Income distribution in the U.S. has gone right back to Gilded Age levels of inequality, says Paul Krugman.
Followed by an article in "Heritage Foundation" about what is really going on. Krugman gets away with murder, as usual.
The Death of Horatio Alger
by PAUL KRUGMAN
[from the January 5, 2004 issue]
The other day I found myself reading a leftist rag that made outrageous claims about America. It said that we are becoming a society in which the poor tend to stay poor, no matter how hard they work; in which sons are much more likely to inherit the socioeconomic status of their father than they were a generation ago.
The name of the leftist rag? Business Week, which published an article titled "Waking Up From the American Dream." The article summarizes recent research showing that social mobility in the United States (which was never as high as legend had it) has declined considerably over the past few decades. If you put that research together with other research that shows a drastic increase in income and wealth inequality, you reach an uncomfortable conclusion: America looks more and more like a class-ridden society.
And guess what? Our political leaders are doing everything they can to fortify class inequality, while denouncing anyone who complains--or even points out what is happening--as a practitioner of "class warfare."
Let's talk first about the facts on income distribution. Thirty years ago we were a relatively middle-class nation. It had not always been thus: Gilded Age America was a highly unequal society, and it stayed that way through the 1920s. During the 1930s and '40s, however, America experienced what the economic historians Claudia Goldin and Robert Margo have dubbed the Great Compression: a drastic narrowing of income gaps, probably as a result of New Deal policies. And the new economic order persisted for more than a generation: Strong unions; taxes on inherited wealth, corporate profits and high incomes; close public scrutiny of corporate management--all helped to keep income gaps relatively small. The economy was hardly egalitarian, but a generation ago the gross inequalities of the 1920s seemed very distant.
Now they're back. According to estimates by the economists Thomas Piketty and Emmanuel Saez--confirmed by data from the Congressional Budget Office--between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent. Meanwhile, the income of the top 1 percent rose by 148 percent, the income of the top 0.1 percent rose by 343 percent and the income of the top 0.01 percent rose 599 percent. (Those numbers exclude capital gains, so they're not an artifact of the stock-market bubble.) The distribution of income in the United States has gone right back to Gilded Age levels of inequality.
Never mind, say the apologists, who churn out papers with titles like that of a 2001 Heritage Foundation piece, "Income Mobility and the Fallacy of Class-Warfare Arguments." America, they say, isn't a caste society--people with high incomes this year may have low incomes next year and vice versa, and the route to wealth is open to all. That's where those commies at Business Week come in: As they point out (and as economists and sociologists have been pointing out for some time), America actually is more of a caste society than we like to think. And the caste lines have lately become a lot more rigid.
The myth of income mobility has always exceeded the reality: As a general rule, once they've reached their 30s, people don't move up and down the income ladder very much. Conservatives often cite studies like a 1992 report by Glenn Hubbard, a Treasury official under the elder Bush who later became chief economic adviser to the younger Bush, that purport to show large numbers of Americans moving from low-wage to high-wage jobs during their working lives. But what these studies measure, as the economist Kevin Murphy put it, is mainly "the guy who works in the college bookstore and has a real job by his early 30s." Serious studies that exclude this sort of pseudo-mobility show that inequality in average incomes over long periods isn't much smaller than inequality in annual incomes.
It is true, however, that America was once a place of substantial intergenerational mobility: Sons often did much better than their fathers. A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people.
Now for the shocker: The Business Week piece cites a new survey of today's adult men, which finds that this number has dropped to only 10 percent. That is, over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence. This goes along with other studies indicating that rags-to-riches stories have become vanishingly rare, and that the correlation between fathers' and sons' incomes has risen in recent decades. In modern America, it seems, you're quite likely to stay in the social and economic class into which you were born.
Business Week attributes this to the "Wal-Martization" of the economy, the proliferation of dead-end, low-wage jobs and the disappearance of jobs that provide entry to the middle class. That's surely part of the explanation. But public policy plays a role--and will, if present trends continue, play an even bigger role in the future.
Put it this way: Suppose that you actually liked a caste society, and you were seeking ways to use your control of the government to further entrench the advantages of the haves against the have-nots. What would you do?
One thing you would definitely do is get rid of the estate tax, so that large fortunes can be passed on to the next generation. More broadly, you would seek to reduce tax rates both on corporate profits and on unearned income such as dividends and capital gains, so that those with large accumulated or inherited wealth could more easily accumulate even more. You'd also try to create tax shelters mainly useful for the rich. And more broadly still, you'd try to reduce tax rates on people with high incomes, shifting the burden to the payroll tax and other revenue sources that bear most heavily on people with lower incomes.
Meanwhile, on the spending side, you'd cut back on healthcare for the poor, on the quality of public education and on state aid for higher education. This would make it more difficult for people with low incomes to climb out of their difficulties and acquire the education essential to upward mobility in the modern economy.
And just to close off as many routes to upward mobility as possible, you'd do everything possible to break the power of unions, and you'd privatize government functions so that well-paid civil servants could be replaced with poorly paid private employees.
It all sounds sort of familiar, doesn't it?
Where is this taking us? Thomas Piketty, whose work with Saez has transformed our understanding of income distribution, warns that current policies will eventually create "a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the US economy and penniless, talented children simply can't compete." If he's right--and I fear that he is--we will end up suffering not only from injustice, but from a vast waste of human potential.
Goodbye, Horatio Alger. And goodbye, American Dream.
thenation.com
Income Mobility and the Fallacy of Class-Warfare Arguments Against Tax Relief
by D. Mark Wilson
D. Mark Wilson is a Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
The dynamic U.S. economy is characterized by an extraordinary degree of income mobility that has been all but ignored in the recent debate on reducing federal income tax rates and phasing out the death (estate) tax. Opponents of tax relief are criticizing commonsense reforms because they claim that "only the rich" will benefit. Yet the notion that low-income or high-income groups are composed mostly of the same people over time is an illusion.
The comparison of average incomes and taxes paid by groups would be meaningful only if America were a caste society in which the people comprising one group remained constant over time. Most Americans, however, understand that family incomes change frequently, and the research on income mobility reveals that most family incomes increase significantly over time.
This is one reason why Americans with modest incomes tend to resist "soak the rich" class-warfare arguments: They hope to be rich themselves one day. Policymakers should ignore this class-warfare rhetoric and redesign America's tax code so that its barriers to upward mobility are reduced.
PATTERNS OF INCOME MOBILITY
Many academic studies have found remarkably consistent results that suggest there is substantial income mobility in the United States. 1 For example:
A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile. 2
A 1995 Federal Reserve Bank of Dallas report showed that almost three-fourths of those in the bottom quintile in 1975 were in a higher quintile by 1991, and almost 40 percent in the top quintile moved down to a lower quintile over the same period. 3
A 1996 Urban Institute study showed that large numbers of Americans move into a new income quintile, with estimates ranging from 25 percent to 40 percent in a single year. The same study found even higher mobility rates over longer periods: about 45 percent over five years and 60 percent over 9-year and 17-year periods. 4
In 1998, the Census Bureau reported that, on average, over 41 percent of Americans increased their inflation-adjusted income by 5 percent or more per year from 1984 to 1994. 5 The primary reasons for changes in income from year to year were changes in marital status, changes in the number of workers in the household, and moving into or out of full-time, year-round employment.
A 2000 Economic Policy Institute study showed that almost 60 percent of Americans in the lowest income quintile in 1969 were in a higher quintile in 1996, and over 61 percent in the highest income quintile had moved down into a lower income quintile during the same period. 6
The direction of income mobility is also important. The upward movement of workers in the second-lowest and middle-income quintiles is larger than the downward movement. From 1969 to 1994, the income of 53 percent of workers in the second-lowest income quintile had increased enough to move them up into a higher income quintile, and 38.7 percent of workers in the middle quintile had moved up compared to 37.9 who moved down. 7
CONCLUSION
Much of the debate and political rhetoric on tax relief have focused on how much income the top one-fifth or 1 percent of families would receive versus the bottom one-fifth and other fifths. Yet this approach is statistically meaningless because the mix of individuals and families who make up the various income groups changes constantly.
The fact is that the U.S. economy, while not without its problems, remains dynamic, open, and productive enough to enable Americans to rise as far and as fast as their dreams, hard work, and perseverance will take them. What is needed is commonsense tax reform that reduces the burden of excess taxation for all Americans.
heritage.org |
