Paul Krugman: Rising Oligarchy

Be sure to read about the soaring wealth of the 99th percentile. Shocking. Exactly what the Founding Fathers didn’t want to happen, and proof that the estate tax shouldn’t be abolished – it should be increased.

Graduates Versus Oligarchs
Published: February 27, 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 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.

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 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.

The Discussion: 7 Comments

So what we have is an entrenched aristocracy ruled by a hereditary monarch named George.

What was that “American Revolution” thingie about again?

February 27, 2006 @ 2:43 am | Comment

“estate tax shouldn’t be abolished – it should be increased.”

Here speaks a man who has never found himself the caretaker of an estate that they have to maintain and pay tax on, but can’t sell because it has to be passed on to the next generation as part of a legacy.

Then again, I can’t expect somebody whose family haven’t been living in the same home for 400 years to appreciate the concept of a legacy estate, or to seperate it from “wealth”.

For the uninitiated, having to sell your family’s history to pay your taxes because some family with no history thinks that a legacy estate is money in the bank, is heart rending.

February 27, 2006 @ 5:20 am | Comment

The estate tax is totally in keeping with the founding fathers’ values and is favored by Bill Gates and other progressive-tilted zillionaires. It affects no one adversely; they still have zillions left over. It has been applied in the US for many decades without harming anyone.

February 27, 2006 @ 6:30 am | Comment

ACB thinks he’s better than other people because his family has a “history.” He also thinks he shouldn’t have to pay taxes because, again, his family “history” exempts him from the obligations of citizenship that the rest of us have to bear. The sad fact is that he’s nothing more than an ignorant boob who doesn’t know how to spell “separate.”

February 27, 2006 @ 4:27 pm | Comment

Estate taxes is unfair double taxation. People may not realize this, but it is being applied to hard working people who own small businesses. I work 90 hours a week to be in the top 1% wage earner you talk about, which puts me in the 40%+ tax bracket. I then pay capital gains tax on the investment earnings on what is left. Then the government tries to take another slice away if I want to leave my business for my children? At which point should I just open my house and business every year and invite people to rob me? (Heck, then I get a tax write-off for getting robbed!) The argument that “rich people” can afford losing a few million because they have a few million left is completely bogus. Asking me to pay for a greater share of the tax burden is just socialist arrogrance. Estate taxes, IMHO should be abolished.

February 27, 2006 @ 8:33 pm | Comment

I’m not sure ACB is an “ignorant boob”, nor am I sure he thinks he is better than other people. However, the comment about a family with “no history” does reveal a bit of a bad attitude, doesn’t it? Even those of us in the trailer park have a history. I think perhaps the concept of the inheritance tax in the US and ACB’s experience are not relevant to each other, as unless I’m mistaken, no one in the US has lived in the same house for 400 years, although sometimes it must feel like it. Great Britain’s history, and it’s class and tax structures are quite different from those in the US, so perhaps ACB shouldn’t take Krugman’s comments so personally.

February 27, 2006 @ 8:38 pm | Comment

You will only pay an estate tax if you are leaving above $3.5 million as of 2009 ($2 million before then). I’m not going to shed tears for those affected by this tax, designed to curtail the establishment of royalty-like estates in America. The estate tax is an important tool to help rein in the oligarchy and affects a very small percentage of the population. If you are so concerned about it, you can give more of your money to charity and lower your taxable estate.

February 27, 2006 @ 8:41 pm | Comment

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