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Tuesday, February 28, 2006

Graduates versus Oligarchs

We're increasingly polarized by class in our society, as this article suggests. Because race and class overlap so much in our society, this is, of necessity, a racial problem as well. This cannot be healthy for our already fledgling democracy. -Angela

Graduates versus Oligarchs

By Paul Krugman

February 27, 2006, The 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, oreven 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 99.9thpercentile 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
marketforces. 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 ofcollege graduates.

1 comment:

  1. Mr. Krugman's article is not surprising. Our society is not based on meritocracy, rather, I think that our society is fueled by the "by right or by might" theory. The unequal distribution of power & privilege in our world is a concept that is steeped in history. Those advantaged few are not willing to surrender it voluntarily nor are they even willing to admit their sometimes ill-gotten privilege. I agree with Dr. Valenzuela that issues of class and race go hand in hand. It is a disheartening to think that the criteria for social mobility is an ever-moving target.

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