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Balanced Fare: We Report, You Deride

Saturday, October 26, 2002

My Open Letter to Prof. Krugman

Dear Professor Krugman;

I greatly enjoyed your NY Times magazine article titled “The End of Middle Class America (and the Triumph of the Plutocrats). I think the notion of an explosion in wealth at the top end of the income scale is well worth exploring and I certainly agree that it may have many profound consequences for American politics and society.

Now, I should provide a bit of a warning here – I am one of those deplorable right-wing bloggers that pounce on you from time to time. My own background is an MBA, and twenty years in finance, but beyond that, I am no one – I am probably overestimating my impact when I describe myself as the flea that bites the flea that bites Paul Krugman. Hmm, do fleas even bite each other? Anyway, I am also, in my dark and twisted way, an admirer of yours, as I am of my fellow bloggers. I have a certain respect for anyone who actually gets “in the arena” and publishes their thoughts, if I may borrow Teddy Roosevelt’s metaphor. Anyone who is putting their ideas out there for the rest of us to peck at deserves credit.

So, enough with the compliments – it’s treacly, and it’s over! On to the article. Snide comments are sort of inevitable at some point to follow, but maybe it will liven this up. In fact, I can hint at a poem to come. However, it’s all meant to be positive – the underlying topic clearly merits serious discussion.

The Title: – “The End of Middle Class America…”: Well, wouldn’t that best be demonstrated by defining a poverty line and a “wealthy” line, and showing how there is a declining population in the middle? My recollection is that the percent of folks living below the poverty line is roughly stable at roughly 12%. If the middle class is disappearing, where are they going? Upward to prosperity? Is this really happening, and is this really a problem? I think a better “scare headline” might be “Triumph of the Plutocrats and the Purchase of American Democracy”.

Your introduction is as follows:

We are now living in a new Gilded Age…

The explosion in C.E.O. pay over the past 30 years is an amazing story in its own right, and an important one. But it is only the most spectacular indicator of a broader story, the reconcentration of income and wealth in the U.S. The rich have always been different from you and me, but they are far more different now than they were not long ago -- indeed, they are as different now as they were when F. Scott Fitzgerald made his famous remark. "

Your article cites Thomas Piketty, at the French research institute Cepremap, and Emmanuel Saez, who is now at the University of California at Berkeley, as the experts in the field. May I quote what they say on this subject?

One might also be tempted to interpret the large upturn in top income shares observed since the 1970s as a revival of very high capital incomes. The interesting point, however, is that it is not so. In fact, as shown in Figure 6, the income composition pattern has changed considerably between 1929 and 1998. In 1998, salary income and business income form the vast majority of the largest incomes. Wage and entrepreneurial income make about 80% of the resources of fractile P99.99-100, and capital income brings a mere 20% income supplement. Therefore, highest incomes at the end of the 20 th century are very different from the highest incomes in the early part of the century. Before WWII, the highest incomes were overwhelmingly composed of rentiers deriving most of their incomes from their wealth holdings (mainly in the form of dividends). Today, the “working rich” celebrated by Forbes magazine seem to have overtaken the “coupon-clippers”."

So, the rich may be different from us, and the F Scott Fitzgerald reference may be meant to take us back to the Roaring 20’s. One presumes the “Gilded Age” statement has a similar impact. However the researchers are clearly seeing something else. Interesting.

Causation: What caused this compression of income? From your article, we enter the Golden Era of income equality thusly:

The Great Compression -- the substantial reduction in inequality during the New Deal and the Second World War -- also seems hard to understand in terms of the usual theories

I imagine you will admit that this is pretty light on causation. In fact, when I do a word search of your text, the word “depression” as in, for example, “Great Depression” does not appear. Perhaps the Great Depression caused the Great Compression, and the New Deal was an attempt to address the depression?

From Saez/Pikkety:

”The large depressions on the first part of the century destroyed
many businesses and thus reduced significantly top capital incomes.
(p. 2)”


“This very specific timing, together with the fact that very high incomes account for a disproportionate share of the total decline in inequality, strongly suggests that the shocks incurred by capital owners during 1914 to 1945 (depression and wars) have played a key role. The depressions of the inter-war period were far more profound than the post-WWII recessions. They destroyed many businesses and had a stronger impact on capital income than labor income.” P. 9

Now, with respect to wage income (as distinct from capital income) they say this:

”We also show that top wage shares were flat before WWII and dropped precipitously during the war.” P. 2

I have electronically searched your article and found no mention of “depression”. I have eyeballometrically searched their document and found no mention of “New Deal”.

As a marketing decision, associating compression of incomes with the “New Deal” makes perfect sense – bold government action producing a desired result. However, the folks doing the analysis do not make that association. So, Professor, are you providing your readers with analysis or advocacy?

Now, I can find points where the authors cite New Deal programs as an example of changes in social norms, and New Deal progressive taxation as preventing a re-accumulation of vast fortunes. But this is a follow-up to the Great Compression, not a cause.

Social Norms: Well, I expect your Nobel Prize will be for something other than pop sociology. You offer us this:

”Some -- by no means all -- economists trying to understand growing inequality have begun to take seriously a hypothesis that would have been considered irredeemably fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to inequality. According to this view, the New Deal had a more profound impact on American society than even its most ardent admirers have suggested: it imposed norms of relative equality in pay that persisted for more than 30 years, creating the broadly middle-class society we came to take for granted. But those norms began to unravel in the 1970's and have done so at an accelerating pace.
Exhibit A for this view is the story of executive compensation. In the 1960's, America's great corporations behaved more like socialist republics than like cutthroat capitalist enterprises, and top executives behaved more like public-spirited bureaucrats than like captains of industry. I'm not exaggerating.”

Let’s see what the authors you cite had to say on this:

”…we emphasize the role of changing social norms as a potential explanation for the observed patterns.

Although our proposed interpretation for the observed trends seems plausible to us, we stress that we cannot prove that progressive taxation and social norms have indeed played the role we attribute to them. In our view, the
primary contribution of this paper is to provide new series on income and wage inequality.”
p. 3

Hmm, they use the word “changing” where you elect to use “unraveling”. More advocacy?

Perhaps something about the social norms adopted in 1950 required modification over time. A few points:

- Absence of foreign competition: our natural industrialized competitors were devastated by WWII. Did US steel or auto workers face significant foreign competition in the 60’s? How about the 70’s, or the 80’s? Might this have affected the ability of US corporations to pay high wages for semi-skilled work?

- Did these “socialist republics” you mention actually work? The Dow crossed 1,000 in 1966, and again, briefly, in 1974. Chrysler went bankrupt in 1979. Ford was believed to be on the brink of bankruptcy then. People who did not know Japan made cars in 1965 wanted nothing else by the late 70’s. If these corporations were failures at their basic business, shouldn’t we expect them to change? Perhaps you remember Jimmy Carter’s “national malaise” speech of 1979.

Let’s talk about change for a moment. Another well known economist, Keynes, had some thoughts. He is ranked slightly ahead of you alphabetically and perhaps by other measures, so let’s consider this comment attributed to him:

“When somebody persuades me that I am wrong, I change my mind. What do you do?"

Cold it have been time for a change in America? And why did America change, per your article?

” Let's leave actual malfeasance on one side for a moment, and ask how the relatively modest salaries of top executives 30 years ago became the gigantic pay packages of today. There are two main stories, both of which emphasize changing norms rather than pure economics

So, changing norms. Surely you do not fear change. Or, is this an unexpected conservative side to your thinking, heretofore unrevealed? I am sure you have given this some thought, as have the professors you cite. However, neither your article nor theirs offers much speculation on why norms might have changed. May I offer mine?

Wartime solidarity: WWII represented a nearly complete mobilization of the US economy, and nearly universal military experience for men of a certain age. Especially since this was followed by the Cold War (Berlin Airlift, 1948), and the Korean War, that sense of shared experiences, shared values, and a common foe may very well have promoted a sense of equality and community. By 1980, the proportion of veterans in the work force had fallen due to retirements. New workers included women, blacks, other ethnics, and 60’s Baby Boomers who viewed the military and hierarchies through the prism of Vietnam. I applaud increased diversity in the work place as a good thing, as I am sure you do. However, a probable consequence would be a decline in the sense of community created by the War, and an introduction of new values, i.e., a change in norms. In fact, a change in certain norms, specifically the belief in the unsuitability of woman and minorities in the workplace, was, I expect we agree, a very good thing.

Could this “life in wartime” idea be tested”? Well, the Civil War represents a comparable level of national commitment, but good luck finding statistics. WWI was shorter and, I suspect, represented a lesser percentage level of male involvement.

Both of these post-war experiences would be confounded by another factor to which you give short shrift (if you give it any shrift at all): immigration. America took in many starving Irish during the 1880’s. Good for them, good for America, but bad for any statistics on income inequality in that Gilded Age. Similarly, I have read that immigration was low in the 50’s and 60’s, then increased in the 70’s through to today – good for low-skilled workers already here, good for certain statistics for that time period. I do not know when the surge in illegal immigration began – a modest hint comes from the release of “The Border” with Jack Nicholson in 1981, but as you are an economist I have no doubt you can do much better research on this.

The point - allowing lots of poor, unskilled, poorly educated people into the country is, I believe, a great thing for the people in question. I still believe in “Give me your tired, your poor, your huddled masses yearning to breathe free”. I am sure you do to. However, it plays hell on statistics such as literacy, lowest quintile income, longevity, and health-related numbers. Far better, for presenting better such statistics, to manage your country like an exclusive, hereditary country club – poor foreigners need not apply. For an example of such a country, how about Sweden, which you mention in your article? I understand their population is about 5% immigrants, and they find it to be a strain. Regrettably, I do not know how to say “Hard Luck” in Swedish.

So, I have mentioned a couple of reasons that income on the low end may have been “above trend” in the 50’s and 60’s – lack of foreign competition, wartime solidarity, and low immigration. The “wartime solidarity” argument may explain a bit of moderation at the high end as well.

The authors you cite believe that their analysis covers this point as to income distributions at the top end. However, I believe my point is valid as to literacy and health statistics.

Yet another point – in 1950, earnest capitalists could look back on a fairly bleak twenty years. Confidence that capitalism was a better system than socialism did not have tremendous supporting evidence, based on a depression and a war. Nor did early Soviet advances in science, such as rockets, reassure us that we had the winning formula. However, through the 70’s as the failure of socialist states abroad and the failure of socialist corporations at home became clear, confidence in capitalism may have had good reason to increase. Hence, the advice of Keynes – what we were doing was not working – time for a change.

That is my pop sociology: norms changed to reflect new entrants into the workforce, the passing of a WWII generation, and the failure of the “socialist” style adopted immediately after the War. I don’t expect I will be getting any prizes for it either. But it does suggest that the Golden Era of Income Equality that you look back to with fondness was a bit of an historical anomaly not easily repeated.

Now, your article blends together what I think of as three ideas. First, what happened to unskilled or low skilled workers – the high school grads? I have already hit on reasons for their decline, summarized as globalization and new entrants to the work force. But how about the top end of the income scale?

Wealth: Here, I think you are a bit of a prisoner of the limitations of the data. I will, after warning deeply committed Marxists to avert their eyes, boldly assert the following: there is “good” wealth, and “bad” wealth”. Bad wealth seems easy to depict – Enron. Truly committed free-marketeers will argue that that is the price you pay for a free and vibrant system. Good point! But Enron-style abuse is still a “price”, not something to be desired. If it could be costlessly eliminated, we would choose to eliminate it, I suspect.

And “good” wealth”? Well, Craig Venter was a pioneer in mapping the human genome as founder of Celera. The possible health benefits are enormous, and I recall reading that Celera had a big sign in their lobby reminding employees that, paraphrasing, “The sooner we finish this, the sooner we start saving lives”. So, Mr. Venter is rich – I don’t begrudge him his wealth.

Similarly, we have seen a tremendous upsurge in worker productivity in the US economy. This is attributed to the widespread adoption of new technology. Well, some techies, like Steve Jobs, helped make this happen and are newly wealthy. But they have greatly benefited society – this is not a zero-sum game.

The income statistics you present are not designed to separate “bad” wealth” from “good” wealth. Failure to make this distinction puts a lot of sand in the gears of your presentation. If we “all agree” that some forms of wealth represent socially desirable outcomes, then the observation that there is an explosion of the super-rich may simply be an observation that we have passed through a wildly innovative era. This is a problem?

Saez and Pikkety mention this:

”Obviously, explanations based on technical changes that point out that periods of industrial revolutions such as the end of the 19 th century or the end of the 20 th century are more favorable to the making of fortunes than other periods, might also be relevant.34 Unfortunately, there are not yet rigorous studies trying to quantify the relative contribution of the technological effect versus the fiscal effect on the pattern of top incomes in the US.” p. 20

So, time will tell. But they at least give a nod to the possibility of wealth associated with innovation.

You might save the day by pointing to other social organizations that have a comparable level of innovation without the emergence of the super-rich. Good luck. Europe is a terrible laggard in new drugs and new technologies generally. Their one-time lead in telecoms seems to have vanished. Japan? Well, as I said, good luck. However, the authors do present data showing that France is trudging along nicely at its earlier levels of income inequality. By that limited measure of success, vive la France!

Consequences: As to consequences, I think it is well worth a discussion of where this emergence of a new plutocracy might take us. You seem to worry that politics have become more partisan. To highlight just one of my responses, and for variety, I actually have a poem:

The egos are large
And the issues are small
So Faculty politics
Are most brutal of all.

OK, no Pulitzer Prize coming my way either. And you are better positioned to comment on the accuracy of the underlying observation regarding faculties.

However, I think Ralph Nader had a point in complaining that, in 2000, voters contemplating Bush and Gore were being offered a choice between chocolate ice cream with vanilla swirls, and vanilla ice cream with chocolate swirls. How do you tell them apart? And what about angel food cake, or tofu and fried rice? I am not original in thinking that a lot of the partisan posturing today is for the sake of “energizing the base” to vote and write checks. For example, it’s not enough to disagree with Ashcroft – he must be depicted as the Anti-Christ. Maybe we should attribute this partisan rhetoric to the financing challenge caused by the post-Watergate campaign finance reforms.

For context, let me offer some phrases to spark a bit of free association. “Who lost China”; Alger Hiss; Joe McCarthy; the Civil Rights movement; the Vietnam protests; the Eugene McCarthy campaign; the Kennedy assassinations; the King assassination; the urban riots of several “long, hot summers”; the Chicago police riots of ’68; the Kent State killings; Cambodia; Watergate. Now, tell me, honest Injun – is this nation more polarized now than it was then? The end of the Cold War opened the door to some partisan kookery culminating in an impeachment, but that was faculty politics. The contemporary “partisan” list could have: the follow-up to Roe v. Wade, Robert Bork, John Tower, Clarence Thomas, Iran-Contra, a hundred Clinton scandals about nothing, and impeachment – how do the lists compare?

You also mention a study that shows a congressmen’s vote is today more reliably predicted by party affiliation. Please. We saw a big realignment in the South of conservative Democrats over to the Republican Party. Something similar happened to the Rockefeller Republican in the Northeast. If this is related to the emerging plutocracy, you ought to tell us why.

As to policy, even if you were to demonstrate that the presence of these plutocrats was undesirable, certain policies advocated by the Democrats do not connect. For example, higher income taxes on “the wealthy” start at incomes of roughly $250,000 per year – a good living, but “super-rich”? Especially if this is a two-earner household, probably not.

Similarly, the estate tax threshold is $5 Million – a comfortable figure, but hardly enough to go out and purchase a Senate seat. Perhaps if you advocated policies that pointed the guns at the identified target, you would be more convincing.

OK, let me exit by the same door I entered – I think you have brought useful attention to an important issue, and I eagerly await part 2. I think you have a much stronger piece if you explore the causes of the Great Compression more carefully and address the suspicion many of us feel, that not all wealth is created equal, and consequently, not all evidence of wealth concentration is evidence of a problem.


UPDATE: Boy, that upgrade to Blogger-Pro went smoothly! Other than deleting this entire post, no problem.

Thans to Brad DeLong for the link. We will see how long this stays up. Yes, we know that somewhere at Prof. DeLong's site is the correct Keynes quote. But did you know that admirers of Prof D. will find him in the footnotes of the NBER Working Paper? He notes that reduced anti-trust enforcement in the 80's was also a factor in wealth accumulation.

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