Graduates Versus
Oligarchs
Paul Krugman, New York Times, 2/27/06
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.
Education isn't the
answer to inequality. A new research paper by Ian DewBecker 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.