Peter E. Pflaum - Golden Globe -
The Synergy Network
http://www.wiredbrain.com/documents// pflaump@wiredbrain.com
Publication:
The Washington Monthly
Issue: October 1995
Title: "What the Public Doesn't Know Can't Hurt Us"
There are three things in modern America you can count on:
The rich get
richer.
The poor get poorer. And conservatives lie about it
by Paul Krugman
To a naive reader, Edward N. Wolff's Top Heavy: A Study of the Increasing
Inequality of Wealth in America might seem unlikely to provoke strong
emotional reactions. Wolff, a professor of economics at New York
University, provides a rather dry, matter-of-fact summary of trends in
wealth distribution, followed by a low-key case for a modest wealth tax.
Although Wolff has done a commendable technical job in combining data from
a number of sources to produce a fuller picture-in particular, his book
tells us more about both long-term trends and international comparisons
than has previously been available-the rough outlines of this story have
been familiar and uncontroversial among economists for at least the past
five years.
And yet Wolff's book has been the target of an astonishing barrage of
conservative attacks: Multiple op-eds in
The Wall Street Journal ("What
Wealth Gap?" asked Michael Novak on July 11), hostile book reviews and so
on. Why should such a mild-mannered little volume provoke such rage?
The answer is that this is a subject on which many conservatives are
unable to hold a rational discussion. Make a mere statement of fact-say,
for example, that the top 20 percent of households in the United States
own 85 percent of the marketable wealth-and conservatives will insist that
you rephrase it as "20 percent of the households have created 85 percent
of the wealth." Try to assess long-term trends in income distribution
using the standard, apolitical device of comparing incomes at the same
stage of successive business cycles, such as 1973 and 1989, and you will
be accused of an outrageous attempt to distort Ronald Reagan's record by
mixing in the Carter years.
Conservatives are wrong about wealth inequality, but they are not
irrational.
There is a method and political purpose to their maddened
reaction-a determination to deny the facts that is dramatically
illustrated by House Majority Leader Richard Armey's new book,
The Freedom
Revolution. Put simply, conservatives don't want the public to know too
much because they fear it would hurt them politically.
To understand the significance of Wolff's book, consider this simple
parable:
There are two societies. In one, everyone makes a living at some
occupation-say, fishing-in which the amount people earn over the course of
a year is fairly closely determined by this skill and effort. Incomes will
not be equal in this society-some people are better at fishing than
others, some people are willing to work harder than others-but the range
of incomes will not be that wide. And there will be a sense that those who
catch a lot of fish have earned their success.
In the other society, the main source of income is gold prospecting. A few
find rich mother lodes and become wealthy. Others find smaller deposits,
and many find themselves working hard for very little reward.
The result
will be a very unequal distribution of income. Some of this will still
reflect effort and skill: Those who are especially alert to signs of gold,
or willing to put in longer hours prospecting, will on average do better
than those who are not. But there will be many skilled, industrious
prospectors who do not get rich and a few who become immensely so.
Surely the great majority of Americans, no matter how conservative,
instinctively feel that a nation that resembles the second imaginary
society is a worse place than one that resembles the first. Yet there is
also no question that our nation today is much less like the benign
society of fishermen-and much more like the harsh society of
prospectors-than it was a generation ago.
The evidence is overwhelming,
and it comes from many sources-from government agencies like the Bureau of
the Census, from Fortune's annual survey of executive compensation, and so
on. And, of course, there's the evidence that confronts anyone with open
eyes. Tom Wolfe is neither an economist nor a liberal, but he is an acute
observer. When he wanted to portray what was happening in American society
he came up with the world of
The Bonfire of the Vanities.
The Way Things Are
Here's a rough (and reasonably certain) picture of what has happened:
The
standard of living of the poorest 10 percent of American families is
significantly lower today than it was a generation ago. Families in the
middle are, at best, slightly better off. Only the wealthiest 20 percent
of Americans have achieved income growth at anything like the rates nearly
everyone experienced between the forties and early seventies. Meanwhile,
the income of families high in the distribution has risen dramatically,
with something like a doubling of the real incomes of the top 1 percent.
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 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
fishermen 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 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.
The good news is that Armey
apparently takes his new duties as majority leader seriously; he couldn't
have taken much time off to write this book.
The Freedom Revolution
consists largely of standard conservative bromides, backed by a number of
unsupported assertions. (As far as I can see, not a single source is
cited.)
Despite the book's sloppiness, its message is extremely
important-important, that is, to understand as false.
The majority leader,
a former economics professor, tries to defuse the issue of income
inequality by claiming, in essence, that we really are still a society of
middle-class fishermen. We can all prosper, he says, if the government
would only get out of the way.
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 that 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 '83 to '89
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 far more unequal than they had been in the seventies.
In other words, the passage is a deliberate attempt to mislead the reader.
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. Again, 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 which 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 towards 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 the 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 Advisors, 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.*
Paul Krugman, a Stanford University economist, is the author of Peddling
Prosperity and
The Age of Diminished Expectations.
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