The Economist Fisks Paul Krugman

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?

Comments

[Joe Sixpack]

Here are the results of a less-than-scientific-poll fur ya:

The Great Unwashed Masses already discount everything that Economists try to tell us anyway. We have little use for Economists. Reason: We have seldom read or heard them analyze or predict anything that proved to be accurate over time. And while they write about it, we live it, and somehow living it seems a better qualification for an expert. Economists in general just appear to be folks whose math scores weren't quite high enough to get into an Engineering field. After a reasonable period of waiting for their crystal balls to clear, and their dart throwing accuracy to improve, it's back to doing the laundry using our luxurious new washing machines as we day-dream about how much better-off we are than our neighbors north of the border.

This next finding is from a survey of one: Ya could have boiled that entire piece down to a Cliff Notes summary that read sumptin' like this: "I'm a Republican, that other dude's a Democrat." That would have saved us more time to shop for one of those new-fangled cellphones that our rich friends at the top have trickled on down to us. Sheez.

[snore]

Joe Sixpack makes an assertion, without proving it true. If he could please provide examples, his argument would be more convincing.

For example, Paul Krugman said in 1995, that Argentina would be forced to abandon the dollar peg before the decade ended. He was wrong... Argentina actually abandoned the dollar peg in 2001. He made this prediction based on his knowledge of economics. I would like Joe Sixpack to provide counter-examples of wrong predictions from Krugman.

That said, Krugman makes the same error that Rush Limbaugh does. Both of them ascribe bizarre and ugly motivations to their ideological antagonists.

[IceCold]

Krugman and many others like him need psychiatrists more than anything else. This obsessive envy thing is bizarre, and utterly unrelated to serious policy debate. Who cares what "excesses" the "rich" engage in, so long as they're legal and done on their own dime? Tell, me Professor Krugman, how the square footage of some "rich" person's house, or the number of luxury cars they own, affects the lives and prospects of a "poor" person?

The neccessary premise to all this envy parading as "social conscience" (whatever that might be) is the economically illiterate concept of economic activity as a zero-sum game. Krugman's whole shtick amounts to little more than a dour version of the sarcastic Russian jokes from the early post-Soviet period about the peasant wishing, more than anything, that his smarter and more successful neighbor's cows would die.

It's easy to understand why society would be concerned with a "safety net" to assure health and dignity for the disabled, ill, and transitionally unemployed. It's unfathomable -- at least in terms of morality or economics -- why society should give the slightest thought to a "ceiling" to constrain the "excesses" of the most successful. One gets the distinct impression from Krugman and company that if the bottom rungs of the American economic ladder were in fact comfortably prosperous, they would STILL obsess about the top 1%.

Like I said, psychiatry, not economics, is at issue here.

[Porphyrogenitus]

Kewl Krugman post.

If folks are interested in more rebuttal of Krugman, I have something here.

[Tom Maguire]

Good post. At the risk of being horribly presumptuous, I will offer a brief defense of the "Joe Sixpack Position", that the public has tuned these econo-doomsayers out.

Start with the story of "Chicken Little", and the "Boy Who Cried Wolf". OK, they are not as important. Flash forward to the '70, and the famous "Club of Rome" study - we were running out of all resources, doom was at hand! Forward again to the '80's, and the Reagan deficits - deficits as far as the eye could see would lead to high interest rates, a strong dollar, an unsustainable trade deficit, and eventual economic badness... until it didn't.

Forward again, its the late '90's, surpluses as far as the eye could see, until we have a recession and a tax cut, and they are gone. (Apparently, the tax cut gets somewhat less than half the credit, sorry for no links).

Now, I pay attention to this stuff, and it can get confusing. The idea that the man in the street has long since given up listening to these doomsayers and prognosticators is not unreasonable.

This time, Krugman may be right, and this may be the dawn of a new fascist era in America, possibly accompanied by an economic collapse of the US or the world. But I am strangely unruffled.

[snore]

Tom Maguire,

You rise to Joe Sixpack's defense, and this is admirable. Still, I would prefer specific examples of Krugman making bad predictions, rather than a referral to some hazy incident in the 70s, in which you don't provide evidence for Krugman personally endorsing those positions.

Now, Krugman is making a straight-line projection, in that he assumes no tax increases, benefit reductions, or other changes that would affect the size of the deficit. That is his point, if you think about it.

Krugman uses that projection to predict that the US will suffer through an Argentine style crisis at some point in the future. This is his prediction, if nothing else changes. I don't see anything particularly shocking about that prediction. It's like predicting that someone who spends more than he makes will at some point go bankrupt, will curtail spending, or will have to get a second job.

I suppose I am missing something, since I am not a smart guy, but maybe someone here can educate me on this point.

[Pete Harrigan]

A specific instance of Krugman being wrong? How about his February 2000 (when we still had a Democratic President) column, when Krugman said that the economy was fine and not to let that dropping stock market worry anyone. "The fall in the Dow is not a verdict on the economy..." he said. He continued on claiming there were no real clouds on the economic horizon. Or 6 weeks earlier, when Krugman predicted the economy would be "merely terrific". Or there was his work in the late 90's touting Enron.

Oh, I'm sorry. You said ONE instance.

For the record, I'll say his current predictions of coming economic crisis are going to look pretty silly in a few years. Of course, his current rantings are more of the something-will-gp-wrong-someday and I'll take credit for having predicted it variety.

[snore]

If he didn't predict this recession, and predicted continued growth, then he has made a wrong prediction.

As far as Enron, well, even George Bush believed in Enron. They snookered everyone using fraud and baroque accounting practices.

The Argentine prediction is for an America that doesn't try to fix the deficit. It would be hard to imagine such an America, since we are a responsible people. That said, it is a possible future, and saying that it's inconcievable isn't the same as saying it's impossible.

[Peter Harrigan]

Krugman definitely predicted continued growth and no recession in early 2000. In the early 90's he was in the Japan is going to take over the world camp.

His terrible track record would be somewhat acceptable, after all prediction is hard, if he weren't such a shrill, partisan ass. He doesn't say Bush is wrong, he says Bush is evil. And that the world is going to end. And that Bush lied, BUSH LIED!!!

My five year old daughter is more reasonable in an argument than Krugman and she wasn't predicting strong growth 3 years ago.

[N/A]

A specific instance of Krugman being wrong. In the post Krugman's estimate of the "really rich" mansion has to be off. In the midwest we can build a house for around 40 to 60 dollars per square foot. The example of the mansion that Krugman used was a $3 million house of about 7,000 sqft which comes out to around $429 per square foot. I know Princeton is not the midwest, but that's nearly an order of magnitude difference, way higher then cost of living.

[Lynn Carrier]

So the deal is that the RICH will get richer. And the poor get richer too, just not as fast.

The poor with no human capital or fiscal capital get richer. Hey, that's not a bad way to go.

Sometimes a few of them will bootstrap themselves out of the ghetto, but they are stuck there not because lack of 'help' to get out, but by expectations they learn inside their apartments as they grow up.

In the mean time, we have carping how utterly sad it is to be poor in America.

[Steve]

LOL, nice job. I love it when people find empirical evidence that Krugman is being misleading. Good work.

[e]

where is the source that canadians are poorer than americans on average? it's incredible to me that canadians are poorer than americans when 35 million americans have no health insurance. i hope "on average" doesn't signify MEAN income or wealth, (as opposed to median). so if you take bill gates and the poorest american, boy, on average, they sure are the richest two people on earth!

[Eric]

"Oh, I agree that Krugman is shrill"

Yes, economic reality is harsh and unpleasent. If you're looking for something pleasant try a children's book on dinosaurs.

Pete, about the economy during our last Democratic president. Remember at that time, there were no Iraq empire-building money sink-holes, massive tax cuts for the rich, and Republicans in the White House.

Bush did deceive the public, that's as close to evil and lies as I know. Of course, I guess, lies and misrepresentations are acceptable from the conservatives. Look, I want happy Iraqis as much as the next person, but why misrepresent the facts about going to war or what tax cuts will do for our economy.

The World Bank and IMF economists didn't shit on Bush's tax cuts for no reason, they did so because they had numbers in front of them that said the tax cuts were fucking stupid. You ready for Japense and Chinese creditors to own our ass? I'm not, but they do as we increase our deficit.

[David Gillies]

By essentially any economic yardstick, the median Canadian is substantially less well-off than his US counterpart. The insanely high levels of corporate and personal taxation in Canada have made its citizens doubly poorer, first by constraining growth and secondly by confiscating their earnings to the point that disposable income (which is really all that matters) is a fraction of that which the average US citizen commands.

Canada's real spending power per capita is lower even than that of the richer European countries (Scandinavia, the UK and Ireland in particular). And its healthcare system isn't all it's cracked up to be. It might not be quite as bad as the UK's NHS, but that's scarcely a figure of merit I would choose to measure by.

[Paul Settles]

All this talk about the absolute level of consumption or income is completely off the mark. Poverty is a relative measure!!! The reduction in poverty from 22% in the 1950s to 12% now is due to a closing of the income gap.

Also, the use of goods availability as a measure that poor people should be happy with their lot is laughable. What this means is that poor people who have plasma screens, DVD players and computers should be happy watching television shows or surfing the internet seeing all these things that they can hardly dare dream of having: beautiful homes, fast cars, holidays in exotic destinations, bling jewellery and all the other consumerist addictions pumped out by the media.

Anyone with the briefest of acquaintanceships with psychology knows that such a situation would breed more of a sense of unfairness than the American myth of everyone pulling themselves up by their bootstraps.

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