Paul Krugman is on the road promoting his new book "The Great Unravelling." Kevin Drum was able to snare an interview with Mr. Krugman for his excellent blog Calpundit. Nice "get", as they say, Kevin.
Paul Krugman on income inequality in the U.S.:
Krugman: If you think that income inequality is one of the things that drives this [i.e., motivates Republicans] – and I do believe it's part of the story – then you have to look at the self-reinforcing process in which growing concentration of wealth at the top feeds into the political power of the people who serve that class's interest. I don't want to sound like a Marxist here, but there's some of that going on. What we thought was an explosion of inequality in the Reagan years was nothing compared to where we are now.
Drum: Purely on an economic basis, what's wrong with income inequality? Does it hurt? And why?
Krugman: Well, I think you can't do it on a pure economic basis, you have to think how it plays through the social system and the political process…
Drum: Suppose it keeps going up. What happens?
Krugman: One thing that happens is you have an adversarial kind of society, you have a society in which people don't share the same lives at all, don't share the same values. Politically, it leads to erosion of the support for public institutions that we need."
As Paul Harvey says: "And now... the rest of the story". As it happens there's a recent Economist article [subscription required] on income inequality in the U.S. just chock full 'o data that puts Mr. Krugman's alarmism into much needed perspective. Here are the "money" grafs, so to speak:
Does America really have an inequality problem? Statistically, the answer is “Yes, but”.
By whatever measure you use, the richest Americans have done very well over the past few decades. According to the Census Bureau, the share of national income going to those in the top fifth of earners rose from 44% in 1973 to 50% in 2000. The share going to the top 1% rose to 15% in 1998, higher than it has ever been since the second world war, according to a recent study of tax returns by two economists, Thomas Piketty and Emmanuel Saez.
Take wealth rather than income, and America's disparity is even more startling. The wealthiest 1% of all households controls 38% of national wealth, while the bottom 80% of households holds only 17%, according to the Economic Policy Institute (EPI). Around 85% of stockmarket wealth is held by a lucky 20%.
If the rich have been doing much better than other Americans in relative terms, the poor have failed to improve their lot as they did in the 1950s and 1960s. The wage incomes of the bottom 20% of households have barely grown in real terms since the mid-1970s. As for wealth, the bottom fifth has debts that exceed its assets, making its wealth a negative number. The bottom fifth's percentage of national wealth worsened from -0.3% in 1983 to -0.6% in 1998.
These depressing statistics, though, come with two caveats. First, poorer Americans are better off than they once were. The proportion of Americans in poverty now stands at 12%; in Mr Krugman's supposedly golden 1950s, it reached 22%.
Meanwhile, although real wages appear stagnant, poor people can buy far more with them. The combination of technology and globalisation—the very thing that has depressed some manufacturing wages—has put many more erstwhile luxuries within the grasp of poorer Americans. They now own better-quality cars and washing machines than rich ones did a generation ago; mobile phones and computers are now mass-market items.
Second, America is a remarkably mobile society. As this year's Economic Report of the President points out, 50-80% of the unfortunates in America's bottom quintile push themselves into a higher quintile after 10 years. There are worries about mobility; Chris Edwards of the Cato Institute complains that marriage patterns may now be reinforcing inequalities, since yuppies marry yuppies these days. Yet, in broad terms, the idea that America is a land of opportunity still stands.
Mr. Krugman continues:
Krugman: Take this catastrophe in Alabama just now. It was a dispute about taxes, but what's ultimately at stake is, are they going to do anything to improve that dismal primary education system in Alabama or is it going to get even worse because of the budget crisis? And the answer is, it's going to get even worse.
It's funny, some of the businesses in Alabama were supporting Riley's tax plan because they actually are starting to understand that a decent education level is more important to them than a couple of points off their taxes. But it gets harder to have that sort of enlightened social policy when you have a society that's so radically differentiated.
Think of Latin America. The characteristic thing in Latin America is that they have lousy infrastructure and lousy education systems because they're so polarized on income, and in turn that leads to low development and polarized income. You get this kind of downward spiral. And there's something like that happening here."
Mr. Krugman's argument would be a lot more convincing if the U.S. were not already tops in the world for education spending.
More important than income disparity in the U.S. are the average standard of living and the welfare of the poorest. The economist again:
Seen from an international perspective, America certainly looks an unequal country, but in a way that many of those optimistic Americans might be proud of (see chart). According to the EPI, admittedly using figures from the late 1990s, the gap between the top and bottom tenth of earners in America is wider than that in almost any other rich country. Even so, America's poorest are (in real purchasing-power terms) only a tiny bit worse-off than their peers in Sweden, Finland and Denmark; and they are better-off than those in Britain and Australia.
The relative inequality in America comes from the people at the top doing unusually well. The top 10% of Americans are nearly twice as well off as the top 10% of Nordic households. They are also much further away from the mean.
Back to the interview:
Drum: But despite 20 years of this, starting in the early 80s, there's actually remarkably little class envy among the working class in America.
Krugman: Yeah, and that's partly because people don't know. There's a funny thing that happened when I had that piece on inequality from the Times magazine a year ago. I had no control over the artwork and didn't see it until everyone else saw it, and they had this big picture of what they thought was a mansion. But it wasn't a mansion, it wasn't what the really rich are building now, it was a roughly $3 million house of about 7,000 square feet, and there are a few of those in Princeton just down the road from me. The people doing the Times magazine artwork just don't realize how rich the rich are these days, what the real excesses look like, and I think that's the general thing. I think most people are not well informed, and after all who is going to inform them?
This is the income disparity that's going to be harder and harder for advocates of the social welfare model to ignore. America is going to be able to afford European levels of social spending at much lower levels of taxation and the standard of living enjoyed by Americans in the lowest income quintile will compare favorably with the average standard of living enjoyed in, say, Canada - which has a 25% lower per capita GDP than the U.S. and lags in productivity. How many Americans do you suppose realize that Canadians are, on average, a full one-quarter poorer than themselves, Mr, Krugman?