Saturday, October 19, 2002

Krugman on the march:

Paul Krugman has an excellent article in Sunday's New York Times magazine about changing income distribution and the politics of wealth. Most of the ideas seem like they came straight out of Kevin Phillip's book (whom he mentions only once - at the end), but they are still potent. We read:
... the growing concentration of wealth has reshaped our political system: it is at the root both of a general shift to the right and of an extreme polarization of our politics.

For at least the past 15 years it has been hard to deny the evidence for growing inequality in the United States. ... Nonetheless, denial of that evidence is a sizable, well-financed industry. Conservative think tanks have produced scores of studies that try to discredit the data, the methodology and, not least, the motives of those who report the obvious. Studies that appear to refute claims of increasing inequality receive prominent endorsements on editorial pages and are eagerly cited by right-leaning government officials. Four years ago Alan Greenspan (why did anyone ever think that he was nonpartisan?) gave a keynote speech at the Federal Reserve's annual Jackson Hole conference that amounted to an attempt to deny that there has been any real increase in inequality in America.

This is the 1998 Greenspan speech Krugman is referring to. Excerpts:
One story that has emerged from that body of research is now familiar: Rising demand for those workers who have the skills to effectively harness new technologies has been outpacing supply, and, thus, the compensation of those workers has been increasing more rapidly than for the lesser skilled segment of the workforce.

Using data from the Consumer Expenditure Survey that the U.S. Bureau of Labor Statistics conducts, researchers have found that inequality in consumption, when measured by current outlays, is less than inequality in income.
[Greenspan's emphasis]

As we consider the causes and consequences of inequality, we should also be mindful that, over time, the relationship of economic growth, increases in standards of living, and the distribution of wealth has evolved differently in various political and institutional settings. Thus, generalizations about the past and the future may be hard to make, particularly in the current dynamic and uncertain environment of economic change. We need to ask, for example, whether we should be concerned with the degree of income inequality if all groups are experiencing relatively rapid gains in their real incomes, though those rates of gain may differ.

When people start talking about consumption as a guage of inequality, it's a redirection from the issue at hand. The wealthy, having certain limits on time and energy, are unlikely to spend/consume all their money. So much of it is saved or invested, which gives them immense security and at times, influence (if they choose to use it). Consumption is a subset of economic activity. One could narrow it further and, for instance, speak of consumption for hygiene (CfH). The total number of bars of soap people use falls within a fairly narrow range - so, using CfH as a metric, there is equality throughout the land, and therefore no cause for concern. Busybodies like Krugman should stop their complaining.     (See how easy that was?)
The three things that Krugman refers to, "globalization'', ''skill-biased technological change", and ''superstar'' - which some claim are explanations for the inequality are precisely what Mickey Kaus wrote a decade ago (a New Republic article, and later a book - Amazon, B&N, review). Kaus will no doubt have something to say in response to Krugman's article.

More Krugman:
According to this story, highly paid C.E.O.'s really are worth it, because having the right man in that job makes a huge difference. The more pessimistic view -- which I find more plausible -- is that competition for talent is a minor factor. Yes, a great executive can make a big difference -- but those huge pay packages have been going as often as not to executives whose performance is mediocre at best. The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation and control many of the perks that board members count on. So it's not the invisible hand of the market that leads to those monumental executive incomes; it's the invisible handshake in the boardroom.

Much more than economists and free-market advocates like to imagine, wages -- particularly at the top -- are determined by social norms.
[Give this man a Nobel Prize!]

[There have been] two huge changes in American politics. One is the growing polarization of our politics -- our politicians are less and less inclined to offer even the appearance of moderation. The other is the growing tendency of policy and policy makers to cater to the interests of the wealthy. And I mean the wealthy, not the merely well-off: only someone with a net worth of at least several million dollars is likely to find it worthwhile to become a tax exile.

As the gap between the rich and the rest of the population grows, economic policy increasingly caters to the interests of the elite, while public services for the population at large -- above all, public education -- are starved of resources. As policy increasingly favors the interests of the rich and neglects the interests of the general population, income disparities grow even wider.
Essentially what Krugman is saying is that the wealthy don't deserve the money they get. That those at the top have been rewarded, not through classic market systems (e.g. CEO supply and shareholder demand), but by alternate methods (connections1, inheritance2, deception3, and luck4). Also, the substantial wealth generated in the last decade or two was not "fairly" distributed within society.

The unanswered question is, what to do about it?

1 The Bush brothers
2 Richard Mellon Scaife
3 Wall Street analysts and assorted book-cooking
4 For example, if you got options in '99 and '00


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