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Wednesday, December 13, 2006

Krugman: The Great Wealth Transfer

At Rolling Stone, "The Great Wealth Transfer" by Paul Krugman. This is shortened quite a bit - the full article is linked:

The Great Wealth Transfer, by Paul Krugman, Rolling Stone: Why doesn't Bush get credit for the strong economy?" That question has been asked over and over again in recent months by political pundits. ... The reason most Americans think the economy is fair to poor is simple: For most Americans, it really is fair to poor. ... Most Americans are little, if any, better off than they were last year and definitely worse off than they were in 2000.

But how is this possible? The economic pie is getting bigger -- how can it be true that most Americans are getting smaller slices? The answer, of course, is that a few people are getting much, much bigger slices. ...

Rising inequality isn't new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth -- and they know it.

America has never been an egalitarian society, but during the New Deal and the Second World War, government policies and organized labor combined to create a broad and solid middle class. ... But in the 1970s, inequality began increasing again -- slowly at first, then more and more rapidly. ...

The widening gulf between workers and executives is part of a stunning increase in inequality throughout the U.S. economy during the past thirty years. To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income -- the richer they are, the taller they are.

Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line -- representing those Americans living in extreme poverty -- is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.

Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle -- the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.

What's useful about this image is that it explodes several comforting myths we like to tell ourselves about what is happening to our society.

MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY. According to this view, most Americans are sharing in the economy's growth, with only a small minority at the bottom left behind. That places the onus for change on middle-class Americans who -- so the story goes -- will have to sacrifice some of their prosperity if they want to see poverty alleviated.

But as our line illustrates, that's just plain wrong. It's not only the poor who have fallen behind -- the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.

MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION. This view -- which I think of as the eighty-twenty fallacy -- is expressed by none other than Alan Greenspan... Last year, Greenspan testified that wage gains were going primarily to skilled professionals with college educations -- "essentially," he said, "the top twenty percent." The other eighty percent -- those with less education -- are stuck in routine jobs being replaced by computers or lost to imports. Inequality, Greenspan concluded, is ultimately "an education problem."

It's a good story with a comforting conclusion: Education is the answer. But it's all wrong. A closer look at our line of Americans reveals why. ... Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.

MYTH #3: INEQUALITY DOESN'T REALLY MATTER. In this view, America is the land of opportunity, where a poor young man or woman can vault into the upper class. In fact, ... America actually has less social mobility than other advanced countries: These days, Horatio Alger has moved to Canada or Finland. ...

Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be -- their opportunities to do so are actually shrinking. ...

It's no coincidence that ringing endorsements of greed began to be heard at the same time that the actual incomes of America's rich began to soar. In part, the new pro-greed ideology was a way of rationalizing what was already happening. But it was also, to an important extent, a cause of the phenomenon. In the past thirty years, right-wing foundations have devoted enormous resources to promoting this agenda, building a far-reaching network of think tanks, media outlets and conservative scholars to legitimize higher levels of inequality. ...

Although corporate executives have always had the power to pay themselves lavishly, their self-enrichment was limited by what Lucian Bebchuk, Jesse Fried and David Walker -- the leading experts on exploding executive paychecks -- call the "outrage constraint." ...

Lately, however, we have experienced a death of outrage. Thanks to the right's well-funded and organized effort, corporate executives now feel no shame in lining their pockets with huge bonuses and gigantic stock options. Such self-dealing is justified, they say: Greed is what made America great...

At the same time, there has been a concerted attack on the institutions that have helped moderate inequality -- in particular, unions. ...[T]oday, in the era of Wal-Mart, fewer than one in eleven workers in the private sector is organized -- effectively preventing hundreds of thousands of working Americans from joining the middle class.

Why isn't Wal-Mart unionized? The answer is simple and brutal: Business interests went on the offensive against unions. And we're not talking about gentle persuasion; we're talking about hardball tactics. During the late 1970s and early 1980s, at least one in every twenty workers who voted for a union was illegally fired; some estimates put the number as high as one in eight. And once Ronald Reagan took office, the anti-union campaign was aided and abetted by political support at the highest levels.

Unions weren't the only institution that fostered income equality during the generation that followed the Great Compression. The creation of a national minimum wage also set a benchmark for the entire economy, boosting the bargaining position of workers. But under Reagan, Congress failed to raise the minimum wage...

After Reagan left office, there was a partial reversal of his anti-labor policies. ... But then came Bush the Second -- and the balance of power shifted against workers and the middle class to a degree not seen since the Gilded Age. ...

Under Bush, the economy has been growing at a reasonable pace for the past three years. But most Americans have failed to benefit from that growth. ...

There are four ways, in particular, that the Bush administration has helped make the poor poorer and the rich richer.

First, like Reagan, Bush has stood firmly against any increase in the minimum wage, even as inflation erodes the value of a dollar...

Second, again like Reagan, Bush has used the government's power to make it harder for workers to organize. ...

Third, the administration effectively blocked what might have been a post-Enron backlash against self-dealing corporate insiders. ... With Americans focused on the war, CEOs are once again rewarding themselves at impressive -- and unprecedented -- levels.

Finally, there's the government's most direct method of affecting incomes: taxes. In this arena, Bush has made sure that the rich pay lower taxes than they have in decades. ... It's easy to get confused about the Bush tax cuts. For one thing, they are designed to confuse. The core of the Bush policy involves cutting taxes on high incomes, especially on the income wealthy Americans receive from capital gains and dividends. ... But there are some middle-class "sweeteners" thrown in, so the administration can point to a few ordinary American families who have received significant tax cuts.

Furthermore, the administration has engaged in a systematic campaign of disinformation about whose taxes have been cut. ... [O]fficial reports on taxes under Bush are textbook examples of how to mislead with statistics...

In reality, only a few middle-class families received a significant tax cut under Bush. But every wealthy American -- especially those who live off of stock earnings or their inheritance -- got a big tax cut. ... Truly, this is a very good time to be one of the have mores. ...

Oh, one last thing: What about the claim that the Bush tax cuts did wonders for economic growth? In fact, job creation has been much slower under Bush than under Clinton, and overall growth since 2003 is largely the result of the huge housing boom, which has more to do with low interest rates than with taxes. ....

A generation ago the distribution of income in the United States didn't look all that different from that of other advanced countries. ... Today, we're completely out of line with other advanced countries. ... These days, to find societies as unequal as the United States you have to look beyond the advanced world, to Latin America. And if that comparison doesn't frighten you, it should. ...

In addition, the statistical evidence shows, unequal societies tend to be corrupt societies. When there are huge disparities in wealth, the rich have both the motive and the means to corrupt the system on their behalf. ...

As the past six years demonstrate, such political corruption only worsens as economic inequality rises. Indeed, the gap between rich and poor doesn't just mean that few Americans share in the benefits of economic growth -- it also undermines the sense of shared experience that binds us together as a nation. "Trust is based upon the belief that we are all in this together, part of a 'moral community,' " writes Eric Uslaner, a political scientist at the University of Maryland... "It is tough to convince people in a highly stratified society that the rich and the poor share common values, much less a common fate."

In the end, the effects of our growing economic inequality go far beyond dollars and cents. This, ultimately, is the most pressing question we face as a society today: Will the United States go down the path that Latin America followed -- one that leads to ever-growing disparity in political power as well as in income? The United States doesn't have Third World levels of economic inequality -- yet. But it is not hard to foresee, in the current state of our political and economic scene, the outline of a transformation into a permanently unequal society -- one that locks in and perpetuates the drastic economic polarization that is already dangerously far advanced.

Update: PGL at Angry Bear comments on Krugman's article.

    Posted by on Wednesday, December 13, 2006 at 11:29 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (103)

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