Paul Krugman had a powerful column on income inequality in America recently. Here are some extracts.
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. …
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.
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. . . .
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. . . .
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.
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? . . . 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….
I’m with Alan Greenspan, who surprisingly, given his libertarian roots has repeatedly warned that growing inequality poses a threat to “democratic society.”
From the article Krugman is quoting
Our most surprising result is that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growing inequality is not just a matter of the rich having more capital income; the increasing skewness in wage and salary income is what drives our results. . . .
The paper concludes with a review of issues related to income mobility, consumption inequality, and the sources of growing income inequality. We argue that economists in their explanations of growing income inequality have placed too much emphasis on “skill-biased technical change” and too little attention to the “economics of superstars,” i.e., the pure rents earned by the top CEOs, sports starts, and entertainment stars. This source of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.
I have a question and a comment.
The question: Why is it that the push for tax cuts to the rich seems to strengthen as the chips in the marketplace are falling ever more heavily in their favour?
The comment. My sympathies are entirely with (what I take to be) the sympathies of the authors of these passages. But one caveat. Notice the list of things that are driving down wages at the bottom end. I’d change the list quite a bit. I’m not sure deunionisation belongs there unions have typically compressed wage outcomes it’s true. But they’ve typically assisted those above the minimum wage, not those at the bottom of the pile. I’d add social breakdown the loss of social capital. And it’s very odd that ‘technology’ is not there. But rather than just machines replacing people, spare a thought for Michael Kremer’s ‘O-ring’ theory of economic development.
Named after the O-ring of the Shuttle the failure of which sent seven astronauts to their deaths the theory shows how the demand for work of lower skill or discipline can plummet precipitously if low quality work can prejudice higher value work as the faulty O-ring did on the Shuttle. As the workplace gets more highly skilled and interdependent, the productivity of those below a certain level of skill can fall way below the basic wage, and indeed turn negative without too much trouble.
In a sufficiently sophisticated workplace or supply chain, it may not even be safe to try people out. Add to this Akerlof’s idea of the market for lemons. As a businessperson you spend your time when hiring low skilled people trying to avoid the lemons. It produces discrimination on a grand scale as the employer tries to pick up cues – from clothes, accent, grade, school, suburb, race, religion, whatever whether the person they’re thinking of hiring is going to be a lot worse than useless.