by Paul Krugman
These widening disparities are often attributed to the increasing importance of education. But while it’s true that, on average, workers with a college education have done better than those without, the bulk of the divergence has been among those with similar levels of education. High-school teachers have not done as badly as janitors but they have fallen dramatically behind corporate CEOs, even though they have about the same amount of education.
Also, the growth of inequality cannot be described simply as the rise of some group, such as the college educated or the top 20 percent, compared with the rest; the top 5 percent have gotten richer compared with the next 15, the top 1 percent compared with the next 4, the top 0.25 percent compared with the next 0.75, and onwards all the way to Bill Gates. The important contribution of Wolff’s book is that it reinforces the evidence that much of the important action in American inequality has taken place way up the scale, among the extremely well-off.
Wolff focuses on wealth rather than income—on assets rather than cash flow. This has some advantages over annual income as an indicator of a family’s economic position, especially among the rich. Someone with a very high income may be having an unusually good year, while it is not unheard of for wealthy families to have negative income if they make a bad investment; in each case their assets will be a better clue to where they really fit in the rankings. More important, however, wealth is in some ways a better indicator than income data of what is happening to the very successful—simply because it is so narrowly held: In 1989, the top 1 percent of families owned 39 percent of the wealth but received only (a still impressive) 16 percent of the income.
A particularly striking statistic in Wolff’s book should put an end to the still-widespread tendency to discuss the growth of inequality in America by tracking the fortunes of the top 20 percent, or of college-educated workers. Between 1983 and 1989, while the wealth share of the top 20 percent of families rose substantially, the share of percentiles 80 to 99 actually fell. In other words, when we say that America’s rich have gotten richer, by the “rich” we do not mean garden variety yuppies—we mean true plutocrats.
Many conservatives have probably stopped reading by now, or at least stopped being able to respond to this article with anything other than blind anger, but for those who are still with me let me make a crucial point about these statistics: They say nothing about who, if anyone, is to blame. To say that America was a far more unequal society in 1989 than it was in 1973 is a simple statement of fact, not an attack on Ronald Reagan. Think about the parable of the fishermen and the prospectors: The greater inequality of the latter society did not come about because it has worse leadership but because it lives in a different environment. And changes in the environment—in world markets, or in technology—might change a society of middle-class fishermen into a society with dismaying extremes of wealth and poverty, without it necessarily being the result of deliberate policies.
In fact, it’s pretty certain that this is what has happened in the United States. Ronald Reagan did not single-handedly cause the incomes of the rich to soar and those of the poor to decline. He did cut taxes at the top and social programs at the bottom, but most of the growth in inequality took place in the marketplace, in the pretax incomes of families. (There is a wide range of opinion as to just what happened with the markets, though clearly technology and the changing international trade scene played big roles.) Furthermore, the upward trend in inequality began in the seventies under Nixon, Ford, and Carter and continues in the nineties under Clinton; similar trends, if not so dramatic, are visible in many other countries.
Yet income distribution is a politicized subject all the same. The reason is obvious: The extent of inequality is relevant for policymaking. In the fisherman society, for example, people might feel that only invalids, widows, and orphans deserve public support. In the vastly unequal prospecting world, however, it is easy to imagine a broad public demand that those who have been lucky enough to find gold be required to share a significant fraction of their winnings with those who have not. Indeed, it is hard to see how such a redistributionist program would not be popular—if the public understood just what was going on.
It is in the light of this possibility—that a redistributionist policy would have broad support if people understood the realities—that we should consider Armey’s The Freedom Revolution. It is not, to say the least, a carefully written or argued book; it consists largely of standard conservative bromides, backed by a number of unsupported assertions. But despite the book’s sloppiness, it is an important document, because of what it says about the majority leader’s intellectual processes. Armey, a former economics professor, could have made the case that there is nothing that can or should be done about growing inequality. But instead he tries to claim, in essence, that nothing has happened—that we really are still a society of middle-class fishermen.
First, Armey denies that the eighties were a period in which the rich got richer and the poor got poorer. “The statisticians,” he writes, “break our population into five income groups, called quintiles. During the eighties they gained in average real income as follows:
Lowest quintile—up 12.2 percent.
Second-lowest—up 10.1 percent.
Middle—up 10.7 percent.
Second-highest—up 11.6 percent.
Highest—up 18.8 percent.”
The source for this data, not cited, is the Bureau of the Census’s Current Population Report. This is helpful to know, because if you check Armey’s facts you will find he is fibbing a bit. These figures are not income gains for all of the eighties, but only from 1983 to 1989. Immediately preceding that recovery, the economy experienced a savage recession, the worst since the Great Depression, that affected the poor much more severely than the rich. The first column of the table below gives the percentage changes for the slump years from 1979 to 1983.
Conservatives will say, “The recession was Carter’s fault, while the recovery proved the success of Reagan’s policies.” But put politics aside for a moment and accept this simple fact: At the end of the 1983 to 1989 recovery, the bottom quintile was still worse off than it was in 1979, while the only really large gains over the decade went to the top quintile. If one takes the long view, as in the second column of the table (which measures from the business cycle peak in 1973), one sees an overwhelming picture of radically growing inequality. And one might correctly suspect even from these data that the pattern continued inside the top quintile, i.e., that the top 5 and the top 1 percent did better still.
When Armey (with his Ph.D. in economics) wrote this passage, he must have had the same table in front of him that I am looking at now. He must therefore have known that he was, strictly speaking, lying when he described his data as being what happened during the “eighties,” and could not have failed to notice that, even at the end of his carefully selected period, incomes were fare more unequal than they had been in the seventies. In other words, the passage is a deliberate attempt to mislead the reader.
Percentage Income Change by Income Bracket for the Periods 1979–1983 and 1973–1989.
Income Bracket
1979–1983
1973–1989
Lowest quintile
-14.2
-3.6
Second lowest
-8.1
3.1
Middle
-6.2
9.0
Second highest
-2.9
14.8
Highest
-1.4
26.0
It gets even better. Armey cites a study that shows that there is huge income mobility in America. The message here is simple: Don’t worry that some people find gold and some don’t—next year you may be the winner. He gives numbers saying that fewer than 15 percent of the “folks” who were in the bottom quintile in 1979 were still there in 1988. He then asserts that it was more likely that someone would move from the bottom quintile to the top than he would stay in place. Ag
ain, he doesn’t cite the source, but these are familiar numbers. They come from a botched 1992 Bush administration study, a study that was immediately ridiculed and that its authors would just as soon forget.
This is why: The study tracked a number of people who had paid income taxes in each of the years from 1979 to 1988. Since only about half the working population actually paid taxes over the entire period, this meant that the study was already biased toward tracking the relatively successful. And these earners were then compared to the population at large. So the study showed that in 1979, 28 percent of this studied population was in the bottom 20 percent of the whole population; by 1988 that figure was only 7 percent.
This means, Armey asserts, that someone in the lowest quintile would be more likely to move to the highest than stay in place. Put kindly, it’s a silly argument. For subjects of the study who moved from the bottom to the top, the typical age in 1979 was only 22. “This isn’t your classic income mobility,” Kevin Murphy of the University of Chicago remarked at the time. “This is the guy who works in the college bookstore and has a real job by the time he is in his early thirties.”
In reality, moves from the bottom to the top quintile are extremely rare; a typical estimate is that only about 3 percent of families who are in the bottom 20 percent in one year will be in the top 20 percent a decade later. About half will still be in the bottom quintile. And even those 3 percent that move aren’t necessarily Horatio Alger stories. The top quintile includes everyone from a $60,000 a year regional manager to Warren Buffett.
Armey is no fool. He cannot be unaware that he is fudging his numbers. Possibly he regards a small fib as justifiable in the service of a higher truth. Or possibly he has managed to achieve a state of doublethink, in which the distinction between what is politically convenient to believe and the objective facts no longer exists. The end result is the same: His book is an effort to obscure the stark realities of growing inequality.
And that is no surprise. After all, the success of free-market conservatives in seizing the mantle of populism in America, despite the growing gap between the broad public and a small minority possessing astonishing wealth, is inherently vulnerable. It took a combination of brilliant political leadership on the right and an awesome mixture of political ineptitude, personal arrogance, and cultural elitism on the part of liberals to give Armey and their allies their current position of power. (I sometimes think that Renaissance Weekend killed the Clinton administration.)
But despite the triumph of 1994, there is always the risk that someone will point out that there are now quite a few men in America who each make more money every year than the entire House of Representatives, and that it is these men who will be the most conspicuous beneficiaries of the new majority’s politics.
As far as Armey and his allies are concerned, the answer to this risk is simple: The public must not know how well the rich have done compared with the rest. If a new study points out just how much income and wealth have become concentrated, deploy the forces of the conservative media to attack the data with every spurious argument imaginable. There are always plenty of places to publish such attacks and people to write them because the rich are different from you and me: They have (a lot) more money. In particular, they own magazines and newspapers, and readily support think tanks staffed with people whose job, whatever its formal description, is to support the interests of their donors. As H. L. Mencken once pointed out, it is difficult to get a man to understand something when his income depends on his not understanding it.
The uneasy politics of free-market populism are also probably a major reason why the Republican majority in Congress seems determined to mount an assault on economic analysis in general—not only to eliminate the President’s Council of Economic Advisers, but to eliminate all National Science Foundation funding for the field, and to slash the budget of the Bureau of Economic Analysis (which provides the basic data on national income).
The irony is that much of this research provides support for Republican free-market ideology. But the motivation for cutting the funding is easy enough to understand: If your doctrine depends on a view of the economy that is flatly contradicted by reality, then the fewer facts, the better.
Edward Wolff has written a good book, while Richard Armey has written a terrible one. The real message, however, comes from the contrast between them—between the mildly liberal economics professor who is disturbed by the trends in our society and would like to make a small effort to ameliorate them, and the tough-talking conservative who is determined to deny the reality of these trends and to smash anyone who reports on them. May the better man win.
The Lost Fig Leaf: Why the Conservative Revolution Failed
“You now work from the first of January to May just to pay your taxes so that the party of government can satisfy its priorities with the sweat of your brow because they think that what you would do with your own money would be morally and practically less admirable than what they would do with it…. Somewhere, a grandmother couldn’t afford to call her granddaughter, or a child went without a book, or a family couldn’t afford that first home because there was just not enough money…. Why? Because some genius in the Clinton administration took the money to fund yet another theory, yet another program, and yet another bureaucracy.” The words are Bob Dole’s (actually, they’re Mark Helprin’s, but Dole said them after accepting the Republican presidential nomination). They are the key to understanding why the Republican Revolution, which seemed so unstoppable at the beginning of 1995, ground to a halt within a year.
Dole’s speech tried to put over, one more time, the fiction that the federal government takes away your hard-earned money and spends most of it on things that only social workers want. Supply-side economics, with its promise that tax cuts would pay for themselves, may have given conservatives the courage to be irresponsible. But what sold the public on conservatism was the images of vast armies of bureaucrats and of welfare queens driving Cadillacs. Conservatives were able to get away with such stories for one main reason: They could always blame their failure to slay Big Government on the Democrats who controlled Congress. Then they suddenly found themselves in control—and the fig leaf was gone. Some on the right attribute their troubles to mere tactical failures; if only Dole had been a better campaigner, if only Clinton hadn’t shamelessly veered right, if only Gingrich hadn’t thrown a tantrum on Air Force One, the conservative wave would have rolled on. And they insist that their defeats were only temporary setbacks. But the truth is that the political appeal of radical conservatism has always been based on a fundamentally untrue vision of what the federal government is and does.
To get an idea of the gap between conservative mythology and reality, let’s look at the best book published in America. It’s called The Statistical Abstract of the United States, and if more people would get into the habit of checking it, our politics would be utterly transformed. The Statistical Abstract makes it quite easy to get a realistic picture of where your tax dollar goes. For example, here is a list of ten major federal programs. The number after the colon indicates each program’s percentage of fiscal 1994 spending:
Social Security: 21.6%
Defense: 18.9%
Interest on the debt: 13.7%
Medicare: 9.7%
Medicaid: 5.8%
Pensions for federal workers: 4.2%
Veterans’ benefits: 2.6%
Transportation (mainly highways, air traffic, etc.): 2.6%
Unemployment insurance: 2.0%
Administration of justice (courts, law enforcement, etc.): 1.1%
There are three important things to say about this list. The first is that it encompasses the bulk of government spending—82.2 percent, to be precise. Anyone who proposes a radical downsizing of the federal government must mean to slash this list. The second is that with one possible exception, these are programs that the public likes—they are not at all what people object to when they rail against Big Government. We believe in ho
noring our debts. We like our strong military; indeed, most conservatives want it stronger. We like our highways. We want strong law enforcement. The only possibly unpopular item on the list is Medicaid, which is the only “poverty” program. But Medicaid is increasingly a program of aid not for the poor per se, but rather, for the old. More and more of it pays for nursing-home care—and many of those patients have middle-class children.
And that brings us to the third point: Aside from defense and interest payments, the U.S. government is now mainly—yes, mainly—in the business of taxing the young and giving money to the old. Look at that list, and consider how utterly shameless Dole was in imagining a grandmother who couldn’t afford to call her granddaughter because she pays too much in taxes. That grandmother almost surely lives better than people of her age ever lived before, supported by Social Security checks that will greatly exceed the value of the contributions she and her husband paid into the system. And her children could easily have sent her the money for phone calls, except that their Medicare contributions had to cover her hip replacement.
There is a good case to be made that America’s gerontocracy has gone too far, that we are too generous to our retirees, especially to those who could afford to do without some of those benefits. But that is not a case the right has ever made. An honest advocate of smaller government would campaign not against elitist bureaucrats but against nice middle-class retirees in their Florida condominiums. Somehow, that wasn’t in Dole’s speech.