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Friday, June 14, 2002

Krugman Tackles Inequality

Krugman's column only allows about 750 words and he can not be expected to solve the problems of the world in a day. So on this fine morning he is taking to the streets to protest rising income inequality. Is income inequality rising, here in the land of opportunity, the red, white and blue US of A, you ask? Indeed it is, if we can believe his sources. And why is that a bad thing, you ask? Ask away, folks. We will be carried through the entire column with nary a suggestion as to why this might be a problem, rather than, just as a thought, a side effect of a boom economy. To be fair, Krugman delivers a hint as to why income inequality might be an issue in his closing paragraph, but I don't want to spoil his big finish, or mine. So meanwhile, this is the NY Times, let's get our popcorn, boo the rich, cheer the poor, and press on.

"Kevin Phillips's new book, "Wealth and Democracy," is a 422-page doorstopper, but much of the book's message is contained in one stunning table. That table, in the middle of a chapter titled "Millennial Plutographics," reports the compensation of America's 10 most highly paid C.E.O.'s in 1981, 1988 and 2000.

In 1981 those captains of industry were paid an average of $3.5 million, which seemed like a lot at the time. By 1988 the average had soared to $19.3 million, which seemed outrageous. But by 2000 the average annual pay of the top 10 was $154 million. It's true that wages of ordinary workers roughly doubled over the same period, though the bulk of that gain was eaten up by inflation. But earnings of top executives rose 4,300 percent.

What are we to make of this astonishing development? Stealing (and modifying) a line from Slate's Mickey Kaus, I'd say that an influential body of opinion has reacted to global warming and the emergence of an American plutocracy the same way: "It's not true, it's not true, it's not true, nothing can be done about it."

Hey, Krugman reads Mickey too. I feel like we are bonding a bit, Paul.

But if I could even be convinced that this was a problem, I would think back to the glory days when Reggie Jackson joined the Yankees in 1977 for roughly $3 Million. No, not per year, he got a full $600,000 per annum. That's what Derek Jeter pays today to garage his cars. Not to knock Jeter, he’s the man. Like Eddie Murphy, who made headlines by signing a movie deal for $15 million back in the early 80’s. "Beverly Hills Cop", yeah. Who could have foreseen “The Golden Child”?. And yes, you’re wise to my tricks, it was a five picture deal, $3 Million per. Tell that to Tom Cruise’s agent, watch him tremble in fear. Why are the people at the top of the pyramid getting so much more? There were some very cool posts on that subject just a few weeks ago. Was it here? [Note to self: Insert cool link when found. No coffee breaks, either].

For many years there was a concerted effort by think tanks, politicians and intellectuals to deny that inequality was increasing in this country.

Remember, this was just moonlighting for the vast right-wing conspiracy; their real attention was elsewhere.

Glenn Hubbard, now chairman of the Council of Economic Advisers, is a highly competent economist; but he demonstrated his fealty during the first Bush administration with a ludicrously rigged study purporting to show that income distribution doesn't matter because there is huge "income mobility" — that is, that this decade's poor are likely to be next decade's rich and vice versa.

They aren't, of course. Even across generations there is a lot less income mobility than the folk wisdom about "shirt sleeves to shirt sleeves in three generations" would have it. Mr. Phillips shows that tales of downward mobility in once-wealthy families are greatly exaggerated; the descendants of 19th-century robber barons are still quite different from you and me

You and me? Hey, here’s another Jersey guy. And sorry, I know I’m breaking your flow, Paul: are we really intent on seeing the folks at the top fall back down, or is it OK if the folks at the bottom simply improve their situation? Relative wealth, absolute wealth, rising tide, someone always has to be at the bottom, the hugely rich are about 1% of the total, that leaves lots of room for the rest of us, is it all zero-sum, sorry.…

But the Gilded Age looked positively egalitarian compared with the concentration of wealth now emerging in America. Pretty soon denial will no longer be possible. What will the apologists say next?

Hmmm. “Denial will no longer be possible. What will the apologists say next?” I feel like this is a prophetic question of greater personal import than you now realize, Paul.

And more importantly, my “Strawman” incinerator is beeping. Possible phony arguments ahead, watch Paul knock them down. Me, I love the Wizard of Oz, I employ “Tin Man” arguments: they sort of clank, and make a lot of noise, and stop suddenly for no apparent reason. You might want to try it Paul. Or maybe you already are.

First we will hear that vast fortunes are justified because they are the reward for vast achievement. Here's where that table comes in handy, because it tells you what achievements actually get rewarded. Only one of the 10, Tyco's Dennis Kozlowski, has actually been indicted. But of the rest, three — four, if you count John Chambers of Cisco — were Andy Warhol C.E.O.'s: their companies were famous for 15 minutes, just long enough for the executives to cash in their stock options. The list also includes Gerald Levin, who engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage.

Oh, I know, Gerald, NOW he tells us. Yet I am confused. Is this “the birthright” of shareholders owning broadly diversified portfolios? I’m sure they are disappointed, but win some, lose some. And wasn’t that earlier bit about lack of income mobility at the top a call for a greater recycling of “birthrights”? Go, Gerald!

And more generally, is Phillips trying to illuminate some long term trends and eternal verities here? If so, does it bother anyone that just a few years ago, the notion of Cisco as a flash in the pan would have been peddled on the Comedy Channel? The stock market has had two bad years, unemployment skyrocketed all the way to 6% before ticking back, but we just might make it through this. Come in off the window ledge, Paul. Or tell us why we should join you.

Back in the early 90’s, I suppose a great book could have been written decrying the excesses of the 80’s: the evil takeover artists disgraced, Drexel broken up, Milken jailed, junk bonds vanquished, now we pay the piper for the excess of the Decade of Greed. Yet, somehow, the 90’s weren’t so bad, and junk bonds are still here. Is there even a remote chance that in a few years our current hangover will pass?

We'll also hear that in any case nothing can be done to limit the accumulation and inheritance of vast wealth. We'll be told, for example, that reinstating the estate tax would have devastating economic effects — even though the great boom of the 1990's took place with a 55-percent tax on the largest inheritances. I've even been assured by some correspondents that inheritance taxes on the very rich are impractical, that they will always be evaded — this in spite of the fact that in 1999 the estate tax raised about $15 billion from estates worth more than $5 million.

Well, the Strawman is finished. But are we even going to attempt to compare the $15 Billion raised with the amount that might have been raised absent estate planning, or estimate the economic drag associated with estate planning? Do economists compare things, and evaluate trade-offs, or is it just this easy: “Whoa, that looks like a lot of money”. Rhetorical question, I’ve peeked ahead and the answer is “no”.

"But it's not just a matter of collecting taxes. Mr. Phillips, a lifelong Republican, is most concerned not by economics per se but by the political consequences of wealth concentration. He warns that "the imbalance of wealth and democracy is unsustainable, at least by traditional yardsticks."

How will this imbalance be resolved? The economists Claudia Goldin and Robert Margo have dubbed the narrowing of income gaps that took place under F.D.R. the "Great Compression"; if I read Mr. Phillips right, he thinks something like that will happen again. But he also offers a bleak alternative: "Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime — plutocracy by some other name.

Apocalyptic stuff. But Mr. Phillips has an impressive track record as a political visionary. What if he's right?

Hold on a minute, Paul. My hyperbole detector broke last Friday when you said something about Dick Cheney’s energy policy being more scary than Osama Bin Laden. I thought I had fixed it, but it is back in the red zone again. So let me get this straight, are you saying that we are on the verge of either a Great Depression, or something really bleak? Something worse than the Great Depression? I mean, you’re an economist, you would know, but wasn’t the Great Depression like, a great big bad experience called, I don’t know, a depression? It was a while ago, maybe they meant “Totally awesome party, dude, like, this so great”. But I thought unemployment exceeded 20%, banks were failing, the Dust Bowl was NOT a college football game, you know, really bad times. If we are on the verge of a Great Depression, maybe you can tell us how it is that income inequality drives us there? And maybe you would like to explain what the alternative is that might be “bleak”, and how that might happen.

Oh, excuse me, I am so sorry Paul, now my Cheap Shot Detector is flashing. That wasn’t you that said those things, it was Mr. Phillips. Let’s re-read that bit:

”if I read Mr. Phillips right, he thinks …”

OK, let's work with that. When, do you suppose, will you decide that you are “reading Mr. Phillips right?“ And is there any chance you are also going to tell us what you think? I mean, at the top of the column its says Krugman, I guess that’s you. Or are you reaching out to us, Paul, a cry for help, “Phillips wrote this 400 page book with lots of charts and graphs, I can’t really evaluate his arguments, just go buy it and figure it out for yourself?”

Gee, I’m sorry, I haven’t read it yet. But instead, I would like to propose a rather simple division of labor that might actually illustrate, at a personal level, the concept of comparative advantage. Phillips wrote a book about economics. Why don’t we have a talented economist read the book, assess the arguments, and tell us if the guy makes sense. Paul, that could be your job. Then, the rest of us can read your column and benefit from your expertise, and get back to whatever the heck it is we do for a living.

It is not as if we lack for issues here. Is income inequality a bad thing in itself, and why? How does the U.S. experience compare with the Far East, or Europe? The Swedes have had a punitive tax system for decades: what has been their experience with economic growth, job creation, the development of an entrepreneurial class, capital formation, or general good times? And I see in Sweden the Wallenberg family is still quite powerful. Don’t they have an estate tax there? Are there any effects on saving versus consumption if the government policy is “you can’t take it with you, and you can’t give it to your kids?” Are some forms of estate-tax evasion so economically wasteful that the net effect of the tax is detrimental to the economy? Oh, this is going to be a great column, Paul, you’re a whiz-bang economist, the stage is set, the mike is turned on, take it, Paul…..

Oh, we did this shtick last week with global warming. Hello, is there an economist in the house? Bit of an odd time for your column to stop, Paul. I know the Times doesn’t have give you much space and they have all those boring rules, but maybe you could tackle one little issue? Different international tax systems? Please? Oh, you’re being coy again.

If I may be serious for a moment, and what are the odds, I will offer this advice, or exhortation: Paul, challenge yourself to write something that draws on your background in economics. You are submitting columns that could be written by Barbara Streisand, or the next freshman to stagger out of an Econ 101 Class, and it is a waste of your time and, frankly, ours (The MinuteMan excepted). As a columnist, these endless, predictable, diatribes are pointing you straight to a lunch reservation at the restaurant with a fancy French name which translates to ”Place for People Who Used to be Relevant”. It’s kind of like “Cheers”, everybody knows your name, but nobody cares. And don’t take Mo’s seat when you get there, she’s soooo touchy. But if you want to draw a wistful smile from old Walter, ask him the same question I have for you: “Where’s the beef?”

And, since I’m full of questions, I have one for the editors of the Times, presuming briefly that there still are some. And this question may become a motto around here, sort of like “Carthage must be destroyed“, so get used to it. Since the Times seems to want an interesting column about economics, I wonder:

“How many trees must die before Krugman’s space is given to Michael Lewis?”

Nice weekend, everyone.

UPDATE: Common Sense and Wonder draws first blood.

SECOND UPDATE: Its long, its strong, and its here.

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