This is an essay by M.I.T. economist Paul Krugman (1998), The Accidental Theorist (New York: Norton: 0393046389)....

An Unequal Exchange

Paul Krugman

An Unequal Exchange

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 that 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 was the target of an astonishing barrage of conservative attacks: multiple op-eds in the Wall Street Journal, hostile book reviews, and so on. Why should such a mild-mannered little volume provoke such rage?

The answer is that this is the subject on much 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 hold 85% of the marketable wealth , and conservatives will insist that you rephrase it as " 20 percent of the households have created 85% 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'll 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 the year is fairly closely determined by their 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 very hard for very little reward. The result will be a very unequal distribution of income. Some of this will 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. It 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 is the evidence that confronts every one 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 to American society, he wrote the bonfire of the vanities.

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 anything like the rates nearly everyone experience between the 40's and early 70's. Meanwhile the income of families high in the distribution has risen dramatically with something like a doubling of real incomes of the top 1%.

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%, compared with the rest; the top 5 percent have gotten richer compared with the next 15, the top 1 percent compared with the next four, the top 0.25% compared with the next 0.75, and onwards all the way up 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 into 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% of the wealth but received only ( a still impressive) 16% 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 did not mean the 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 the 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 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 necessarily being the result of deliberate policies.

In fact, it's pretty certain that this is what is happening 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 to place in the marketplace, in the pre-tax 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 key roles. ) furthermore, the upward trend in inequality began in the 70's 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 question of inequality is relevant for policy-making. 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 reality--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 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've made the case that there's 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 fisherman.

First, Armey denies that the 80's were a period in which the rich got richer and the poor got poorer. " the statisticians, " he writes, " break the population into five income groups, called quintiles . During the eighties they gained in average real income as follows:

  • Lowest quintile--up 12.2%.
  • Second-lowest--up 10.1%
  • Middle--up 10.7%
  • Second-highest--up 11.6%.
  • Highest--up 18.8%"

The source of the 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 more severely than the rich. The first column of the table below gives the percentage changes for the slump years from 1979 to 1983.

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%

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 fo 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 that the pattern continued inside the top quintiles, 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.

[sci] [meta] [misc] [home]