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Graduates versus Oligarchs
By Paul Krugman
02/27/06 "New
York Times" -- -- : 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.
Copyright 2006 The New York Times Company
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