Fwd:: FOCUS | Paul Krugman: Graduates versus Oligarchs

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t r u t h o u t

 

 

Graduates versus Oligarchs

By Paul Krugman

The New York Times

 

Monday 27 February 2006

 

Ben Bernanke's maiden Congressional testimony as chairman of the

Federal Reserve was, everyone agrees, superb. He didn't put a foot

wrong on monetary or fiscal policy.

 

But Mr. Bernanke did stumble at one point. Responding to a question

from Representative Barney Frank about income inequality, he declared

that " the most important factor " in rising inequality " is the rising

skill premium, the increased return to education. "

 

That's a fundamental misreading of what's happening to American

society. What we're seeing isn't the rise of a fairly broad class of

knowledge workers. Instead, we're seeing the rise of a narrow

oligarchy: income and wealth are becoming increasingly concentrated in

the hands of a small, privileged elite.

 

I think of Mr. Bernanke's position, which one hears all the time,

as the 80-20 fallacy. It's the notion that the winners in our

increasingly unequal society are a fairly large group - that the 20

percent or so of American workers who have the skills to take advantage

of new technology and globalization are pulling away from the 80

percent who don't have these skills.

 

The truth is quite different. Highly educated workers have done

better than those with less education, but a college degree has hardly

been a ticket to big income gains. The 2006 Economic Report of the

President tells us that the real earnings of college graduates actually

fell more than 5 percent between 2000 and 2004. Over the longer stretch

from 1975 to 2004 the average earnings of college graduates rose, but

by less than 1 percent per year.

 

So who are the winners from rising inequality? It's not the top 20

percent, or even the top 10 percent. The big gains have gone to a much

smaller, much richer group than that.

 

A new research paper by Ian Dew-Becker and Robert Gordon of

Northwestern University, " Where Did the Productivity Growth Go?, " gives

the details. Between 1972 and 2001 the wage and salary income of

Americans at the 90th percentile of the income distribution rose only

34 percent, or about 1 percent per year. So being in the top 10 percent

of the income distribution, like being a college graduate, wasn't a

ticket to big income gains.

 

But income at the 99th percentile rose 87 percent; income at the

99.9th percentile rose 181 percent; and income at the 99.99th

percentile rose 497 percent. No, that's not a misprint.

 

Just to give you a sense of who we're talking about: the

nonpartisan Tax Policy Center estimates that this year the 99th

percentile will correspond to an income of $402,306, and the 99.9th

percentile to an income of $1,672,726. The center doesn't give a number

for the 99.99th percentile, but it's probably well over $6 million a

year.

 

Why would someone as smart and well informed as Mr. Bernanke get

the nature of growing inequality wrong? Because the fallacy he fell

into tends to dominate polite discussion about income trends, not

because it's true, but because it's comforting. The notion that it's

all about returns to education suggests that nobody is to blame for

rising inequality, that it's just a case of supply and demand at work.

And it also suggests that the way to mitigate inequality is to improve

our educational system - and better education is a value to which just

about every politician in America pays at least lip service.

 

The idea that we have a rising oligarchy is much more disturbing.

It suggests that the growth of inequality may have as much to do with

power relations as it does with market forces. Unfortunately, that's

the real story.

 

Should we be worried about the increasingly oligarchic nature of

American society? Yes, and not just because a rising economic tide has

failed to lift most boats. Both history and modern experience tell us

that highly unequal societies also tend to be highly corrupt. There's

an arrow of causation that runs from diverging income trends to Jack

Abramoff and the K Street project.

 

And I'm with Alan Greenspan, who - surprisingly, given his

libertarian roots - has repeatedly warned that growing inequality poses

a threat to " democratic society. "

 

It may take some time before we muster the political will to

counter that threat. But the first step toward doing something about

inequality is to abandon the 80-20 fallacy. It's time to face up to the

fact that rising inequality is driven by the giant income gains of a

tiny elite, not the modest gains of college graduates.