Paul Krugman: Where’s My Trickle?

Paul Krugman says the experience since the Bush tax cuts shows that trickle down theory does not work:

Where’s My Trickle?, by Paul Krugman, Commentary, NY Times: Four years ago the Bush administration, exploiting the political bounce it got from the illusion of success in Iraq, pushed a cut in capital-gains and dividend taxes through Congress. It was an extremely elitist tax cut even by Bush-era standards: the nonpartisan Tax Policy Center says that more than half of the tax breaks went to Americans with incomes of more than $1 million a year.

Needless to say, administration economists produced various misleading statistics designed to convey the opposite impression, that the tax cut mainly went to ordinary, middle-class Americans. But they also insisted that the benefits of the tax cut would trickle down — that lower tax rates on the rich would do great things for the economy, helping everyone.

Well, Friday’s dismal jobs report showed that ... working Americans have a right to ask, “Where’s my trickle?” ... What’s really remarkable ... is that four years of economic growth have produced essentially no gains for ordinary American workers.

Wages, adjusted for inflation, have stagnated..., benefits have deteriorated..., [a]nd one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam...

Now you know why 66 percent of Americans rate economic conditions in this country as only fair or poor, and why Americans disapprove of President Bush’s handling of the economy almost as strongly as they disapprove of the job he is doing in general.

Yet the overall economy has grown at a reasonable pace over the past four years. Where did the economic growth go? The answer is that it went to the same economic elite that received the lion’s share of those tax cuts. ...

The absence of any gains for workers in the years since the 2003 tax cut is a pretty convincing refutation of trickle-down theory. So is the fact that the economy had a much more convincing boom after Bill Clinton raised taxes on top brackets. It turns out that when you cut taxes on the rich, the rich pay less taxes; when you raise taxes on the rich, they pay more taxes — end of story. ...

[T]he whole idea that a rising tide raises all boats, that growth in the economy necessarily translates into gains for the great majority of Americans, is belied by the Bush-era experience. As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.

America was a highly unequal society during the Gilded Age, but workers’ living standards nonetheless improved as the economy grew. Inequality rose rapidly during the Reagan years, but “Morning in America” was nonetheless bright enough to make most people cheerful, at least temporarily. Inequality continued to increase during the Clinton years, but wages rose, as did the availability of health insurance — and the great majority of Americans felt prosperous.

What we’ve had since 2003, however, is an economic expansion that looks good if not great by the usual measures, but which has passed most Americans by.

Guaranteed health insurance ... would eliminate one of the reasons for this disconnect. But it should be only the start of a broader range of policies — a new New Deal — designed to turn economic growth into something more than a spectator sport.

_________________________
Previous (9/7) column: Paul Krugman: Time to Take a Stand
Next (9/14) column: Paul Krugman: A Surge, and Then a Stab

Comments

[bailey]

"... one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam...."
Is it wise for the FED to cut rates dramatically to defend against a GDP retracement if its recent growth in GDP is largely "flim-flam", especially if retail buying is already being supported by "no down, 0% interest financing"?

[Peter Schaeffer]

Krugman is entirely correct in writing

“As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.”

Indeed, he may well be understating his case. Edward Rubenstein National Data has shown that Median Household Income has fallen for all groups since 2000. The fall for blacks is astounding, -8.0%. This will almost certainly be the first modern economic expansion where incomes failed to reach their prior peak…

Nor are his comments about tax policy off base. However, he has not made any attempt to explain why this period of growth has failed the American people so badly. The words immigration, trade, and outsourcing, are conspicuous by their absence.

Instead we get yet another plea to expand the welfare state. Could it be that the fundamental woes of the US economy are such a sacred cows, that they can not even be mentioned?

It is a sad day when the American people can learn a lot more about what is wrong the economy by listening to Lou Dobbs than someone with a Ph.D. in economics.

[Mark Thoma]

If you think you can learn more from Lou Dobbs, the only sadness I feel is for you.

You should probably read this, because your insinuations are wrong:

http://economistsview.typepad.com/economistsview/2006/03/paul_krugman_no.html

There's plenty on trade too.

Given how badly Lou Dobbs misrepresents facts (if he even bothers with them), and that you are a fan, I guess I shouldn't be surprised that you do it too. If you want to spout off here, and you clearly do, try to at least use criticisms with some factual basis.

[John]

Dr. Thoma,

How do you interpret the data that Peter points out in terms of policy?

Far from a fan of Bush, I still have a hard time seeing how those figures can be pinned on what Bush did.

Good comment on Dobbs, BTW. The man knows next to nothing about anything.

[BJ Feng]

Dr. Thoma, perhaps you can clear up the conventional economic view that taxes are distortionary. Therefore it has to be shown that government spending must make up for the deadweight loss taxes impose on the public. Government must spend in a manner the public cannot in order to make up for its inefficiencies and produce more economic good than the economic bad it imposes on us all. And since the richest 1% pay the most in taxes, it stands to reason that they stand to gain the most with any tax cut. I simply do not see anyway the bottom 20% can further benefit from any tax cuts since they pay negative taxes (due to tax credits). Since Congress has enough money to pay for bridges to nowhere and farm subsidies to major corporate farmers, it seems that there is plenty of money for Congress to spend even with the tax cuts. Therefore it stands to reason that we demand Congress spend the considerable resources it already has, more effectively first, rather than argue for tax increases. After all, it is the American view that a man should keep what he earns. The government should prove that it simply cannot use the money it has more effectively first before arguing for a tax increase. Do you agree?

[cm]

BJ Feng: I don't know where to start. Your presentation doesn't look very coherent to me.

[Mark Thoma]

No.

[BJ Feng]

"It was an extremely elitist tax cut even by Bush-era standards: the nonpartisan Tax Policy Center says that more than half of the tax breaks went to Americans with incomes of more than $1 million a year."

Sorry, maybe it could be more clear.

1) The tax breaks went to Americans with incomes of more than $1 million a year. The top 1%, which includes those of incomes of more than $1 million a year pay the majority of taxes, thus tax cuts would have to benefit the top 1% since they pay the majority of taxes.

2) Taxes are distortionary, which is what I learned in Econ 1. There is a deadweight loss from taxes.

3) In order for government to justify tax increases, they have to show that the distortion they create benefit the public at large.

4) Given that Congress has enough money to pay for bridges to nowhere and all the other foolish programs in the Congressional budget, it stands to reason there is plenty of money to spend.

5) Congress has to justify that the distortionary taxes it imposes gives a greater benefit to the public than the losses it imposes, since taxes are distortionary. If taxes are not distortionary, then I would like to hear this line of argument since I've been taught otherwise.

6) If Congress cannot justify a greater benefit with the resources it already has, then it stands that the tax cuts were good for the public at large, and that further tax increases are not necessary as Congress already has enough resources.

My argument is that Congress already has enough resources. Before any tax increases (which the elimination of the current tax cuts would be) can be considered, Congress should prove that it is already using its current resources to maximum efficiency. Unless Congress can prove that, we should naturally return all excess funds to the public. And since the top 1% pay a disproportionate amount of taxes, it is only natural that the top 1% benefit from any and all tax cuts. Basically, I am arguing that taxes should be returned to the taxpayers unless government can show that it would be better for taxes to spent otherwise. It is up to the government to prove that a man should not keep what he earns.

[Mark Thoma]

I've been pretty clear about this. Generally, though not exclusively (e.g. I am leaving out matters of equity, but that's not all) market failure is the basis I cite for government intervention. And of course there must be a net benefit -- see the farm subsidies post, though the general story is more complicated. But all you are saying is that benefits must exceed costs. Yep. And that principle often justifies intervention.

As to your other argument, it amounts to little more than “if the government has enough money, then it doesn’t need more taxes” which is of course true. But an assertion the government has enough money is not proof, and citing a bridge proves nothing (inefficiencies should be minimized, but their presence does not imply there is no net social benefit -- also, that you can find $5 in waste when the government spends $100 does not prove that $100 is all the government needs, i.e. it says nothing about whether the level of spending is adequate).

[reason]

BJ Feng...
Georgian taxes as far as I am aware are not distortionary, it is just that they are difficult to introduce because of asset price effects. Similarly, taxing external costs (e.g. pollution) is not distortionary, it is removing a distortion.

[Shadow]

Lets be very clear, the Bush era growth peek was not that impressive. Between 2003-06 the Bush era economy grew 3.2-3.3%. I would have loved a 4.7% rate like from 97-99, but the Midwest held everything back.

Listen, that is fine and dandy, but it wasn't overly impressive compared to several other expansions post WWII.

I would say the growth rate and job growth have exactly matched each other very well. When the recession ended September 2003, the economy did fine for 3+ years.

Hence, Americans have benefitted. Just not as much as previous expansions which is the disconnect from "the average American" when they think of the fun times in the late 90's and hearing about all these so called "Corporate profits" now. Then you throw in natural rises in healthcare and other inflationary things, we have pain. I think if the Midwest had been able to replace its manufacturing job loss during the last recession with its own wide housing boom, the national economy would have boomed like in the late 90's.

So blame the Midwest for the "underperforming" economy this decade.

[Lafayette]

PK: a broader range of policies — a new New Deal — designed to turn economic growth into something more than a spectator sport.

OK, that's the easy part ... saying what has to be done. Now for the hard part. How to do it?

My thinking:
1) Increase marginal rates on income learned by the top 5% by significant amounts
2) Make the Dept. of Commerce the Department of Commerce & Industry. Endow it regulatory powers and watchdog surveillance of BoD shenanigans as regards stock holder rights, such that corporate-cronyism stops feeding at the trough, and corporate profits benefit ALL stockholders uniformly. Limit golden parachutes by taxing their "total value" at 95% and capping them at some percentage of turnover (to avoid disabuses).
3) Direct the Fed to supervise and spot-audit all credit institutions for adherence to "truth in lending" regulation. Large fines for those who bend the rules.
4) Universal Health Care funded by the Federal Government in conjunction with the states ... but in a parallel system (to private-practice practitioners) that mandates service and pharmaceuticals pricing at fair value. Establish a nation-wide Health Care account for all American citizens or foreigners with valid work documents. Endow the Department of Health to supervise the implementation of a nationwide Health Care Service, offering both preventive and remedial Health Care to all citizens, regardless of age/income.
5a) Implement a parent-voucher program for secondary schools as well as parent feedback ratings of local secondary schools. Additional, federal funded resources for teachers aids and psychologists to assure that children learn the basic elements of reading, writing and elocution. Schools to be rated also on SAT-score achievement and incentivated accordingly
5b) Assure that skills-based training and education beyond secondary-school is available to all who wish to undertake it. All publicly-owned school tuition and fees are refundable against both federal and state taxes. (Dept. of Education to monitor for uniformity of program nationwide as well as implement a "SATs for teachers" qualification testing every half decade and stipulate retraining where necessary.
6) Embark upon a massive nationwide program to redevelop the economic infrastructure of the nation. Meaning: transportation (hi-speed trains, energy-efficient local commuter services), renewable energy sources, current energy emission control, nuclear energy building programs,
7) Get out of Iraq, diminish the Pentagon budget and redirect the monies saved to item 6.
8) Reduce the amortization period for all production-related technology in a program to offer companies the opportunity to retain manufacturing stateside. Tax freedom for telecom/telephony back-office applications serviced by regional entities (tribal lands / tax-zoned work centers in designated neighborhoods).
9) Lafayette for PotUS! (;^)

[Lafayette]

PS: The words immigration, trade, and outsourcing, are conspicuous by their absence.

Immigration offers employment in jobs Americans don't want to do. So, it reduces the cost of production in certain sectors, particularly agriculture. It has an negligible effect on overall economic activity ... despite the bee in some people's bonnet. (Illegal immigration is just a matter that needs proper policing and prosecuting.)

Trade is a matter of comparative productivity. China is not at fault if Americans want to purchase willy-nilly cheap household gadgets from China. The dollar is cheap enough to promote expanded international trade as part of GNP.

Outsourcing is the offspring of the American fixation for low-cost production. It's perniciousness has taught Americans, finally, that low-cost is not the only virtue of a product. Maintaining local employment is another. (Of course, they didn't catch on to this early enough - like when their neighbor lost HIS job. Now that they have lost THEIR job, they are learning. That's progress!)

None of the above require any particular New Deal measures.

[Cyrille]

This is not to imply that I'd necessarily disagree with the other points (in fact I'd probably agree broadly with most, including 9 which would at least be an improvement over 19 of the past 27 years), but in particular points 1, 4, 6 and 7 would be a very good place to start. In fact, they should be a must be of any serious program.

I'd add providing mostly free education (and better standards until high school -the younger you learn to learn the better), and restricting the political power of money by limiting campaign spending (like forcing each candidate to live on public founds) and forbidding political advertising.

[Guy H]

Dr.Thoma- is it not time to drop Krugman from your interesting blog ? His endless repetition of his one
argument has gotten through loud and clear- look at
Bush's approval ratings.

[John]

As if we knew that trickle down economics don't work. We learned that during the Reagan era. The irony of all this is that in fact the tax reductions of the Bush administration while they have increased the income divide were only marginally responsible for the undoubted strength of the economy over the past five years. The main sources of it's strength were cheap money, principally, and a huge expansion of govt spending which has basically increased by about 70% since Bush took office. It's perhaps significant that both serious trickle down experiments, Reagan's in the early eighties and Bush's in the early 2000's were both accompanied by massive increases in public expenditure. Is there a connection here? Ultimately, Reagan had to reverse course and start raising taxes, the Republicans don't mention this very often, and this process continued during the Bush presidency because the balance between tax receipts and public spending had got so out of kilter.

[Barry]

Lafayette says...

"Immigration offers employment in jobs Americans don't want to do."

Because...the jobs suck, and the pay does too.

Now, why does the pay suck?

[save_the_rustbelt]

There is trickle down.

It is benefiting Chinese workers though.

Krugman should know, he is the Grand Kahuna of increased prosperity through increased trade. Wall Street should love him. Wal-Mart should love him.

[ken melvin]

I suspect that in the long run it is more important for the wage earners to realize a surplus than it is for investors to have big returns. Times when workers made enough to both save and consume look awfully good in retrospect. It may be better overall when investors have to take chances on rates of return (they don't really have an option other investing).Much of what has occurred the past few years is their, the working class, having to cash in what assets they may have had to survive.

[anne]

"Krugman should know, he is the Grand Kahuna of increased prosperity through increased trade. Wall Street should love him. Wal-Mart should love him."

Rubbish, as always.

What is important is always to belittle Paul Krugman and cower when Krugman mentions say Republican health care insurance policy or Republican fiscal policy. The problem is always South Africa or Nigeria or Ghana or Liberia; never a problem with Republican domestic economic policy.

No universal health care insurance.
No minimizing or freeing public college and university tuition.
No concern with integrating K to 12 public schools.
No support for unions.
No development of green infrastructure.

Yes; the problem is South Africa.

[bakho]

Inequality rose very little under Clinton. In fact, given the enormous gains in the economy and how well the wealthy did under Clinton it is amazing that the bottom 20% lost than 1% of the economic pie.

Feng makes a mistake that many do with Federal spending. Seemingly large expenditures (such as the "Bridge to nowhere" at $2 Billion) are not large compared to $240 Billion in transportation infrastructure spending (less than 1%). However, that still does not lessen the corruption involved.

America loses $70 billion due to workers' long hours in traffic, lost productivity, and wasted gas. So investments in infrastructure can have returns.

A big problem over the past 7 years has been the corruption and politicization of all parts of government including infrastructure decisions. Rather than a comprehensive plan to deliver the most bang for the buck, Congress and the Administration have been in the business of selling earmarks for campaign donations to the politically connected. This practice has already landed some former Congressmen in jail as it should.

I agree with Feng that tax dollars that go to corruption are a waste. I disagree that tax dollars can't have return on investment. The solution is to end the corruption. A substantial part of ending corruption is changing the appropriations process and doing the necessary planning to spend tax dollars wisely. When politicians have a philosophy that government can do no good, why should they plan to use our tax dollars wisely? Politicians with that philosophy will come to view our tax dollars as their own private slush fund to reward their political patrons. This is what has happened to our government over the last 7 years. The result is bridges in disrepair that fall into the river, lack of investment in alternative energy, money to rebuild New Orleans squandered on no-bid contracts, private contractors war profiteering in Iraq while Iraqis are pissed off because there is no electricity.

What we have is a meltdown of a governing philosophy that has corrupted the process. We need to elect Hercules in 2008 to clean out the stables.

[save_the_rustbelt]

Anne:

Do you ever stick to the subject?

Krugman said trade would make US workers more prosperous and in large measure he was wrong.

Get it?

By the way, I'm not a Bush supporter. Get it?

[bakho]

Thanks for mentioning student loans Anne. Why should a government subsidized student loan cost former students 7.8% to pay back? Private lenders are gouging both the students and the government.

[Richard A.]

In defense of Lou Dobbs he is the only one on an MSM outlet that seems to be aware that the Bush administration is releasing first time H-1b visas outside of the quotas. As a result the Sept 30, 2005 figure was close to 125,000 not the phony 65,000 (or 85,00) as reported by the MSM.

[Oupoot]

Anne, please do not provide Mr Bush with some stupid idea as to blame my country, South Africa, as the cause of the problems the USA currently faces. (Rather use Zimbabwe :-))

[anne]

Bakho:

"Why should a government subsidized student loan cost former students 7.8% to pay back?"

Thank you; I had no idea what the interest rate was on student loans, and would not have guessed that it was nearly this high given a history of low cost subsidized loans from the Wrold War on whether for education mortgages. I will read on this issue which I have ignored, favoring a federal-state revenue sharing program to allow for minimal or no tuition at public colleges and universities.

[anne]

South Africa is a country I have an abiding love and hope for, even though South Africans are all for trading with us as I can attest to by the art my parents have collected.

Trade has enriched us immensely for generations, and the hope is always that trade, protecting workers and the environment and supervised for product safety, will be easily as enriching for those we trade with. That somehow a Sweden can show just how enriching trade can be still protecting domestic workers, however, appears to teach us little or less.

[anne]

During the first year of the bear market of 2000-2002, the sharp decline in the stock market and dominant growth stocks in particular was accompanied by a wild price increase in drug and medical equipment company shares. The increase was predictable by the obvious gains in political strength of Republicans, and a sense that there would be no subsequent pressure to limit drug and equipment price price.

Policy matters. Fiscal policy matters. Politically directed changes in economic structure matter. There has been a startling series of changes in economic structure since 2000 that have contributed to increasing wealth and income inequality at the relative expense of workers, and the fault is in domestic policy and does not rest internationally.

No other country is directing us to neglect insuring the health care of tens of millions of Americans, but we are struggling to lessen the allowance for health care even for children. We turn from the South, even as infant mortality increases, and refuse to think of domestic policy faults.

[Jean]

Lafayette, I'll vote for you, only if Krugman's the Veep!!!!! Universal, single payer: the only way to go! Down with the insurance frauds! Tax'em all so all our boats can rise!!!! GRRRRRRRR!

[anne]

By 2004, 1% of American households controlled 57.5% of corporate shares. When Paul Krugman points to Republican policy as playing to increased wealth and income inequality, where is the least surprise? Emphasize a tax system that plays to income and wealth inequality along with changing financial and corporate management structures, along with regulatory structure, along with turning so far away from commonplace needs that cuts in health care insurance for children are actually fought for, let alone other commonplace needs, and wonder about worker problems.

[Cyrille]

Trade has a lot going for it, but also carries significant externalities that have usually been neglected thus far.
There are social ones -even if it may make economic sense to specialise in what you are good at, a very specialised society may be much less pleasant to live in, and some people may never manage to change qualification.

There is less resilience to a period of unstability -what would happen in case of a major war or breakdown of the trade system, in particular to countries that are nowhere near able to meet their basic needs?

Then there are major environmental externalities. Monoculture is a recipe for disaster, as is too intensive culture (the logical result of one country specialising in growing crops because of a competitive advantage). And transport costs a lot more indirectly than directly. Whole marine ecosystems are ruined by ballast water, CO2 is produced in spades, and ships cause a tremendous amount of pollution, sometimes deliberately when getting rid of dirty stuff in the open sea.

Which is not to say that we should close borders. But neither should "bigger GDP" be an absolute and irrefutable argument. Especially for developed countries, GDP is a poor target.

[calmo]

Such a premium on "clear".
Are you clear today? As clear azit eva was?
You be clear, but your non-lurking audience B impatient, testy...maybe just plain dense?
This thread is not about Krugman's view of supply side, but a weather report...get it?
Today's weather: not so clear with periods of intermittent skirmishity.
Not that I (mere tickler and anti-enemy combatant) want to add to that, but Guy H says:is it not time to drop Krugman from your interesting blog ? [Who dares to question this?] His endless repetition of his one
argument has gotten through loud and clearzoundz that clear and monotonous note that Krugman drones onanonanonanon...and that it not B Guy's fault that his ears can no longer pick out other notes.
Will we hear another installment from Guy detailing how this piece is another dreaded re-run, or was this his last gasp?
Idle skirmishers want to know.

[CALLAHAN]

Trickle Down does'nt work? What's new?

And by the way, Lou Dobbs is my main man, those who bash him must have rocks in their head.

[Bruce Webb]

"Lets be very clear, the Bush era growth peek was not that impressive. Between 2003-06 the Bush era economy grew 3.2-3.3%"

In context it is even less impressive. If you examine table 1 in the last BEA Press Release you see a near constant deterioration in GDP from an impressive (and pre-tax cut 2003) to some pretty dismal 2006 and 2007 numbers
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

And as you would expect that is paralleled in the Productivity Series.
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=WPSSOP3000&output_view=pct_1mth
Year Annual
1997 1.6
1998 2.8
1999 2.9
2000 2.8
2001 2.5
2002 4.1
2003 3.7
2004 2.7
2005 1.9
2006 1.0
2007 (Q1 0.7 Q2 2.6)

Drop 2003 from any Bush economic data series and it gets more and more difficult to argue that the 2003 tax cut had positive effects at all. Conventional wisdom is that it takes 18 months for the effect of tax cuts or increases to bite. Well 18 months after the May 2003 effective date Q4 2004 Productivity was down to 0.7% on route to 2.7% for the year. And with further sharp drops in 2005 and 2006. Wherever those capital gains tax cuts went it wasn't in any direction that increased national growth.

[robertdfeinman]

Everyone gets to beat their favorite drum, so I'll do mine: unions, unions, unions, unions, unions...

The drop in the rate of unionization is what underlies everything else. With strong unions there would have been less outsourcing (look at the legal framework in Germany about plant closings). With strong unions there would have been a partial capture of firm profitability by the workers. With strong unions the dropping of benefits would not have taken place. With strong unions the "trickle down" tax policies would never have been passed in the first place.

The union movement has suffered from several effects. First was the decline in manufacturing which cut out their membership base. Then there was the gutting of the legal protections for unions starting with Reagan. This was done with the acquiescence of the courts and congress. Finally there was the attitude instilled in young people that unions are evil. This has had the effect of making the newer professions in the knowledge industries less interested in organizing. They aren't interested in work rules or over time pay, they are interested in professional development, portable benefit plans, social networking and other issues that traditional unions don't know how to deal with.

The truth of all political interactions is that "might makes right". In this case the might of the workers has diminished and their share of the economic pie has gone along with it. The remedy - workers (including high income knowledge workers) need to organize. If they don't like unions then create a structure to suit their concerns. Why people fail to understand that the many have more power than the individual remains a puzzle.

[Bruce Webb]

Interestingly this effect was masked for quite some time. Right up through Q3 2005 productivity as reported by the BLS was ripping right along. But the Q4 2005 number was shocking (right above zero, since revised to -1.4%) and then relatively massive revisions back to 2002 with the Q2 2006 release followed by four ugly quarters revealed the dismal picture you see.

Tax cuts create growth? Not according to the government.

[ken melvin]

Facts are not important.

[calmo]

Thank you for those thoughtful posts drum-beater rdf and number-crunching Bruce.
The strength of unions now appears to have been a flash (a short term trickle) in the pan. I wonder if this can be tied to demographics as well as globalization?

Those downward revisions Bruce, in the productivity numbers, are based on revised hours worked? volume of products/services actually produced? a reflection of energy costs?
...or just winging it ("(right above zero, since revised to -1.4%) how can productivity change so drastically?) [Why shouldn't we be skeptical of their methodology? Does negative productivity mean we forgot how to make something/(provide some service) ...or maybe a matter of scale --that we had to retreat to smaller volumes and incur higher costs?]

[Mike]

Whatever benefit the tax cuts created, they were overshadowed by the massive inflation tax still being levied on you. The inflation tax is the tax that hurts the lower and middle classes most, and is never talked about by the status-quo politicians. Ever since Nixon took the US off the gold standard in 1971, permitting unlimited inflation, median wages have remained stagnant for most demographics, even declining for the 25-34 demographic. 35 years ago, the median wage for the 25-34 demographic was higher than it is today. This is outrageous and shows how restrictive inflation is on average people.

Ron Paul wants to get rid of the inflation tax, while all the Democrats who claim to champion the lower and middle classes completely ignore this regressive tax and the debt-for-money federal reserve system that permits it.

[bakho]

Quite cute Bruce.
Growth under Bush has indeed been more of a "peek" than a "peak".

[Bruce Webb]

Calmo I don't crunch numbers, I just point to them. Kind of like Harry Truman "I don't give them hell, I just give them the truth and they think it's hell"

The data table and explanations are given starting on p. 5.
http://www.bls.gov/news.release/archives/prod2_08082006.pdf

The key sentences: For the entire 1987 to 2005 period for which manufacturing data are available, the average annual rate of productivity growth was unchanged at 3.7 percent per year. The revisions did lead to changes in recent periods; productivity growth from 1995 to 2000 was revised up from 4.1 percent per year to 4.7 percent per year, while the average rate of growth from 2000 to 2005 was revised down from 5.0 percent to 4.1%
Which if I was a vicious partisan would result in my saying. Clinton Up! Bush Down!

On looking at the explanation again it seems like a lot of it had to do with the timing of the release of the Census of Manufacturing and the Survey of Manufacturing, and perhaps more by changing classification systems. I remember something about how light trucks moved from one category to another. For people that understand this stuff;
The BLS is now calculating intrasectoral transactions, subtracted to avoid
double-counting, using BEA's 1997 input-output (I-O) table which was constructed using data collected on the North American Industry Classifications System (NAICS). Earlier estimates of intrasectoral transactions were estimated using I-O tables based on the Standard Industrial Classification (SIC) system.
So it might be a matter of apples and oranges and adjusting the baseline back to maintain comparability. But like you I have problems with a number series that is so subject to revision and one that can jump around so much from quarter to quarter without an apparent ripple rising to the surface.

Both Dean Baker and Max Sawicky have assured me that there is no way to tamper with the number series itself, that it is honest reporting within the limits of the data inputs. And I am not about to quarrel with the Masters here. Let me just say that I was this close to calling victory on the Social Security front in Spring 2006, 2.0% productivity for 2005 seemed totally impossible. Nothing in the news in March 2006 suggested that productivity had taken a huge fall from 2.9% in Q3 2005 to zero in Q4, bringing it neatly in line with SS Intermediate Cost's 2.0%. But there it was. And when it bounced to 5.1% in Q1 2006 I was ready to let my paranoia unleash itself. But apparently this one corner of the Federal Government is immune from Bush Administration data cooking. (Me? I am reserving judgement).

[Peter Schaeffer]

Paul Krugman’s views on immigration and trade are well known to me. Indeed, I have used his reference to Polarized America several times in this blog and given Krugman credit (as recently as 2007/09/09). However, Krugman’s piece contains no mention of trade, immigration, and outsourcing irrespective of his views on these subjects. By contrast, Lou Dobbs and others aren’t shy about these subjects.

Krugman’s column focuses on economic performance since the Bush tax cuts. Fair enough and if anything, he understates his case. However, the likely suspects are conspicuous by their absence. For better or worse, the Bush administration has been notable for its failing trade policies and overt promotion of illegal immigration.

The trade deficit in goods has expanded from -$469.6 billion in Q1 2001 to -$885.5 billion in Q3 2006 (and declined to -$829.1 billion in Q2 2007). The deficit in goods and services and the Current Account have followed a similar pattern. As a consequence the US has lost 3.1 million manufacturing jobs since Jan 2001 (17.105 million versus 14.003 million in Aug 2007).

Of course, the other side of the trade/CA deficit coin has been the fast rising tide of household debt and, of late, mortgage loan fiascos. If is worth noting that the flood of foreign money back into the US as debt (rather than purchases of exports) hasn’t been motivated by the attractiveness of US investment returns. Private investors have increasing shunned the US and the CA deficit has been funded by foreign government seeking to maintain overvalued currencies instead.

In summary, the Bush administration’s trade policies have amounted to an ever rising substitution of imports for domestic production with highly adverse consequences for American workers with losses concentrated in manufacturing areas. The household income statistics for the Midwest are poor (under Bush) . For the region, median household income is down 8.5% (and -13.5% in Missouri, -10.3% in Illinois, -11.9% in Michigan, and -9.5% in Wisconsin). See JOINT ECONOMIC COMMITTEE Fact Sheet.

The flip side is of course, a vast expansion of household debt, the housing bubble, and now the subprime, Alt-A implosion. Together these dismal statistics amount to a failing trade policy. However, no mention of this debacle is to found in Krugman’s column.

The failures of the Bush administration on immigration of so legion that I don’t think I need to enumerate them in detail. Bush slashed immigration enforcement after 9-11 (see Report: Immigration workplace fines and arrests plummet or Less Pain for Employers) and publicly promoted illegal immigration on number occasions ("Hell, if they'll walk across Big Bend, we want 'em”).

However, the issue at hand is the impact of mass immigration since Bush took office. Any number of studies have shown large scale worker displacement since then. For a recent example, see Impact of Immigration In South Carolina. A grim and useful quote

“According to U.S. Census data, among construction workers real median earnings for Latinos dropped approximately 12 percent from 2000 to 2005, even as the number of construction workers expanded 181 percent. Black construction labor saw inflation-adjusted earnings fall two percent. It is also surprising to find that total Black employment dropped by 24 percent during the construction boom.”

Of course, no mention of the America’s immigration problems can be found in Krugman’s article. It is true that Krugman has, on other occasions, recognized that immigration is hurting our own workers. However, Krugman also endorsed the 2006 Teddy Kennedy Amnesty bill (minus the guest worker plan). Anyone with any knowledge of the subject recognizes that Amnesty now, means millions of more illegal aliens later and yet another Amnesty down the road. So far, I have found no mention of Krugman’s position on immigration enforcement, other than to oppose it.

He has also claimed that Bush told Mexico to take a hike on immigration. This will comes as news to the American people who have endured 7 years of Bush preaching about the wonders of importing poor people. On other occasions he has espoused the joys of mass immigration (MY BEAUTIFUL MANSIONETTE) without even mentioning the downsides.

By contrast, Lou Dobbs has spoken out on these issues time and time again. Can anyone really imagine Lou Dobbs noting the poor economic performance of this administration without talking about the reasons why? By contrast, Krugman appears to be quite capable of overlooking the elephants in the room.

As for Lou Dobbs and the facts, Dobbs operates with a bulls-eye on his back. His critics are quite willing to pounce on anything they can demonstrate is a factual inaccuracy. The number of times he has come up short is quite small.

[kthomas]

Peter, you forgot to mention that Krugman forgot to mention "La Raza" or Open Borders.

If you're gonna shill, do it right.

[calmo]

Thanks for that correction number-pointer (possibly misreported as "number-cruncher") Bruce [But I have reservations about this somewhat self-effacing correction, recognizing your SSTF work and still recognizing the difference between an historian and an actuary.]
So Max and Baker offered assurances about the political integrity (neutrality) of the largest and arguably best information gathering bureaucracy on the planet (nobody wants to trash the BLS and reduce their positions to the same anecdotal sputterings of their detractors), because they are on the inside and just know...unlike us who are not, and just hope?
To be blunt: the volatility here and significant revisions sink me.

[Mark Thoma]

Peter:

Your basic answer to everything is that it's those damn foreigners. They either come here or we send work there, either way it pisses you off.

Fine, you have a right to you opinion and you've made that point. Again, and again, and again. We get your point of view.

But I am not going to allow every post to be turned into your personal soapbox to whine about these issues. So, feel free to contribute to the topic at hand, you are welcome here if you want to do that, but if you are going to behave like a troll and try and commandeer every thread to the topics and points you want to address (those dirty foreigners mostly), then I will be forced to take steps to stop that. I'd rather not do that, it's unpleasant for all involved, but it really is getting tiresome.

Don't bother to protest, I am not going to debate you on this or anything else, that's how it is.

[Lafayette]

bak: Inequality rose very little under Clinton.

The Piketty-Saez study says it rose from 40 to 44%. In fact, during the Clinton Administration the vertiginous rise of income share of the top 1% of the American population, from its Reaganomic origins of 32%, was an unbroken continuation. So under Reagan and Bush I; we saw it rise 8% and with Billy Boy 4%.

What do you mean, therefore, by "very little"?

Yes, Clinton did put a stop to its rise when it topped out at about 44% and fell precipitously to ... 42% with his new "tax the rich" policy. Let's hear it for Bill!

Prior to 1940, it had been around 45%. The war made it drop to 33% in 1943, where it remained constant (more or less) until Ronny decided that he'd like to have wealth trickle down to the little people.

Some wealth. Some trickle. Some (more) political claptrap.

[Bruce Webb]

Well Calmo you would have to rope in the BEA and the Census Bureau. After a while it gets to be a pretty Grand Conspiracy. And of course the central contradiction is evident. Productivity numbers that would show low enough growth going forward so as to not fully fund Social Security are also fatal to both the Tax Cuts and Privatization arguments.

As I put it a decade ago: If Private Accounts are Possible, they won't be Necessary. If Private Accounts are Necessary, they won't be Possible.

You could make a substitution with Tax Cuts. If they operated anywhere near with the effect that Supply Siders once claimed the subsequent growth would clearly be well above fully funded Low Cost. That is the catch phrase transforms to "If Tax Cuts Work, Private Accounts won't be Necessary". This was the conumdrum at the core of the No Economists Left Behind challenge. Could Privatizers produce historic returns on worker funded private accounts using Intermediate Cost assumptions. And they couldn't. A few managed to try to do an end run by assuming that returns were coming from foreign investments, but that had the unfortunate side effect of suppressing domestic real wages and so choking off the funding of the IRA.

Ultimately they will have to abandon one narrative or the other. And while killing Social Security would give them great satisfaction, I suspect they will fight to the end for Tax Cuts. Ideology is great, but Dollars buy dinner at Mortons.

[John]

Lafayette (and others),

The post above makes an insinuation whose merits are hard to prove. Perhaps Mark Thoma can share his thoughts on this...\

There's this unspoken correlation that many like make about tax policy (mainly income taxes in these examples) and inequality and/or stagnant wages...as if one causes the other. I don't see it.

How does raising the top tax rate truly reduce inequality? What is happening when the top rates on the wealthy are raised that this magically shrinks the inequality gap...other than by maybe making the wealthy earn less?

I'm not being glib here. What is the rationale? What is about taxing wages and corporate profits with the aim of more government revenue supposed to do to middle and lower class people truly better off?

[im1dc]

To: wogie1 (put down that beer)

PK says..."Wages, adjusted for inflation, have stagnated..., benefits have deteriorated..., [a]nd one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam..."

We have spared over this point for years and it is high time you admit I am now and have been correct, the middle class in America is not better off today than 1970 economically.

They may be better off using other measures, eg., life expectancy, number of MRI machines within 100 miles, number of household LCD/Plasma TV's, number of computers in the house, Cable or DSL Broadband Internet access, the competition of various cell phones and text messaging devices and services, etc., but stagnancy and decline are the hallmarks of the average American worker economically today adjusted for inflation.

PS Let me point out that things will continue to get worse on the energy front for Mr. and Mrs. Average American b/c of the M&A consolidation of Big Energy that began in the Clinton years and accelerated since '01, i.e., there are far fewer gas station outlets in America today than 2001 and more are closing left and right as Big Energy squeezes out the Independent operators.

You can confirm the decline in gas station outlets by simply counting those closed in America today in every town and city, North South, East and West.

Call it oligopoly. Or, American Capitalism gone mad.

[bruce webb]

John a prominent argument of the Economic Right is that inequality is to be explained by variations inI educational levels. Just get training dammit! Well that is logically consistent with raising top rates and devoting the subsequent revenues to subsidize education.

Tax unproductive capital and fund education, in Right Economic terms that should increase productivity and reduce inequality. Or is the education argument only operative post facto?

You don't get to argue both points. If inequality is a product of higher education then the solution is to democratize higher education.

[Icarus]

I have a fundamental problem with the logic of using wage/wealth inequality as a metric for progress.

While payment in terms of wages have been stagnant for many in the US during a period of growth, the question isn't necessarily why the pieces of the proverbial pie fell how they did.
We've launched an era of globalization, multi-national style. The costs of products go down tremendously, and the culture of consumerism is spreading profusely. If we look at total utility, it is rising.

30 years ago, the idea of a person in the lowest quintile of US wages could afford a color television, or a video game console, or other gifts of our supply chain revolution, would have sounded silly.

This is what globalization provides...access to goods at prices previously unheard of. Some American workers would want to slow that process, in the name of their jobs, and it is in conflict with the American consumer. This battle line, however loud, is clear. The consumer votes with his/her dollar, and wins.

The amazing thing is that the US maintains the level of employment it does, and, that the standard of living is still amazingly high (for a large nation, which tacitly or explicitly, embraces immigration).

A little thought experiment: Instead of comparing equality within the US, look at a role in society (a profession), and compare that to others in other nations doing the same role. How does a janitor, miner, manual worker, service worker live in the US, and, how do they live in other societies? This shows us what Capitalism, US style provides.

While a few nations such as Japan, Germany, France, and a few others seem to do a good job with wage labour for the middle class, it is quite rare. Out of 190 some odd nations, very few provide the worker in the lower quintiles such an opportunity.

The other 'confusion' is the idea that the capitalist class confiscates profits which belong to the worker. No such logic exists. A worker's wage really does base itself on market availability (which makes immigration more tempting to ignore by republicans)...That's what a worker is 'worth'...nothing more. The idea that a given job 'should' pay enough to raise a family is outdated.
And now, with uber-globalization, production takes place in many nations, and, the rewards are taken by management for setting up this global process. This globalized management is by no stretch easy...as we've seen, some MNC's fail miserably because they're late adapters to change. It may be difficult to hear, but, in the US, most people earn what they deserve...

[anne]

Remember, 1% of households by 2004 controlled 57.4% of corporate shares. * So, a 15% maximum tax on capital gains and dividends, while interest is taxed at regular income tax levels, alone will tend to emphasize wealth and income inequality. Additionally, fees from profits on hedge fund management at taxed at a maximum of 15% when the profits are realized, and profits need not be realized for years. Hedge fund asset accumulation has grown astonishingly, dramatically accentuating the income of managers. Another contributor to inequality.

The rule is that income taxes are progressive to upper middle income levels, gradually flattening for income levels of the lower wealthy on, becoming mildly regressive for the wealthiest.

I am not at all suggesting change here, simply pointing out briefly that tax structure matters a whole lot.

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

[DJM]

I saw a union slogan today; "United we bargain, Divided we beg" ...this is something Americans need to think deeply about. (and I don't mean the Republican version of trust in big "Daddy")

[John]

So Bruce,

It's about more funding for education? OK. That's your point.

Sorry, it wasn't so obvious, to me at least, that that was simple correlation at stake here.

But how do we judge what unproductive capital is? And I was talking about income tax anyway. Sorry, but it still doesn't make a lot of sense. I'm not being cute or difficult here. I'm totally serious.

I was hoping for a more mechanical explanation.

[anne]

There is a curious problem that John Bogle and Charles Munger have presented, and involves the vast sums of institutional money professionally managed ar very high fees lessening the investment returns though insuring vast management gains. But, to whom do much of the investment returns belong? To workers.

There is a skimming of returns to workers through tax advantages for the wealthiest, through worker benefits that are ultimately limited by the nature of investment pools supposed to be for workers. Bogle and Munger have pointed out that this reflects not an ownership bent but a management dominance that is entirely new in corporate history.

David Swenson and Brad DeLong have been thinking along these lines, as well.

[Poorly written, but I am thinking this through.]

[The Dirty Mac]

"mandates service and pharmaceuticals pricing at fair value"

Price controls should be called price controls.

[bruce webb]

John much of the standard expanation of income inequality is indeed being attributed to differences in post graduate education. Perhaps you are not aware of this. Try Google. But those who live by the skill premium die by the skill premium. Why not tax the winners of the last generation(s) of winners, i.e. Hilton to pay for the education of Chang, Singh, Nguyen, or for that matter Washington. Or Nkobe:

[Stephen Heyer]

Peter Schaeffer: "...However, he has not made any attempt to explain why this period of growth has failed the American people so badly. The words immigration, trade, and outsourcing, are conspicuous by their absence."

Yes, well, I don't know.

For a long time about all economists kept assuring us that all three were great economic benefits, benefiting me in particular.

Then, gradually, they have began kind of admitting that some (immigration to begin with) may be kind of neutral economically. They of course carefully leave out external costs, in short that more people decrease, for example, the original populations' access to "natural resources" such as water, energy or even a reasonably priced block of land on the water or a forest to go hunting in.

They also carefully forget to mention that all three of the sacred cows benefit the people who were paying them greatly. Or, for that matter, themselves as members of the professional class - cheap lawn care, childcare, etc.

Ok, immigration, trade, and outsourcing, may still turn out to be great benefits we are promised they are, it's just that I'm not trusting the people who keep telling me that they are. Something about they or their masters benefiting from all three too much themselves.

Anyway, there are other opinions, just today over at Economonitor the article "A Rising Tide (Not) Lifting All Boats?" at http://www.rgemonitor.com/blog/economonitor raises some concerns.

Who's right? Hell! I don't know, I'm just a small coastal town Australian.

'm kind of beginning to suspect nobody is.

[BJ Feng]

Anne, there are returns to labor and returns to capital. We've had times in the past when returns to labor were high (such as in the 1950's) and we're currently living in a period when returns to capital are high. Many economists blame globalization, but I don't see how it can be stopped. Other countries such as France and Germany are working to free up their labor markets to more competition. I think it would be a mistake for us to go in the other direction. While it sounds good, I see no way for your proposals to be implemented on a practical level that would not hurt our overall economy more than it would help.

As for student loans, the high interest rate reflects the number of loans that go into default and are never paid off. If these loans are indeed guaranteed by the government (and not all student loans are) then I see no reason for rates to be so high. It would be strange and unexplainable for companies not to jump in and offer a better rate as they've done with the mortgage markets. Perhaps someone else can explain this conundrum, but it seems to me there must be some restriction on competition or some other reason for guaranteed rates to be so high.

Rather than rush to increase taxes, I believe that there is enough waste and corruption that could be rung out of our government and that this should be the main focus of our attention. Citizens Against Government Waste is one of the sites that list government waste and we should be demanding government clean up its act before entrusting it with more money.

http://www.cagw.org/site/PageServer

Someone also brought up the issue of inflation and money management. Just by personal observation, the poor do not understand how to manage their money for maximum gain. You cannot leave your money in a bank account at 0% interest! Especially with banks that charge a maintenance fee for it. The "rich" people I know have money market accounts that are linked to their bank accounts and are earning enough interest to protect against inflation. But the poor people I know just don't understand and are distrustful of the methods I suggest. They don't seem to understand that all it takes is a few mouse clicks to transfer money from a money market account, say with Vanguard, to their personal bank account. They also seem distrustful of the stock market as a way to preserve and make more money. I explain that you don't have to have all your money in the stock market and that asset allocation is the key, but I just get blank stares back.

[BJ Feng]

I believe that trade is almost always good, but industries will be hurt. Yet there is no way to protect those industries without cutting off an economy, as trade protectionism usually will result in a trade war. We just have to take it and focus on the industries where we have a comparative advantage in. Importing cheaper products also allow us to have more, and buy more goods than otherwise. This is understated and a great benefit to the poor. You can now get a T-Shirt of good quality for under $5! That has to be a great help to the poor who can then use their meager savings elsewhere. Low prices saves the poor billions upon billions every year.

[zinc]

The verdict on trade is far from clear. Certainly, the majority of academic economists continue to argue tooth and nail that free trade is the path to economic growth for all, even to the point of accepting grotesque distortions in supportive markets that under pin the current trade structure.

The verdict will be rendered during the next recession where credit, employment, and asset prices will be normalized.

To me, the loss of dollar purchasing power, decimation of the manufacturing core, stagnation or decline in working wages, the massive increase in public and private debt, etc are sufficient evidence that the current free trade agenda is foolish and dangerous.

Most mainstream economists failed to appreciate the housing (debt) bubble. We shall see if their myopia extends to trade in the years ahead.

[DJM]

BJ Feng, (I must be shopping in the wrong place) "You can now get a T-Shirt of good quality for under $5! " Oh, I know you can buy cheap clothes but not "quality" cheap clothes. I remember clothes that really lasted and were actually wash and wear (fabric by Monsanto..maybe they were poisoning the environment with chemicals to create the fabric ?). You could buy them at places like Kmart, Sears and JC Penny in the sixties for a reasonable price and they were made in the USA. Now almost everything shrinks or stretches and all of it wrinkles. I know this is off the subject.

[lonesome moderate]

from save_the_rustbelt--Krugman said trade would make US workers more prosperous and in large measure he was wrong.

To my knowledge, Krugman has never said anything remotely like this. What he, and most other leading economists, has said was that free trade would make the country as a whole more prosperous, but that there would be many losers. He has also gone on to say that government had a responsibility to intervene to make sure that the benefits of trade went to the country on a more equitable basis.

[cm]

DJM: Perhaps he means what passes as "reasonably priced" quality nowadays. It appears to be generally so that the "good old days" weren't actually as good as we make them out to be, but these days clothes indeed wear out more quickly. But then now we have dryers, and "back then" we had clotheslines. It is amazing how much stuff one can pull off the lint mesh after a load.

[calmo]

cm, you say the damnest things It is amazing how much stuff one can pull off the lint mesh after a load.Now don't get me wrong, I deliberately don't wash my clothes that much because I, too, have the sense that the dryer is, well, eating my clothes. I tried hanging my clothes up in the living room, but they took forever to dry...and the cobwebs on them just meant that I needed to wash them again.
U B right lonesome.

[BJ Feng]

Yes, perhaps good quality isn't what it used to be, unfortunately I don't remember. What I mean by good quality is that the front pocket of the T-shirt doesn't fall off after a wash or two. I admit, that's a pretty low standard, but I've had T-shirts before that literally fell apart. The "quality" T-shirts you can get nowadays actually hold together, and I suppose what is considered "quality" ain't what it used to be.

[Cyrille]

Television may be cheaper, but 30 years ago you didn't have to be filthy rich to breath cleaner air than today, you could buy fish or meat that had not been raised industrially for a very reasonable price, someone from the bottom quinitile could get good quality wine (as opposed to a lot of cheap crap as is the case now -good wine has gone over the roof) furniture was WAY more solid... There was a time when clothes were made to last a lifetime...
Also, you may have been able to live very conveniently without a car, which is really a deadweight cost in most cases.

Besides, my parents WERE in the bottom quintile 30 years ago and had a television (black and white admittedly, although that changed to colour around 27 years ago), that we didn't watch much because there are far better things to do with a book or playing between parents and children -so it was not their massive investment either. And that was in France, a less wealthy country. OK so no game console? Let me tell you: my children won't have one either. It's reall not a particularly great breakthrough.
One can also ask whether the bottom quintile can reall "afford" all that much, or rather borrow it and be in debt forever.

But most of all: housing. It has got hugely more expensive.

So yes, hi-tech came to exist, and of course it wasn't there before. Other things have disappeared -many linked to the degradation of the environment. Anyway since the stagnation is in real terms, the fact that some goods are now affordable necessarily means that others are less so. Of course, maybe inflation is inaccurately calculated, it is a tricky thing to do.

It's strange how you often get the same people arguing that GDP growth is THE target and anytime GDP is growing it means a great economy, yet will argue that stagnant (or worse) wages do not mean that people are not going forward. I don't see how the fact that they are consuming more could make up for everything. If I like a shirt, I don't see how I could be worse off if it lasts. It doesn't matter to me how many I buy in a year, rather how many I have at any given time.

For equal quality, hi tech apart, I'd be surprised if the median US wage earner really could afford more now than before.

[lonesome moderate]

For what it's worth, my memories of growing up in the early and mid seventies are very different from Cyrille's. What I remember was a big national fuss at the time about how expensive meat was (certainly more expensive in constant dollars than today), and the air in Los Angeles then being dirtier than it is anywhere in the country today. I also remember cars and appliances being much less reliable, and not lasting nearly as long, than is the case now. Housing and gas were cheaper.

[Bruce Webb]

John I was posting remotely on an iPhone from a bar. Not exactly ideal blogging conditions. As I read it you were asking a serious question here;
How does raising the top tax rate truly reduce inequality? What is happening when the top rates on the wealthy are raised that this magically shrinks the inequality gap...other than by maybe making the wealthy earn less?

I'm not being glib here. What is the rationale? What is about taxing wages and corporate profits with the aim of more government revenue supposed to do to middle and lower class people truly better off?
And I rather glibly blended two serious responses.

In the debate over income inequality over the last few months the Economic Right has finally been forced to admit that it exists but continue to deny that it is the result of market distorting pricing power, i.e. CEOs paying themselves more just because they can. Instead they have been pushing back on two fronts, one rather bizaarely arguing that growth of the corporation itself justifying proportional increases in top compensation (as if the CEO was the only driver of growth) and the other more widely arguing that almost all of income inequality can be traced back to differences in educational achievement. The term of art generally used is "skill premium".

So one theoretical response to your question is that increasing taxes on the wealthy and devoting it entirely to training and higher education would be one way to answer the question "How does raising the top tax rate truly reduce inequality?" using the assumptions and premises of the defenders of inequality themselves. Now I don't see higher education as the panacea here, my view is that the masters of inequality are using credentials as a gatekeeper and have little interest in opening the gate to the masses. But then again the education thing is their argument and not mine.

Another response is to look back at times when top rates were substantially higher and see what the effects really were on income inequality. And if you look at the fifties and early sixties you see a time when high taxation on higher income allowed a whole set of positive economic outcomes for the middle class. The GI Bill that not only moved millions of veterans into houses but financed their educations coupled by a rapid expansion in public education. In my old state of California you saw an amazing expansion of higher education through the three stools of the University of California, the California State University System, and the Community Colleges all of which combined to be practically a world wonder of low cost, high quality education. And then came Prop 13. Which not only was a boon to wealthy property owners but shielded corporations from higher property taxes as well.

Another way to put it is that liberal tax and spend policies provide more utility to the middle and lower classes than market based versions that assume that efficiency always produces equity. Because in the end that was how Supply Side sold itself, 'trickle down' and 'rising tide' are just metaphors for equitable solutions, or at a minimum win-win solutions. Letting rich people have more of their money was supposed to benefit everyone. Now that it has been shown that it really isn't, the original beneficiaries of the tax cuts are trying to move the goalposts. Well in my usual metaphor "Where is my slice of the pie? You promised more pie, and not just for you! I want my pie!"

To put it another way. What is the theoretical argument against tax and spend in a democratic society if it produces a more equitable solution? In the Fifties the argument was simple, point to Hayek. But the emergence of Scandinavian style Social Democracy makes that argument more and more difficult, the suggestion that "Well that would just make America look like Sweden" drawing baffled looks from people like me and drawing this response;

"Well yeah. What's your point?"

[DJM]

I was thinking this morning about the question : are we really better off.... My parents raised five children and bought a house (and a color TV) on one paycheck (shipyard worker)and no credit cards. For over half of their marriage my mom was a stay at home mom. My mother went to work part time when my youngest sister was in grade school (and even then she went to work at the school so she was still basically a stay at home mom) My mother had really good benefits and retirement by the time she left work for the Los Angeles school system (which is less true these days for the same job)during that time a lot of her pay went into CDs and such for retirement savings......

[anne]

Mention was made somewhere, sometime, about Iraqis wishing us to remain in Iraq, and though I would not care for a polling wanting us to stay, evidently polling tells us just the reverse. Iraqis evidently have wanted and do want to be free of the occupation, which only makes sense.

[John]

Bruce,

Thanks for the more serious answer.

Couple things, debating the existence of income inequality is futile...of course it exists. And I'd love to know what morons actually tried to argue this. And I'm not part of the "economic right"...at least not as it is understood so I'd prefer to not have Left-Right as some backdrop to all this.

Anyway, some red flags that went "CLUNK" in my head:

[The E.R.] continue(s) to deny that it is the result of market distorting pricing power, i.e. CEOs paying themselves more just because they can..

I don't see how this is a source of true income inequality. We could just blame professional athletes. A few thousand 6 and 7 digit salaried CEO's is not responsible for income inequality. Wages and Prices work in the same way and serve the same purpose. They are market signals that show us what people are willing spend or pay to improve their perceived economic self interest in voluntary exchange in light of scarcity. It's why diamonds cost more than water under normal conditions...even though water is more important. I know that sounds dry and unsatisfying but it's a simple dispassionate truth.

"Distortion" implies something that isn't natural or an exchange price (or wage) that isn't based on free exchange. And unless you show that CEO wages are unnatural, meaning a result of coercion or "outside the natural market" forces, I can't say it is a distortion.

Of course, I should clarify something I haven't through all this, going back to my original question. And that is that I don't "look at" income inequality as a controllable factor that yields any real benefit in terms of quality of life and standard of living...which is really what this all about. I say this in much the same way that collecting data on what time of day it rains isn't going to really tell us anything worthwhile in advancing the study of "rain".

I have to run soon and don't want to get deeper into this. Looking ahead, I could write a lot more on what's left. I'll try and come back to it.

[Lafayette]

John: There's this unspoken correlation that many like make about tax policy (mainly income taxes in these examples) and inequality and/or stagnant wages...as if one causes the other. I don't see it.

Then open your eyes. Go here.

Now explain the spike upwards (in the top 1% of the population) of income distribution that "mysteriously" appeared after 1980. Who was PotUS in 1980?

Then explain "income inequality", if the above is not sufficient proof to you.

Waiting for your response with bated breath ...

NB: The Piketty-Saez work, in the explanation link above, is based upon filed tax declarations.

[Lafayette]

John: They are market signals that show us what people are willing spend or pay to improve their perceived economic self interest in voluntary exchange in light of scarcity.

Being market signals does not justify them. Influenza is a recurrent winter malady ... so that makes it "OK"? It comes and goes, but kills people.

Income inequality is similar. It incarcerates people in poverty and they are unable to take the escalator up to a middle class existence (except by crime).

Redistributing income from the top to the bottom has other justifications. The first of which is that we live in a collective economic sphere where no one person is the entire master of their destiny. Millionaires do not make a million dollars on a deserted island.

It takes an economy to have that happen, and a vibrant one. That economy distributes income based upon progressive taxation, because it is presumed that the rich should pay more because they have more. Very simple logic, that. I.e., people are obliged to contribute to running public services commensurate with their incomes out of a sense of solidarity -- without which a society has no cohesion.

That economy is also a social entity, not a jungle where the fittest survive at the upper echelons and the rest are just road kill on the highway of life.

The notion of an collectivism is the basis of modern society. We collect ourselves into groups not only for mutual protection but mutual well-being. Our society provides us the broad economic foundation for our own individual well-being.

But, that society does not come about on its own. And when it is left to develop on its own, what happens is massive income inequality with a select few at the top and a great amount of poor at the bottom. If you don't believe this can happen, time-transport yourself back to 19th century America ... or just take a walk around South America today. Or go to China.

Your posts are purely anecdotal citing some celebrities or top managers who "made it" -- as if they are somehow special, blessed by God (or something) and therefore with an endowed right to excessive capital accumulation.

Of course, you're in the right country to maintain such a belief. You are, indeed, not alone. But, having company won't make income distribution the consequence of a "fair game" in which the "winners take all" - which is more like plunder than distribution of wealth.

Humanity has come a long way since that was the norm.

[Steven Capozzola]

The U.S. lost 46,000 manufacturing jobs in August 2007. More significantly, the ongoing losses are taking a cumulative toll on communities throughout the country. We need to adequately enforce our trade laws, and hold countries like China accountable for illegal trading practices such as currency manipulation. Otherwise, we’ll continue to shed manufacturing jobs.

[DJM]

Lafayette, your comments about the rampant belief in this country that those who "made it" are somehow special, gifted, talented and deserving reminded me of a comparison of that attitude with a very different approach to educating children in Asian countries.
... the point made was that in our country the lavish praise goes to those who seem to have an easy natural talent or ability. The unintended consequences of that are that the children struggling to learn something are left feeling stupid and often give up trying or become defensive rather than deal with the anxiety (because the message becomes that intelligence and talent are innate). In Asian countries children are praised for their efforts even if they don't get it right away, they are encouraged and supported in the belief that it is just a very natural part of the process of learning.

*from research in the 1970s by psychologists Harold Stevenson and James Stigler mentioned in the book Mistakes Were Made (but not by me) .....which by the way I again, highly recommend.

[Bruce Webb]

John I too am on the run. And I may have to follow up from my iPhone. But you have built a lot of assumptions in that need to be unpacked.

"Couple things, debating the existence of income inequality is futile...of course it exists. And I'd love to know what morons actually tried to argue this."

Well I left out a word. The issue has been 'increasing' income inequality, and all kinds of morons have been arguing that it doesn't exist, for example that it only reflects income mobility over a lifetime, or abandoning that that it all is a product of an increasing skill premium. I really can't recap the last year of econoblogging on this, if you are interested one of the seminal posts on this on this site was Janet Yellen: Economic Inequality in the United States from last November.

Me; "i.e. CEOs paying themselves more just because they can..

You; "I don't see how this is a source of true income inequality. We could just blame professional athletes. A few thousand 6 and 7 digit salaried CEO's is not responsible for income inequality."
Well the problem isn't the 6 digit CEO's, who are probably an endangered species among Fortune 400 companies to start with. It is the 8 digit CEOs like Nardelli, and the 9 digit Hedge Fund Managers. And it is not salaries, generally they on paper seem reasonable, it is the options and the buyouts that rake up the 8 digit takes for these guys. I suspect you could total MLB payroll and not equal what some of these hedge fund guys are dragging down.

"Distortion" implies something that isn't natural or an exchange price (or wage) that isn't based on free exchange. And unless you show that CEO wages are unnatural, meaning a result of coercion or "outside the natural market" forces, I can't say it is a distortion."
John you are assuming what is being put to the test here. I daresay most people here are familiar with the Day one lesson in 'supply and demand' in the typical Intro to Econ course. One question for you is why supply and demand for CEO salaries operates so differently in Europe than it does here. There is a distortion for you, explain that in "natural market" terms then we can talk.

"I know that sounds dry and unsatisfying but it's a simple dispassionate truth."
No not dry. Extraordinarily naive and devoid of historical understanding of the history of labor relations certainly, and so unsatisfying.

I'll let others deconstruct the notion of 'dispassionate truth' as it relates to neo-classical economics. Lets just say that some of this ground has been trodden many times before. Everything is simple if you ignore the complexities.

[DJM]

By the way what I quoted earlier about the Asian method of teaching (which I know nothing about first hand, only things I read) was supposed to be about their pre-school and grade school....I have been told that the middle and high schools are grueling, competitive and very harsh to kids who can’t keep up.

[Lafayette]

DJIM: Laf ... your comments about the rampant belief in this country that those who "made it" are somehow special, gifted, talented and deserving reminded me of a comparison of that attitude with a very different approach to educating children in Asian countries.

A nation of superlatives

Can't imagine how you came across that silly notion.

The base cultural ethic, of the US, and which differentiates it substantially from its most comparative neighbor (the EU), is this: It's an intensely competitive society.

The cultural instinct, that of "being Number 1", in all ways (the perfect but desperate mom, the TOP Manager, the billionaire, the celebrity star, the "Greatest Thing since Sliced Bread", most bang-for-the-buck merchandise/product offering, the "firstest with the mostest") is paramount.

We have become a nation defined by superlatives.

This cultural value distills into all facets of society and into education as well. The arch-requirement for competition underlines the value of "individualism", whilst the communal interests of society are relegated to the back burner. (Meaning social services that render to the lower and lower-middle classes the wherewithal to live in health and with personal dignity.)

Our concern for the poor pops up in blogs ... but where is it to be seen on the political landscape? Nowhere. Hugo Chavez giving oil to poor blacks in some suburb or NYC. BFD.

Europeans learned the hard way, through centuries of conflict and strife. The social cohesion of a society is key. Its foundation constitute two simple precepts: A fair and just distribution of income and the ability of all to have a chance at earning a decent revenue for their labour.

Earning a megabuck-a-week is nowhere whatsoever to be seen on the horizon of real social necessities. It is a vain, needless pursuit of people who must assure their raison d'être by means of financial conquest and conspicuous consumption. Preferably on a yacht anchored in St. Tropez.

Differentiating yourself from the crowd is not important - though innately human ... admittedly. Living peaceably and decently as a member of a community does, to my mind, indicate an "advanced society" - where as few as possible are left behind as road kill on the highway of life.

And the Asian cultures, centuries older than us, understand better that notion than we do. These recent years of massive transfers of wealth to them has shown well that they know full well how to take their place on the global scene.

My hat's off to them. Whilst we are sitting on our laurels of yesteryear ... wondering what-in-hell is happening to us.

[Lafayette]

BW: One question for you is why supply and demand for CEO salaries operates so differently in Europe than it does here.

That is, indeed, a good question. From what I have seen of them, even with a four week vacation, European CEO's work just as hard.

I would offer this response to the question posed above, which is called, "the abuse of corporate assets". This idea is written into law, that the abuse of corporate assets is punishable as a crime. (Yes, I know, it is also law in the US. But, in the US it is more under the caption of "fraud" where the proof of the accusation is different in front of a court of law.)

There exist all sorts of cronyism in Europe, just as in America. But, when corporate assets of a public company, that is, the property of public stock holders, then laws protect the "property rights" of those stockholders.

This means that the manipulation of corporate assets for the individual benefit of one or a few is punishable as a crime. For instance, a Rightist government in France just outlawed "golden parachutes" that had no relevance to either tenure or performance.

In a nation such as the US, where property rights are one of its legal cornerstones, it is difficult to understand how it can be so permissive of the abuse of corporate assets that are in the public domain.

Board level cronyism in America allows for top management to accord itself perquisites. And stock holders, though fewer comparatively, seem to be more vociferous in Europe when it comes to abuse of power/position.

[jesse anderson]

well for one thing it all begin when roland reagean was our man don't get me wrong but he all right it just that I'm a black republe and Mr. Bush did not begin this so tell the true.

[Jaggy]

I'm really surprised by the economical stagnancy of the middle class american level since 70s.

Well, from France, american people seem very strange.

You seem to live in a dreaming world, where dreaming figures (top managers, celebrities...) make most of american think that everything is possible in their country. And that if everything is not perfect, it is far better than life in EU countries ! :D
The american dream.

But this dream is like a very powerful lie, a mirage provided by rich people, to convice others to give up any solidarity policies.

Indeed, anywhere else in the world, in every rich countries, you can find people who started from very low to reach a high level of success. This is not an american miracle.

So if america is really a place where opportunities are greater than anywhere else (why not after all), this fact has to be prooven by the number of people who succeed, and not by the level reached by the rare lucky people who succeed, while a large majority of men stay poor and die miserably...

So the best factors that should be followed are :
- the poverty rate in the population and its decrease,
- the middle class rate in the population and its increase,
- how progress the standard of living of poor/middle class people
- health of poor and middle class people

These factors are far more important than GDP.

The astonishing thing is that law should yet naturally benefit to poor and middle class people, because they are ~95% of the population. So they are politically far strongest than all others.

That's why the american dream still remain : it is necessary to blind people, and make them vote against there own interest.

Wake up, american people ! I hope you will not let things go on like that...

[anne]

"Well, from France, American people seem very strange."

"Well, from America, American people seem very strange."

Please do not allow France to become more like America at this time as Nicolas Sarkozy appears to wish in looking to an imperial France. I am much bothered by the Americanized tone of this Sarkozy government.