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Home / Brad Delong, Berkeley / Weekend Reading: Paul Krugman: The Rich, the Right, and the Facts: Deconstructing the Inequality Debate

Weekend Reading: Paul Krugman: The Rich, the Right, and the Facts: Deconstructing the Inequality Debate

Summary:
...Most academic studies on the distribution of income in the United States rely on Census data, compiled from the Current Population Survey.... In all the mud-slinging of the income distribution debate, nobody has yet accused the Census of bias or distortion (although that may come next).... The 1947-73 numbers show what real, broad-based prosperity looks like. Over that period incomes of all groups rose at roughly the same rapid clip, more than 2.5 percent annually. Between 1973 and 1979, as the economy was battered by slow productivity growth and oil shocks, income growth became both much slower and more uneven. Finally, a new pattern emerged after 1979: generally slower income growth, but in particular a strong tilt in the growth pattern, with incomes rising much faster at the top

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...Most academic studies on the distribution of income in the United States rely on Census data, compiled from the Current Population Survey.... In all the mud-slinging of the income distribution debate, nobody has yet accused the Census of bias or distortion (although that may come next).... The 1947-73 numbers show what real, broad-based prosperity looks like. Over that period incomes of all groups rose at roughly the same rapid clip, more than 2.5 percent annually. Between 1973 and 1979, as the economy was battered by slow productivity growth and oil shocks, income growth became both much slower and more uneven. Finally, a new pattern emerged after 1979: generally slower income growth, but in particular a strong tilt in the growth pattern, with incomes rising much faster at the top end of the distribution than in the middle, and actually declining at the bottom.... 'Good' growth looks like an all-American picket fence; growth in the 1980s looked like a staircase, with the well-off on the top step....

Census numbers are of little use in studying high-income families... the arcane technical issue of 'top-coding'.... It is precisely because Census data are weak when it comes to very high incomes that those who use that data usually look no higher than the 95th percentile.... Over the period 1947-73, when everyone's income went up at about the same rate, the weakness of Census data at the top end didn't matter much. But it became obvious during the 1980s that incomes were rising even faster among the very well off than at the 95th percentile.... Work by the Congressional Budget Office fills the gap.... The top 1 percent of families saw their incomes roughly double over a twelve-year period. That's a 6 percent rate of growth, which means that for the very well-off the 1980s really were a very good decade not only compared with the slow growth lower down in the distribution, but even compared with the postwar boom years.....

It is a remarkable fact that incomes have soared so much at the top of the U.S. income distribution. But is it important? Until recently, most economists thought not; growing poverty might be an important social issue, but the fact that some people are very rich was only a social curiosity. My own contribution to this discussion was to point out that there is a sense in which the rise in incomes at the top is in fact a major economic issue, and to offer a shorthand way of conveying that point: the now infamous 'Krugman calculation' that 70 percent of the rise in average family income has gone to the top 1 percent of families.... To help attract attention to a trend that I thought had been neglected I proposed the following thought experiment. Imagine two villages, each composed of 100 families representing the percentiles of the family income distribution in a given year in particular, a 1977 village and a 1989 village. According to the CBO numbers, the total income of the 1989 village is about 10 percent higher than that of the 1977 village; but it is not true that the whole distribution is shifted up by 10 percent. Instead, the richest family in the 1989 village has twice the income of its counterpart in the 1977 village, while the bottom forty 1989 families actually have lower incomes than their 1977 counterparts. Now ask: how much of the difference in the incomes of the two villages is accounted for by the difference in the incomes of the richest family? Equivalently, how much of the rise in average American family income went to the top 1 percent of families? By looking at this measure we get a sense of who was "siphoning off" the growth in average incomes, accounting for the fact that median income went up so little. The answer is quite startling: 70 percent of the rise in average family income went to the top 1 percent... [and] when we speak of "high income" families, we mean really high income: not garden-variety yuppies, but Tom Wolfe's Masters of the Universe....

Many conservatives were furious when the income distribution story surfaced in early 1992. Above all, the story made the editors of the Wall Street Journal and the Bush administration see red. The reason was pretty clear. Supply-siders like Robert Bartley, the Journal's editorial page editor, believe that their ideology has been justified by what they perceive as the huge economic successes of the Reagan years. The suggestion that these years were not very successful for most people, that most of the gains went to a few well-off families, is a political body blow. And indeed the belated attention to inequality during the spring of 1992 clearly helped the Clinton campaign find a new focus and a new target for public anger: instead of blaming their woes on welfare queens in their Cadillacs, middle-class voters could be urged to blame government policies that favored the wealthy. So the dismay and anger of conservatives was understandable. The response from the administration, the Journal, and other conservative voices was, however, inexcusable: instead of facing up to the fact of rapidly growing inequality under conservative rule, they tried to deny the facts and shoot the messengers....

The initial response of a number of conservative economists (including staffers at the Council of Economic Advisers) was to do a different calculation: to ask what share of the growth in total rather than average income went to the top 1 percent.... This is a very different number, because the number of families in the U.S. grew substantially between 1977 and 1989.... What's wrong with the CEA calculation? Remember the questions we are trying to answer: why didn't the typical American family see much increase in income even though productivity rose substantially, and who was reaping the benefits of rising productivity?... Using income growth numbers that include sheer growth in working-age population gets us completely away from those questions....

The next issue fits awkwardly into this scheme, since it involves an honest difference of opinion between myself and the CBO, and does not in the end make much difference.... Adjusted family income has been rising faster than income itself, because families have been getting smaller.... When you do a Krugman calculation using AFI instead of raw income, the result looks a little bit less extreme: the top 1 percent get 44 instead of 70 percent of the increase.... All this is relatively minor, however. With or without the family size adjustment, the data confirm a radical shift of income to the top 1 percent.

Capital Gains: Many conservative commentators including Paul Craig Roberts, Alan Reynolds, Representative Richard Armey, and the editorial page of the Wall Street Journal have bitterly attacked the CBO for including capital gains.... Excluding capital gains from the CBO numbers makes very little difference. With capital gains included, the CBO shows the share of income accruing to the top 1 percent rising from 7 to 12 percent between 1977 and 1989, and shows this group receiving 44 percent of the rise in adjusted family income. Without capital gains, the shift is from 6 to 10 percent, and the share of the rise is 38 percent....

Can You Be Too Rich? When the Federal Reserve wealth study came out, it was immediately attacked by Alan Reynolds in the Wall Street Journal, as well as by Republican Congressman Richard Armey. Reynolds's main argument was that the study, based on a survey of 3,000 families, could not be reliable about the top 1 percent, since thirty families is too small a sample. This was an interesting reaction, since the Fed study carefully explains that they used a two-stage procedure and that their estimates were based on over 400 families in the top 1 percent. In fact, the study is written in the form of a working paper on statistical methodology, and the issue of sample size is raised immediately. One can only conclude that Reynolds did not bother to read the study before attacking it....

The second line of conservative defense has become a familiar one: they claim that the growth record of the Reagan years shows that supply-side policies produce gains for everyone, and that it is destructive to worry about or even to notice the distribution of income....

The basic proposition that the "Krugman calculation" was meant to convey is that income inequality has been increasing so rapidly that most families have failed to get much benefit out of long-term growth. This proposition stands. One need not take seriously the efforts by supply-siders to chop the past fifteen years into little slices, and claim the good ones while disclaiming the bad ones.

The Conservative Response 3: Income Mobility: America is not a static society.... In the two hypothetical villages that I described earlier, one would not necessarily suppose that the same people (or their children) occupied the same positions in 1977 and 1989. And economic welfare depends more on the average income you earn over a long period than on your income in any given year. So there are some risks in drawing too many conclusions about the distribution of economic welfare from statistics on the distribution of income in any one year.... If income mobility were very high, the degree of inequality in any given year would be unimportant, because the distribution of lifetime income would be very even. I think of this as the blender model: whatever the current position of the bubbles in your Mixmaster, over the course of a few minutes each bubble will on average be halfway up.... If income mobility had increased over time, this could offset the increased inequality at each point in time.... Unfortunately, neither of these possibilities actually characterizes the U.S. economy. There is considerable income mobility in the U.S., but by no means enough to make the distribution of income irrelevant....

The Hubbard Study: In June [1992] the Treasury's Office of Tax Analysis, under the direction of Glen Hubbard, an economist on leave from Columbia, released a report claiming that there is actually huge upward mobility in the U.S. In particular, it claimed that 86 percent of individuals who started in the bottom quintile in 1979 had moved out by 1988, and indeed that an individual who started in the bottom quintile was more likely to end up in the top quintile than to stay where he was. But this report was based on what we may charitably call a strange procedure. Here's what Hubbard's report did: it tracked a group of individuals who paid income taxes in all ten years from 1979 to 1988, and compared their incomes not with each other but with those of the population at large. The restriction to individuals who paid taxes in all years immediately introduced a strong bias toward including only the economically successful; only about half of families paid income taxes in all ten years.... [Plus] the report essentially treated the normal tendency of earnings to rise with age as representing social mobility. The median age of those whom the study classified as being in the bottom quintile in 1979 was only twenty-two. Kevin Murphy, a labor economist at the University of Chicago, neatly summed up what the Treasury study had found: "This isn't your classic income mobility. This is the guy who works in the college bookstore and has a real job by his early thirties."

Income Gains.... In the Urban Institute's numbers, families in the bottom quintile in 1977 saw their income rise 77 percent by 1986, while families in the top quintile saw their income rise only 5 percent. The editorial page of the Wall Street Journal, Paul Craig Roberts, and others have seized upon this kind of number as evidence that the poor actually did better than the rich in the 1980s. Let me call this the "WSJ calculation."... Essentially, the initially rich have nowhere to go but down, the initially poor nowhere to go but up. So if the income distribution were stable, any income mobility would inevitably produce the WSJ result; and it is not surprising that we still get it even when income inequality is rising.

You may accept this trend or deplore it, but one might have thought that nobody could seriously deny it.... The growth in income inequality in the United States since the 1970s is hardly an inconspicuous part of the economic landscape.... The surprise lesson of the income distribution controversy, then, is what it says about today's conservative mind-set. It turns out that many conservatives, for all their anti-totalitarian rhetoric, have Orwellian instincts: if the record doesn't say what you wish it did, hide it or fudge it. There are substantive issues about income distribution. Nobody really knows all the reasons why incomes at the top have soared while those at the bottom have plunged. Still less is there a consensus about what kinds of policies might limit or reverse the trend. But it seems that many conservatives not only don't want to discuss substance: they prefer not to face reality, and to live in a fantasy world in which the 1980s turned out the way they were supposed to, not the way they did.

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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