The Rich, the Right, and the Facts by Paul Krugman

[Joanne98]

Deconstructing the Income Distribution Debate

Paul Krugman | November 30, 1992

During the mid-1980s, economists became aware that something unexpected was happening to the distribution of income in the United States. After three decades during which the income distribution had remained relatively stable, wages and incomes rapidly became more unequal. Academic researchers soon began arguing vigorously about the causes of the growth in inequality: was it global competition, government policy, changing technology, or some other factor? What nobody, whatever his or her political stripe, questioned was the fact that there had been a dramatic change in income distribution.

During 1992 this genteel academic discussion gave way to a public debate, carried out in the pages of the New York Times, the Wall Street Journal, and assorted popular magazines. This public debate was remarkable in two ways. First, the conservative side displayed great ferocity in presenting its case and attacking its opponents. Second, conservatives chose to take an odd, and ultimately indefensible, position. They could legitimately have challenged those who have called attention to the growing dispersion of income on the grounds that nothing can, or at any rate should, be done about it. But with only a few exceptions they chose instead to make their stand on the facts to deny that the massive increase in inequality had happened. Since the facts were not on their side, they were forced into an extraordinary series of attempts at statistical distortion.

The whole episode teaches us two lessons. At one level, it is a sort of textbook demonstration of the uses and abuses of statistics. This article reviews that lesson, tracing out how conservatives tried to distort the record and why they were wrong. But the combination of mendacity and sheer incompetence displayed by the Wall Street Journal, the U.S. Treasury Department, and a number of supposed economic experts demonstrates something else: the extent of the moral and intellectual decline of American conservatism.

I begin with a review of the basic data, followed by an assessment of the three kinds of conservative attacks on the simple facts about growing inequality: (i) efforts to deny the facts, through a mixture of confused statistical arguments; (ii) claims that the growth record of the Reagan years outweighs or negates any apparent increase in inequality; (iii) claims that income mobility makes comparisons of the income distribution at a point in time meaningless. A final section tries to put some perspective on the whole debate.




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Some Basic Facts
There are some non-official sources that provide evidence for growing inequality of income in the United States. For example, Fortune has long carried out annual surveys of executive compensation; and since the mid-1970s compensation of top executives has risen far faster than average or typical wages, a process entertainingly discussed by Graef Crystal in his In Search of Excess. Surveys carried out by the University of Michigan have also shed useful light on income distribution, in particular on the dynamics of income over time. There is also anecdotal evidence: Tom Wolfe noted the soaring demand for apartments in Manhattan's "Good Buildings" well before academics had started to take the growing concentration of wealth seriously, and indeed his Bonfire of the Vanities arguably tells you all you need to know about the subject.




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What the Census Shows
Most academic studies on the distribution of income in the United States rely on Census data, compiled from the Current Population Survey. These data have certain limitations, to which I will turn in a moment. But as a starting point, the Census numbers have one great advantage: they are not controversial. In all the mud-slinging of the income distribution debate, nobody has yet accused the Census of bias or distortion (although that may come next).

Figure 1 shows a picture that ought to be part of the consciousness of anyone who thinks about trends in the U.S. economy since the 1970s. The figure shows the rate of growth of income at selected points in the income distribution over several different periods.

Figure 1
The income distribution is measured in percentiles. For example, the first set of bars shows the rate of growth of income of the family at the 20th percentile (the top of the bottom quintile). The choice of percentiles ranging from 20 to 95 means excluding the real extremes. Some very important developments are missed by these exclusions, especially at the top. But this picture still gives us a useful baseline.

The three periods chosen are 1947-73, 1973-79, and 1979-89. The first period represents what Alice Rivlin has called the "good years" the great postwar boom generation. The remaining two periods show the "seventies" the period from the business cycle peak of 1973 to that of 1979 and the "eighties" from the 1979 peak to the 1989 peak.

What do we see in the figure? First, the 1947-73 numbers show what real, broad-based prosperity looks like. Over that period incomes of all groups rose at roughly the same rapid clip, more than 2.5 percent annually. Between 1973 and 1979, as the economy was battered by slow productivity growth and oil shocks, income growth became both much slower and more uneven. Finally, a new pattern emerged after 1979: generally slower income growth, but in particular a strong tilt in the growth pattern, with incomes rising much faster at the top end of the distribution than in the middle, and actually declining at the bottom.

In some of the conservative critiques I will describe below, apologists claim that the 1980s represented a normal process, that there was nothing unusual or distressing about the rise in inequality. As the discussion gets a bit complicated, it will be useful to retain the basic image of Figure 1: "good" growth looks like an all-American picket fence; growth in the 1980s looked like a staircase, with the well-off on the top step.




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The CBO Numbers
The Census numbers shown in Figure 1 tell a pretty clear story. Nonetheless, it has been apparent for some time that the story is incomplete, because it fails to give a full picture of gains among families with very high incomes.

Census numbers are of little use in studying high-income families, for two rea sons, one major, one minor. The main problem is the arcane technical issue of "top-coding." The questionnaires on which the Current Population Survey is based do not ask for precise incomes; instead, families are asked to place their income within a series of categories, of which the highest is "over x," currently $250,000. This means, of course, that the Census data give no information about changes in the fortunes of families with incomes high enough to be above that top number. The minor problem is that Census data do not count one important source of income for high-income families: capital gains.

http://www.prospect.org/cs/articles?article=the_rich_the_right_and_the_facts

[lamp_shade]

1. Thanks. Bookmarked.

[MissMarple]

2. Thanks. And, thank you, Paul Krugman.

[vinylsolution]

3. A worthy winner....

... of the Nobel Prize. Hats off to ya, fella!

[bleever]

4. Krugman connects theory with current social and political reality so well

that I can't believe the Nobel caught up with him.

Congratulations, Dr. Krugman, and thank you for elevating the social aspect of social science.

[BrklynLiberal]

5. Hey Jo..You have been posting some really great stuff here today. Thanks.

:thumbsup: :hi:

[d_b]

6. Krugman for treasury secretary

[snot]

7. k&r'd

[Waiting For Everyman]

8. And beside this, look at the minimum wage...

which these same overly-rich fight against viciously every time increasing it comes up. They have the money to buy power, so they get their way. The poor have no way to defend themselves from it. It's legalized theft - ongoing for more than 30 years. It's stealing from the weakest. And until now, the thieves got admired for it.

We need an excess income tax to redress this, with a corresponding wage increase pinned to the cost of living with exemption from taxes at the bottom tier. It's the right thing to do, but in addition to that, putting more income into the bottom of the scale would do the most to boost our economy right away. The poor can't just stowe increased income away into mutual funds, they have to spend it on the ever-increasing list of needs they have been forced into making-do without, for a long time now... serious things like medical attention, home and car repairs, unpaid bills, a job education course, etc. The bottom rung is like a dry sponge of pent-up consumer demand, becoming almost desperate by now.

[mzmolly]

9. K, R

and bookmarking. :hi:

[fasttense]

10. And the republicons continue to distort the truth in the current republicon economic crisis.

"But with only a few exceptions they chose instead to make their stand on the facts to deny that the massive increase in inequality had happened. Since the facts were not on their side, they were forced into an extraordinary series of attempts at statistical distortion."

They are doing the same thing with the current economic crisis.

Republicons are blaming the seizure of tens of trillions of dollars in credit markets on a handful of poor home owners.

How a handful of people could have caused such massive financial problems is beyond me. Hell, even if ever single mortgage made from 2002 to 2006 in the US was a cheater loan, there still would not be enough people or households to have created that much debt.

The numbers just don't add up. Since facts don't support republicons version of the cause of this crisis the conservatives were forced, as Krugman puts it, into an extraordinary series of attempts at statistical distortion, yet again .