Paul Krugman: Graduates Versus Oligarchs

Paul Krugman on the 80-20 fallacy:

Graduates Versus Oligarchs, Rising Oligarchy, by Paul Krugman, Commentary, NY Times: Ben Bernanke's maiden Congressional testimony as chairman of the Federal Reserve was, everyone agrees, superb. ... But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education."

That's a fundamental misreading of what's happening.... What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite. I think of Mr. Bernanke's position ... as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group ... the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization...

The truth is quite different. Highly educated workers have done better than those with less education, but ... real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

So who are the winners from rising inequality? ... A new research paper by Ian Dew-Becker and Robert Gordon ... gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only ... about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint. Just to give you a sense of who we're talking about: ... the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The ... 99.99th percentile [is] probably well over $6 million a year. ...

The notion that it's all about returns to education suggests that nobody is to blame for rising inequality, that it's just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.

Should we be worried about the increasingly oligarchic nature of American society? Yes ... Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There's an arrow of causation that runs from diverging income trends to Jack Abramoff ...

And I'm with Alan Greenspan, who ... has repeatedly warned that growing inequality poses a threat to "democratic society." It may take some time before we muster the political will to counter that threat. But the first step toward doing something about inequality is to abandon the 80-20 fallacy. It's time to face up to the fact that rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates. [Link to Dew-Becker and Gordon paper, includes comments from Ian Dew-Becker on the paper]

Previous (2/24) column: Paul Krugman:  Osama, Saddam and the Ports
Next (3/3) column: Paul Krugman: George the Unready

Comments

[save_the_rustbelt]

I will be the first to say it.

Krugman is exactly right on this issue.

I have seen this in the construction of "monster homes" for some time.

To be fair this started to pick up a head of steam int he Clinton administration. And then there is the Shrub....

[Winslow R.]

"It's time to face up to the fact that rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates."

I second STR but how does Krugman know it's time?

If Bernanke had any other 'expressed' view would he be in the position that he is in? Chosen to be the firewall between the political elite and the masses while allowing for the maximiziation of disparities?

The limit has not been reached and from looking at countries with stable governments such as North Korea, things could get much worse. Perhaps, he is hiding his credentials of 'guardian against depression' until he starts hearing real screams of anguish? I hear none where I live. Even the homeless seem content or at least apathetic.

[Bruce Wilder]

The extent to which apathy rules is amazing to me. I am certainly not apathetic. I am seething with anger, and not just about rising income inequality. I am more angry about the apathy, I think -- the not caring about the truth, about real moral principle. I am sickened and ashamed that my government is torturing people, for example.

Krugman amazes me, with one blunt column after another, but it also depresses me, when the Light of Krugman reminds me about just how truly awful the Media have become. The Washington Post now has a right-wing ombudsman, who thinks her job is to balance out the left's demands for factual accuracy with sops to the demands of the Right for misleading propaganda. The Sunday Morning political talk shows are dominated by Right-wing ignoramuses spouting cant.

And, all so Richard Mellon Scaife, can, what? What does that greedy, stupid man want? And, why does he want it?

[Winslow R.]

"In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal."

http://www.pkarchive.org/cranks/LivingWage.html

I have to disagree with Krugman, labor is not a market price like apples or coal in many ways.

Labor cannot be stored like apples and coal.
Apples do not pay taxes.
Coal does not feed it's family.
Etc.

[camille roy]

If you are discouraged about general apathy and a passive press, I've got a hot head article for you. This appeared in the SF Chronicle, and it is a passionate diatribe against Bush and his influence in the world.
"America, Narcoleptic Pit Bull":
http://tinyurl.com/hq47a

Perhaps the tide of resistance is rising!

[Phil]

Isn't being a "college graduate" a poor category to look at? I think it would be more appropriate to break this down into college graduates with "hard" skills (e.g., science, finance, engineering) vs. those with "soft" skills (i.e, english, art history). I see the global job market increasingly bifurcating into those with skills and those without skills, where the jobs for those without skills either get offshore outsourced or have a decreasing wage. Those with skills don't see their wages inflate as fast as they did in the past because the skilled labor pool is much larger (read, lots of really smart Indian and Chinese engineers). But, there's still demand for these skills, just not enough to drive up wages.

[Ian D-B]

One thing that's interesting in all of this, and is often left out, is where the top of the income distribution gets their money. Krugman here is quoting results that refer only to wage and salary income. But if you look at Piketty and Saez's work, what's actually happened over the past century is that the richest people have stopped getting all their money form capital income, and now get it much more from wages. It's no longer a few barons owning companies and earning the returns on their property. Rather, it seems that there are a bunch of very highly paid executives.

It really makes one wonder about whether the labor vs capital share paradigm is the correct way of looking at things. Maybe it's more a rent-sharing model, in which case the post from this weekend (who gets the cookies) on labor competition from abroad is really important. There isn't one return to labor and one return to capital. There is just a fight between workers and bosses over who gets what, and if there's some desperate labor around then the going rate will fall. I don't know. MPK and MPL and all are hard to argue with...

[reason]

Winslow R.
Did you read the whole of that Krugmann piece you linked to?
You and he do not disagree about ends in the least. He is just arguing that the market is amoral and cannot be relied upon to produce moral outcomes. To produce moral outcomes you need to supplement the market not corrupt it.
Krugmann is an impressive mind, and he is on "our side".
Maybe now he will address issues about why so small a minority are getting such a large share of the income. Some thoughts:
1. Accumulation - money makes money (and largely avoids tax).
2. Class warfare (Ian D-B your point?) - owners co-opt managers to be more ruthless by paying them vast sums to suppress their consciences.
3. Lack of competition - winner takes all markets etc. (See discussions about good deflation, why lower costs are resulting in higher profits and not lower prices etc)
4. A (very) corrupt political system.

[chuck roast]

“So who are the winners from rising inequality? ... A new research paper by Ian Dew-Becker and Robert Gordon ... gives the details.”

Krugman would have us believe that this is, as my old-man used to say, a “news-flash.” He is well aware that US economists have studied the phenomenon of an entrenched oligarchy in the recent past and have reached similar conclusions. Unfortunately, they are members of our very own caste of “economic untouchables,” and heaven forbid if they ever reproduce.

Please see:
“Schooling in Capitalist America” Bowles & Gintis, 1975; “Schooling in Capitalist America Revisited” 2002; and “Intergenerational Inequality” Bowles & Gintis, 2002.

We can only hope that the economics profession eventually opens up to embrace these types of thoughtful and penetrating thinkers, and that for once, ontology doesn’t recapitulate phylogeny.

[ken melvin]

Most Americans haven't caught on to the implications of wealth transfer that accompanies the Microsoft, Oracles and Exxons of the world still thinking it is all part of the American Dream and that they too have a shot. Kinda like Lotto, hyuh?

[jm]

Ian D-B is mostly right but errs on an important technical point with "the richest people have stopped getting all their money form capital income, and now get it much more from wages." More precisely, they get it much more from immediate sales of stock acquired at below-market prices through stock options (which for tax purposes are treated much like wages).

An important phenomenon I've rarely seen mentioned in the press is the degree to which the serial bubble-blowing of the Fed has transferred vast wealth into the hands of the well-placed* by making particular businesses insanely profitable for short periods of time.

In the tech-stock bubble we saw huge fortunes made by ground-floor employees of companies that went public at the peak of the boom (and the venture capitalists and financial industry insiders). In the real estate bubble we see mortgage-lending and construction-industry executives reaping the gold. Last time I looked, Toll Brothers execs had cashed out (if I remember correctly) about $600 million (but the stock has never paid any significant dividends).

Bubbles also pump large amounts of wealth through to non-oligarchic fortunates by driving malinvestment. It's a safe bet that a lot of small-business owners in housing construction related businesses are making profits much larger than they would without the bubble, such that the more intelligent among them who manage so as not to lose it all in the coming bust will be set for life.

*often more by luck of the draw than by oligarchic privilege

[Ian D-B]

jm,

You're right about the stock options issue, but there's no data on that so we can't really know how much income comes from options. Also, the standard interpretation of the wage versus capital share of income from options is that the Black-Scholes value when issued is wage income and anything after that is capital income. So the simple fact that much of wage income is in the form of options doesn't mean it's actually capital income in disguise.

[Winslow R.]

Predicting What Will Happen in Economic Future 2/27/2006

reason wrote:

"Winslow R.
Did you read the whole of that Krugman piece you linked to? You and he do not disagree about ends in the least. He is just arguing that the market is amoral and cannot be relied upon to produce moral outcomes. To produce moral outcomes you need to supplement the market not corrupt it."

The unregulated market is an amoral market. Krugman is arguing that 'labor' is part of that market.

I am arguing that a market requires a balance between 'willing sellers' and 'willing buyers'. With the inability to store labor there is not a true 'market'. With the requirement that people pay taxes only with a 'monopoly' currency, there is not a true 'market'.

History has given us representative democracy to address the amoral market. Many people have fought and died for the ability to vote. Krugman ignores 'the people' , their vote, and their regulations are an interegal part of the market. 'The people' have the ability to give the market morality through their government. Through government we create a 'moral market' acceptable to 'the people'.

Krugman wrote:
"In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away."

His dismissal of the ability of government to regulate the market strikes me as an attempt to preserve his 'conservative creditials'. Too many 'liberal economists' follow his lead, to write stuff like this. As Krugman has quoted, in the 'long run' he may be right, but in the long run we are all dead.

[Lord]

The rate of new discovery and invention has been on the decline and the increase in disparity increases the motivation for renewed entrepreneurship. Some will yield more discovery and invention while the rest may lead to increased power seeking. Expect to see calls for preserving the republic even as empire displaces it.

[save_the_rustbelt]

One of the bigger problems is that public stock companies are not run for the benefit of shareholders or employees, but for the benefit of executives and board members.

Not that much has changes since Sarb-Ox, most of the "financial experts" on boards are crony CEOs just like before.

Solution? Repeal Sarb-Ox and have the SEC appoint 2/3 of board members to public stock corporations.

That should shake up the crony class.

[calmo]

This bit:
But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent.
is a worthy advance on the 80-20 view (a somewhat uncharitable view of Bernanke who sees much more than this)[And this remark about that view, an understatement of Bernanke's role as per Winslow's "If Bernanke had any other 'expressed' view would he be in the position that he is in?"]
This bit:
real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

is an advance against growing (but bogus) claims of shortages of qualified candidates.

It is a good start, but there is much more to unravel in this picture than the 99.99 percentile and the irrelevant role of education (really, training at the expense of education).
This bit: Yes ... Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There's an arrow of causation that runs from diverging income trends to Jack Abramoff ...

brings us up to date with only some of the current (and minor) figures in this narrative. There is a list of top income earners and one could distill from that list where and how the wealth is acquired, transferred and concentrated among these few families. It's not the mafia. It's worse.

[anne]

Quite a nice essay and conversation, but remember Benjamin Friedman's work on the humane potential of growth and the danger of growth that is socially limiting.

Dear STR, I enjoy watching you struggle with yourself :)

[im1dc]

I can tell from reading the comments above that not one of you read David Cay Johnston's superb book "Perfectly Legal" where he thorougly discusses the same Top 1%, Top 1/10th of the Top 1% and then the Top 1/10th of the top 1/10th of the Top 1% of American Taxpayers and came to the same conclusion as Professor Krugman: The Top income group in America form an Elite.

This Elite is not benign however, it protects its own, works secretly out of sight of the public, uses it money to buy power, influence, friends in high places as well as perferential legislation and believes with all sincerity that they deserve what they have (the higher up the ladder you go more inherit their wealth) and want to make sure as little of it or even none of it goes to support other Americans or the American Government.

Fred Alger of Alger Money Management got citizenship in a European country tax haven outside of Switzerland and was moving his entire estate worth several Billion dollars over there and not paying a dime on the money to the US tax man. September 11th killed his brother in one of the WTC towers and he had to stop and come back, dual citizenship, to get the company he founded back up and running.

Oh, and according to David Cay Johnston, the Pultizer winning journalist, many of America's richest people and families don't pay taxes because they don't have any income to report so they don't report any.

Its nice when you can arrange your affairs so that you have no money yet live like a Billionaire, eg., take trouting fishing trips to Chili by corporate jet, helicopter to the Andes for a personally guided trip to the best streams and lakes for an afternoon of fishing before jetting back to a 5 Star penthouse overlooking the bay with meals prepared for you in your room all charged to and paid by one or more of your operating companies.

The children of the top 1/10th of 1% are given positions with their parents corporations earning $50,000 a year, or more, that mimics allowance money to them, i.e., pocket money, (they do report and pay taxes on that income).

What Paul Krugman editorialized about today is simply beyond your all of your collective comprehensions.

WAKE UP. Become informed.

[anon]

Maybe you should actually read the comments, including who they are from, and read this blog for awhile.

Makes you like kinda silly.

[im1dc]

anon says: "Maybe you should actually read the comments, including who they are from, and read this blog for awhile. Makes you like kinda silly."

anon, I have for a couple of months and I am generally impressed with the comments.

However, this is one subject where I am knowledgable and decided to comment.

After all if you have to resort to the Logical Fallacy of Appeal to Authority (argumentum ad verecundiam) that tells the world you are impressed with credentials but not ideas, facts and reason.

BTW, I'm not awed by Economists, forgetabout 'overawed', remember the fiasco called LTCM?

Not only did they have prestigous Economics Ph.D.'s from prestigous Uni's they had Nobel Laureates that proved they knew what they were talking about.

Would you invest your money with them today?

Oh, I forgot, you can't. They went BANKRUPT: personally, professionally and corporately. They hit the TRIFECTA and LOST.

You want to post to me bring your 'A game', snide I do without.

[dryfly]

However, this is one subject where I am knowledgable and decided to comment.

We got the message & many here understand what you said.

I've tried really hard to make other wage slaves like me understand there is 'wealth' & there is 'money'. While money is a form of wealth it is not the only form & is not even a very good one at that... Too easy to track & tax.

The real rich - super rich - convert only the wealth they absolutely must to money through visible transactions. Instead they try to keep as much of it 'hidden' as possible in trusts & RE & privately held companies... and untaxed to a great extent. Think of it as 'stealth wealth'. There in force but out of sight and it sure doesn't stop growing just 'cause we don't see it.

Eliminating estate taxes makes this really easy & all but guarantees we'll have a permanent oligarchy. That is until a real crash hits... 1929-like. Or World War. Or both. There are social forces that act as levelers even more powerful than the tax man.

In my estimation this concentration of super wealth is the most dangerous current trend... economically, socially & politically. What the super rich don't know is it is more dangerous for them than for many if not most of us... if they doubt what I'm saying then they should channel the spirits of Marie Antoinette & King Louis or the Romanovs. It can happen again - whole families erased.

[anon]

Then you realize that one of the commentors you claim to know more than is one of the authors of the article (Ian D-B)?

Yeah I know you aren't impressed. So, where can I read your papers on this topic?

[save_the_rustbelt]

Dearest Anne:

The only thing I am struggling with is a wretched head cold made worse by wretched weather. Otherwise no struggles here.

Perhaps it is time to abandon the rustbelt and go somewhere warmer.

For now, please be aware that any posts made today were made under the influence of Nyquil, a potent and dangerous concoction.

says...

I hope this isn't in the "asked and answered" category. Is Krugman referring to income (the term is income inequality), or both income and wealth? Does it matter?

says...

Income. Wealth is much harder to measure and track. Does anyone know how much wealth you have, even you?

says...

Thanks. I guess that means we don't know if it would be better/worse with wealth. Assume it would be worse (the inequality at very top).

[Winslow R.]

Anne wrote:

"but remember Benjamin Friedman's work on the humane potential of growth and the danger of growth that is socially limiting."

Benjamin M. Friedman wrote:

"To answer Amitai’s question on whether it was growth or distribution of the growth that drives moral progress, the answer is that it is broad distribution. To paraphrase former senator Lloyd Bensten: I knew Jack Rawls, Jack Rawls was a friend of mine, I am no Jack Rawls. Instead, my point is that income growth for the middle three-fifths of the population is important for moral progress."

http://www.aei.org/events/filter.all,eventID.1221/summary.asp

I've read very little of Ben's work but have to wonder, is it income growth for the middle three-fifths of the population that drives morality, or is it morality that drives income growth for the middle three-fifths?

says...

Good question.

[anne]

STR

There are even colds in the tropics :) When you are well do get a flu shot even this late in the season, and earlier thereafter. Curiously, my friends seem to avoid the shots which I believe is a mistake no matter aqe.

Winslow

Interesting. Benign economic conditions allow for increased realization of ideals, but the ideals must be there. I will think carefully about your question :)

[calmoc]

From Winslow (no ordinary driver)

is it income growth for the middle three-fifths of the population that drives morality, or is it morality that drives income growth for the middle three-fifths?

Such odd question(s).[Do not be misled by that fraction, 3/5.] We are accustomed to questions about what drives the economy (housing) or my dog's hearty pursuit of the neighbour's cat,(doghood)[Ok, it is cathood, but don't tell the dogs.] but this question of what drives morality, is new. [Ok, maybe not for philosophers whose business it is to raise funny questions.] (Is that you Winslow?)
What drives morality? Suppose God is on holiday, why be good? (See people? funny questions. Very.)[You think that's funny?--how about a poke in the eye with a sharp stick?]
Suppose Good is not what it's cracked up to be. What's in it for you? Especially if all that good behavior is for an empty sack in the end. (The Dali Lama says you are going to be a slug next time around whether you don the purple sheet or not.)
Could you be otherwise, good or bad? (The Dali says no.) [But his mother believed otherwise. (Mothers: the real drivers.)] Seriously, you (I mean us) are human afterall and 100% good is a Jesus-High standard. Think of the beating your self-esteem will take if you don't lower that to, say, 75%? 66%? 60% (like the senate) Ok, my last offer: 51%.
That is so fair.

You are a loaded Bus with those questions Winslow. Where are you going?

[hm]

im1dc: Hope you weren't driven away - as far as I can tell, all thoughtful comments are welcome here.

[Winslow R.]

"You are a loaded Bus with those questions Winslow. Where are you going?"

Is slink and calmo one in the same, the personas meld? Krugman throws me for a loop with his populist economics with supposed amoral 'market' solutions though most don't have the $50,000 to access the solutions? Where is he headed?

Where I am going currently ends in banking reform with government imposed universal access to financial assets for entrepreneurial types and a guaranteed peaceful government job for the working stiff types that the private sector won't/can't provide. No unemployment is 'necessary' to keep inflation in check. SBA does not cut it, no one should need to tell a bank officer how he plans to earn money just because his/her mommy/daddy doesn't have any. To get there requires people to truly understand financial asset creation/destruction something that may never be taught in school.

Where are you headed?

[calmo]

I B me, extraordinary high school drop out, unlike slink, and unkown to slink and separate and distinct from slink --whose poetic skills (maybe more) I envy. I sometimes get posted by mistake as cm (who I also envy).
Winslow, I think Krugman faces the key feature of our times (not global whateveritis) and I am keen to see where he takes it. I'm not sure PK's headed anywhere, but noting that a diminishingly small elite is getting richer and likely more powerful at our expense seems like the place to start.
The compliance that you may have been concerned about and cast in terms of 'morality' was a stroke of genius (ok, maybe mere brilliance)[And now that I hear your socialist [Oh Horrors!] or socialist-like dispositions, just shocking. Shocking, I tell you.].
So, I don't know where I'm headed --atleast not like you with your modest (but implausible) banking reforms for more equitable access to financing. Inheritance is a huge component of Family Values it seems to me. For all the song and dance about Patriotism, it gets a miserable share of the assets that transfer from one generation to the next, no?
Where am I headed? I don't bloody know, but like some, I'm done waiting for instructions, you?

[Winslow R.]

"Where am I headed? I don't bloody know, but like some, I'm done waiting for instructions, you?"

I'd suggest finding some local in politics and getting involved in their campaign for 06' or starting your own. I still have faith in 'the system'.

[calmo]

I knew you weren't as radical as me, Winslow. I just knew it. [Like discovering I am fatter.] And more hopeful too. [Like discovering you are faster.]
'Better watch those questions and those marks around expressions like 'the system' or some of us will take you to be an instigator.
We will. I do.

[Winslow R.]

I am just a latecomer to the realization of what Krugman is about.

"Amoral" economics is proudly taught at college level by people like Paul Krugman. They teach it as a social science that ignores purpose in favor of discovering the hard to fathom natural rules of economics— as though human society were the same as a colony of insects, birds or animals— in the wild....

The alternative to establishing an economics-with-a-purpose discipline is to wait for purposeless neoliberal economies to be smashed by environmental and violence imperatives and the inadequate reduction of scarcity neoliberalism has already achieved. Along with scarcity and bloodshed will come change. And those left alive may find moral purpose is more than people thought it was.

John Gelles
September 2003

http://www.tiea.us/purpose.htm

[Winslow R.]

*This blog defines people not markets as having morals - then a 'labor market' by definition would inherently have morals?

"While researching the “living wage” debate, I came across this old Paul Krugman article, written five years ago. He makes an interesting observation towards the end:

"In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away."

Now, Austrians and Objectivists may dispute the notion that the market economy is amoral, but I think Krugman has a point. The market itself is neither moral nor immoral; it simply allows individuals the freedom to make their own decisions. Markets do not act - people do - and human action is the only thing that can be described as having moral qualities. "

http://catallarchy.net/blog/archives/2003/08/27/market-morality

[Winslow R.]

*As I go further I find myself quoting.... Mr. Luskin. Maybe Krugman and Luskin will soon be shaking hands. This bus was a bit overloaded after all...

"Economics was once a noble discipline of moral philosophy, but it has become so disconnected from the real world as to become utterly abstract and amoral. What was once a compass for bringing order to the challenge of collective action has become weaponized -- a tool for carrying out political warfare. The economics of mass destruction.....

Milton Friedman had it right when he said "Inflation is always and everywhere a monetary phenomenon." In other words, it is the result of printing too much money compared to how much is needed. Yet that army of Fed economists is dedicated to thinking about an entirely different -- and entirely wrong -- explanation for inflation. They're focused on a notion economists call the Phillips Curve -- the idea that economic growth itself inherently causes inflation.

Sounds like one of Big Brother's slogans in 1984, doesn't it. "Slavery is Freedom." "War is Peace." "Growth is inflation."

This slogan, this theory, this myth -- the Phillips Curve -- is so deeply embedded in economic thought as to be beyond serious question. Yes, Friedman himself won the Nobel Prize for questioning it -- for demolishing it, in fact. Alan Greenspan frequently says he doesn't believe in it. But the economics elite has managed to take even Friedman's work and contort it into a post-modern version of the Phillips Curve. They call it other things now, such as the "output gap model." But nevertheless, we find the FOMC at every one of its regular meetings declaring a so-called bias with respect to the Phillips Curve. Which is the worst risk, they declare in each published statement: the risk of economic weakness, or the risk of inflation? That's the trade-off we're given. Choose your poison."

http://www.trendmacro.com/a/luskin/20030507luskin2020.asp

says...

We look in the mirror and find the enemy is us.

[anne]

Interesting comments to think through :)

[Winslow R.]

Anne, I do think highly of Krugman...

*To give Paul the final word...

" Notice what Paul Krugman, the MIT economist, has to say on this: "We have the resources to take far better care of our poor and unlucky than we do; if our policies have become increasingly mean-spirited, that is a political choice...

We cannot evade responsibility for our actions by claiming that global markets made us do so" (New York Times, February 13, 1997)."

http://www.sdnbd.org/sdi/news/general-news/May-2003/22-05-2003/Feature.htm

[calmo]

This is another [And I am counting.] funny question Winslow: Are the markets amoral?
It looks to me like if you continue in this vein, there is no hope for your belief in 'the system'. [I can see those quote marks shaking already, you?]
I used to think only people could be moral and that extending it further, say to animals or organizations was a bit rich. [You can tell my beliefs are so precarious as to be hilarious. Yes, not funny.]
I have a border collie cross (he has me, an aging anglo mongrel) who (yes, not that) deserves so much better than me. He is that good (not merely devoted, loyal, attentive or..obedient).
Not that he is not an exceptional dog, but one that was raised in a loving atmosphere that incubated enough characteristics that I do not hesitate to call Oscar, a good dog. [Ok, the parakeets did not (sorry anne, the birds don't have it); the 2 cats whose ongoing fights are mediated by Oscar, did not; the gold fish...]
And I do mean this in exactly the same way that I would say of my older sister 'she is a good person.' [I could be extending the English language or you could be inhibiting your conceptions or operating with inhibited perceptions.]
Oscar is a moral agent whose behavior goes beyond the typical dimension of criticism: obedient or not. (He is beyond the legal realm people.)[And let's skip the dog food bill vs the 3rd world aid, please.]
The officials, performing in their capacities defined by the rules of the organization, are atmost, law-abiding legal entities. [With the parakeets people.]
'The market is amoral.' is on a par with 'The wheelbarrow is indifferent.' There are more interesting things to say (Surely!) before we throw our "absolutely Socrates","balderdash", "whatacroc" or "huh?" at it.

[Ian D-B]

Winslow,
Friedman did not mean that inflation results from printing "too much" money. He meant that inflation and money growth are tightly linked. And in the data, over the long run, that's exactly what we find. However, in the short run it is difficult to find data to support this hypothesis.

There is a serious flaw in your argument beyond the data issue though. You seem to think that the fed has some power to move the economy. If prices are perfectly flexible and inflation is only a monetary phenomenon, then in fact the fed has no power to affect the economy whatsoever. So either they can affect the economy in which case there is a phillips curve, or therer is no phillips curve and they are powerless. You can't have it both ways.

[Ian D-B]

and beyond that, Winslow, the Phillips curve most certainly does not imply that economic growth is inflation.

[im1dc]

To: anon and et. al.

Comment: Here's one of those Tax Deals/Manipulations/Estate Planning/Avoidance Schemes only the extemely Wealthy get AND USE

(Do notice that these people have Senators and senatorial staff sweeping out their horse barns and bringing in fresh hay for them) Will those Ssenators and staff even take your calls?

Virgin Islands Are at Center of Dispute on Tax Break

By STEPHANIE STROM, March 5, 2006

The United States Virgin Islands and several wealthy financiers who own homes there are working to persuade Congress to drop a new requirement that at least half the year be spent in the islands in order to get a tax break intended to spur their economic development.

The economic development program allows an effective federal income tax rate of just 3.5 percent for bona fide residents of the Virgin Islands. It has drawn wealthy Americans from the mainland and kindled an economic boom.

But the program, whose benefits have been available for decades, has also allowed some homeowners who spend little time in the islands to avoid federal taxes estimated at $400 million. At least one person, who lived in the islands less than one month a year and nonetheless claimed the program's benefits for income he generated selling insurance in Massachusetts, has pleaded guilty to tax fraud.

The new requirement, adopted by the Internal Revenue Service under legislation enacted by Congress in 2004, is intended to crack down on the practice. The legislation followed articles that exposed how little time some of the beneficiaries spent in the islands and how little of their income was derived there.

The program has long required individuals who benefit from the tax break, as well as companies that do so, to commit $100,000 of capital, employ 10 local residents, buy goods and services from local suppliers and promise to make charitable donations. But until Jan. 31, when the new restriction took effect, there was no explicit residency requirement; the I.R.S. instead used a "facts and circumstances" test to assess eligibility. As a result of the change, individuals claiming the benefit must now prove that they have spent 183 days in the Virgin Islands during the year.

In response, the Virgin Islands Tax Working Group, which represents people who benefit from the break, paid $200,000 last year for lobbyists, according to records compiled by Political Money Line, a nonpartisan campaign finance tracking service. At least one senator, Gordon H. Smith, Republican of Oregon, has been saluted in the islands at a fund-raiser on his behalf attended by several beneficiaries of the program.

The government of the Virgin Islands is just as eager as the beneficiaries to have the new restriction eased. Donna M. Christensen, the islands' delegate to Congress, acknowledged problems with the program in written testimony submitted at a hearing held Wednesday by the Senate Energy and Natural Resources Committee, which oversees the Interior Department and thus territorial affairs. But she asked committee members to lobby for a lightening of the residency requirement.

Ms. Christensen, describing the rule as onerous, wants Congress to reduce the requirement to 122 days over three years, or an average of a little more than a month annually.

"This is the No. 1 issue for us in terms of our economic prosperity going forward," she said.

The rule's opponents, whose efforts were first reported in The New York Sun, have asked Senator Michael D. Crapo, an Idaho Republican on the Senate Finance Committee, to propose an amendment in tax legislation now being negotiated. In a letter to Senator Pete V. Domenici, the New Mexico Republican who heads the energy committee, Mr. Crapo said the specific tax rules governing beneficiaries of the program had been changed without legislative hearings and without consulting the Virgin Islands government.

"As a result, we now see that the changes may have gone too far," Mr. Crapo wrote. "While the bad actors have been successfully removed from the program, these changes are also disrupting legitimate businesses and causing fiscal hardship."

Chris Matthews, a spokesman for Senator Smith, who sits on both the energy committee and the Finance Committee, confirmed that the senator attended a fund-raiser for him in the Virgin Islands last year. Mr. Matthews said Mr. Smith had subsequently chatted with some of his colleagues about his concerns that the tighter regulations were hurting law-abiding businesses.

Link: http://www.nytimes.com/2006/03/05/national/05taxes.html?ex=1299214800&en=690a7aa52103920f&ei=5090&partner=rssuserland&emc=rss

[Winslow R.]

Ian wrote:

"There is a serious flaw in your argument beyond the data issue though. You seem to think that the fed has some power to move the economy."

The fed's 'main' ability is to invert the yeild curve.

"If prices are perfectly flexible and inflation is only a monetary phenomenon, then in fact the fed has no power to affect the economy whatsoever."

If prices are perfectly flexible then inverting the yield curve would cause all prices to fall as loan growth slowed (a monetary contraction) leading to deflation and problems because loan values don't fall.

Loan growth does not by itself create inflation because if done optimally GDP will grow with loan growth. Suboptimally, loans will be made that may or may not be bailed out by government deficit spending.

Even the growth of money from government deficit spending does not necessarily lead to inflation if GDP growth from deficit spending matches the deficit spending growth. On top of that you have 'savings' desires which remove money from circulation.

"So either they can affect the economy in which case there is a phillips curve, or therer is no phillips curve and they are powerless. You can't have it both ways."

Phillips curve sees a relationship between the rate of wage inflation and the rate of unemployment and has been twisted to suggest unemployment is necessary to control inflation.

The Fed can invert the yeild curve causing a contraction in loan growth which can cause a deflation in all prices including wages. This implies inflation is a monetary phenomenon. Unemployment is not necessary to control inflation and in fact has little to nothing to do with it except to shift the balance of power to reap the rewards of labor from employees to employers.

I believe your data 'issue' can be resolved if you take into account shifting saving desires as well as the effects wealth consolidation have on saving/dissavings rates. 'Printing' of too much money, I would argue would have a very direct connection to inflation, especially if that money was 'spent' rather than 'saved'.

As you can see I don't 'get' your reasoning. Sorry I missed your post, I would like to read your response.

[Gabriel Mihalache]

Krugman has fixed-pie-myopia. Other than that, he uses an improper term such as "oligarchy", which is a political terms regarding political matters (i.e. the use of the State's monopoly on lawful force). The US is still a liberal-democracy, isn't it? So why be so polemic? Maybe because saying that some people are better off while others stayed the same has not the same effect of bizarre calls to (proletarian?) revolution.