Paul Krugman has written a very interesting article in the New York Times called For Richer, about the growth of income equality in the US. In light of the Fibbertarian threads that have occurred here, this is one of the most interesting excerpts:
Although America has higher per capita income than other advanced countries, it turns out that that’s mainly because our rich are much richer. And here’s a radical thought: if the rich get more, that leaves less for everyone else.
That statement — which is simply a matter of arithmetic — is guaranteed to bring accusations of ”class warfare.” If the accuser gets more specific, he’ll probably offer two reasons that it’s foolish to make a fuss over the high incomes of a few people at the top of the income distribution. First, he’ll tell you that what the elite get may look like a lot of money, but it’s still a small share of the total — that is, when all is said and done the rich aren’t getting that big a piece of the pie. Second, he’ll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.
Sound familiar? Krugman does a pretty good job of dismissing the first (small share) counterargument, starting with this:
the share of the rich in total income is no longer trivial. These days 1 percent of families receive about 16 percent of total pretax income, and have about 14 percent of after-tax income. That share has roughly doubled over the past 30 years, and is now about as large as the share of the bottom 40 percent of the population. That’s a big shift of income to the top; as a matter of pure arithmetic, it must mean that the incomes of less well off families grew considerably more slowly than average income. And they did. Adjusting for inflation, average family income — total income divided by the number of families — grew 28 percent from 1979 to 1997. But median family income — the income of a family in the middle of the distribution, a better indicator of how typical American families are doing — grew only 10 percent. And the incomes of the bottom fifth of families actually fell slightly.
He then goes on for a few more paragraphs to elaborate. Unfortunately, he never really dives into the second (incentive) counterargument with quite the same gusto; about all he comes up with is this:
The most impressive economic growth in U.S. history coincided with the middle-class interregnum, the post-World War II generation, when incomes were most evenly distributed. But let’s focus on a specific case, the extraordinary pay packages of today’s top executives. Are these good for the economy?
The argument for a system in which some people get very rich has always been that the lure of wealth provides powerful incentives. But the question is, incentives to do what? As we learn more about what has actually been going on in corporate America, it’s becoming less and less clear whether those incentives have actually made executives work on behalf of the rest of us.
In a slightly different vein, Krugman also talks a little about the estate tax. I never got around to making an entry about it here, but I was recently involved in a thread on Quorum about this, and what Krugman says on this topic fits well with what I was trying to say:
The most remarkable example of how politics has shifted in favor of the wealthy — an example that helps us understand why economic policy has reinforced, not countered, the movement toward greater inequality — is the drive to repeal the estate tax. The estate tax is, overwhelmingly, a tax on the wealthy. In 1999, only the top 2 percent of estates paid any tax at all, and half the estate tax was paid by only 3,300 estates, 0.16 percent of the total, with a minimum value of $5 million and an average value of $17 million. A quarter of the tax was paid by just 467 estates worth more than $20 million. Tales of family farms and businesses broken up to pay the estate tax are basically rural legends; hardly any real examples have been found, despite diligent searching.
In the interests of being fair by criticizing my intellectual allies as well as foes when they commit transgressions, I should also point out that Krugman does engage in some rather unsavory debate practices. Most notable is his tendency to poison the well, as in the following examples:
even bringing up the subject exposes you to charges of ”class warfare,” the ”politics of envy” and so on
a Heritage Foundation document titled ”Time to Repeal Federal Death Taxes: The Nightmare of the American Dream” emphasizes stories that rarely, if ever, happen in real life: ”Small-business owners, particularly minority owners, suffer anxious moments wondering whether the businesses they hope to hand down to their children will be destroyed by the death tax bill, . . . Women whose children are grown struggle to find ways to re-enter the work force without upsetting the family’s estate tax avoidance plan.” And who finances the Heritage Foundation? Why, foundations created by wealthy families, of course.
That quibble aside, though, I think Krugman overall does a pretty good job of bringing to a national audience the same issues and concerns that I’ve been discussing lately. I’d be very interested to see what his suggestions are for what to do about the situation he so eloquently describes.