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 Rep. 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% or
so of American workers who have the skills to take advantage of new technology
and globalization are pulling away from the 80% 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% between 2000 and 2004. Over the longer stretch from 1975 to 2004 the
average earnings of college graduates rose, but by less than 1% per
year.
So who are the winners from rising
inequality? It's not the top 20%, or even the top 10%. 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%, or
about 1% per year.
So being in the top 10% 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%; income at the 99.9th percentile rose 181%; and
income at the 99.99th percentile rose 497%. 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.
http://www.truthout.org/docs_2006/022706Z.shtml
