with high incomes this year may have low incomes next year and vice versa, and the route to wealth is open to all. That's where those commies at Business Week come in: As they point out (and as economists and sociologists have been pointing out for some time), America actually is more of a caste society than we like to think. And the caste lines have lately become a lot more rigid.

The myth of income mobility has always exceeded the reality: As a general rule, once they've reached their 30s, people don't move up and down the income ladder very much....

[anne]

Again, remember that income and wealth allows for opportunity, but apart from external income swings think of the endowment wealth allows and keep in mind that wealth is highly concentrated in America and know that those with significant wealth can readily maintain income and wealth.

[Mike B]

Anne,
thanks for the info and comments.
I agree that wealth leads to persistently high income. But I am still wrestling with the meaning of the following:
Much of the growth of the top 20% income share seems to be due to growth of the share of the top 1%. Probably mostly CEOs and top management,but also media stars, pro athletes, etc. Many of these people may have extreme spikes in income but then fall back into the merely very high income group and are replaced by a new group of super-highs.
But it seems that the income share of the very-highs is not growing.
I'm not suggesting that the growth of the super-highs is a good thing, just trying to understand the implications for society. Because it may be quite different than a trend where say the top 20% as a group was expanding its share. It is much easier to believe that a someone in the 19th (from the top)percentile will pass on their position to their children than that someone in the top 1% will pass on their position. And the relative position of that 19th percent person doesn't seem to be improving.