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Tuesday, February 28, 2006

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

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

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

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

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

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

    Posted by on Tuesday, February 28, 2006 at 12:42 PM in Economics, Income Distribution, Universities | Permalink  TrackBack (0)  Comments (15)

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