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September 19, 2007

The Great Divergence (And The Krog!)

The demise of TIme Select also marks the birth of the new Paul Krugman blog, The Conscience of a Liberal. I would've preferred "Krog," but still: Exciting! Krugman starts things off with a graph of the top 10 percent's share of the country's income over the past century or so, and sections it off into four key periods in American economic life:

Krugman Graph

We're in the Great Divergence now, a period when the incomes of the rich are rocketing away from those of the rest of us. As Krugman writes:

Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s. It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

In some ways, the conversation over whether inequality is being driven by impersonal, technical forces or government policy is neither here nor there (at least on a policy level -- politically, people use it to justify inequality as something organic, inevitable, and even beautiful -- like the tides). We live in a regulated economy governed by both public and private institutions, so there's no such thing as "natural" forces. Even if superstar CEOs are taking home billions, they're still reliant on our system of contracts, and limited liability, and stock market regulation. In other words, what public policy giveth, public policy can taketh away. Few doubt that we have the tools -- using something called "the tax code" -- to engage in some redistribution. The question is whether we have the will.

September 19, 2007 in Inequality | Permalink


Hmmm ... those good ol' moral values days of the 1950s occured when? That great compression? And when did that great compression start up? During the New Deal?

Could it be that if you wanna have a "moral" society, you need to have wealth redistribution first? Hmmm ... I wonder what the Bible has to say about that? Something about every 50 years having a Jubilee in which "liberty is proclaimed across the land and unto all of its inhabitants thereof" and in which wealth redistributes from the rich who bought up lands sold by desparate poor, etc.?

Ummm ...

Never mind ... move along ... nothing to see here ... let's get back to condemning teh hawt fornication and gay sex ...

So much for values voters, eh?

Posted by: DAS | Sep 19, 2007 11:58:14 AM

It is important in that chart to note that inequality did not decrease during the 30s, despite the FDR program. You could maybe say the effects were delayed. It also shows that the Great Society programs had little real benefit.

But I think the chart shows that massive, massive gov't intervention is required to change social structures. Not New Deal or Great Society palliatives, but the equivalent of WWII wage/price controls, central planning of industry, artificial labor shortages, etc.

Posted by: bob mcmanus | Sep 19, 2007 12:03:24 PM

Isn't the chart essentially the inverse of this one: http://www.financialsense.com/editorials/2005/images/0828_2.gif

Is it really revelatory that a 90% tax rate inhibits the growth of great wealth, or that lower tax rates allow people to accumulate assets more easily?

Posted by: Jeff | Sep 19, 2007 12:33:54 PM

I'm not saying I approve of what's happening now... but can we really ascribe all of this to tax policy? It seems to me there's a lot of political, economic and social history in this graph that makes it hard to tie the recent poor distribution of income to exactly one thing, It seems to me there's a bunch of things in play here, and simply changing tax policy will only get part of the desired result. There are other changes needed here to really effect wealth redistribution (something I believe in as well), is all I'm saying. And what worries me about Democrats is that we seem to have lost our interest in some of those other things. Just my impression.

Posted by: weboy | Sep 19, 2007 12:46:53 PM

Are you prepared to rename this place the "Klog"?

Posted by: rea | Sep 19, 2007 12:55:08 PM

". And what worries me about Democrats is that we seem to have lost our interest in some of those other things. Just my impression."

Of course. They had help and a lot of history, but the unions took care of themselves during the war. And although I think Friedman was motivated by libertarianism in talking Nixon into ending the draft, I think Greenspan had an anti-communitarian and anti-eglitarian intent. A lot of factors.

Are Democrats interested in radical structural change, a change in power relations and counter-vailing forces, or do they want the poor to get housing, food, meds, but never power?

Posted by: bob mcmanus | Sep 19, 2007 1:01:54 PM

We might have the will to let marginal rates return to pre-Bush2 levels. But that's probably about it. I doubt that would have much impact on the trend.

Posted by: henry evans | Sep 19, 2007 1:08:38 PM

S Brennan says...

I wonder if any of conservative keepers of the flame will be honest enough to note that all the great depressions/recessions, save the Reagan recession occurred when inequality was far higher than the golden age of progressive taxes and effective government regulation of utilities and essential goods and services?

No...I didn't think so.

As for the conservatives above noting that change did not happen instantaneously in 1933, that it took huge deficit spending by a central government to reduce poverty...I agree...next you'll be supporting communism just to try to make a point. And on that subject, most Republicans of the thirties thought Hitler was a guy we should do business with....Roosevelt, felt otherwise and prepared for war against Republican wishes. And don't talk about Kennedy, unless you want to bring up the Bush family operation, Joe wasn't brought up on trading with the enemy, but Bush was.

Posted by: S Brennan | Sep 19, 2007 1:21:50 PM

Is it really revelatory that a 90% tax rate inhibits the growth of great wealth, or that lower tax rates allow people to accumulate assets more easily?

it's the disproportionate rates of said accumulation that are under scrutiny. not that it happens.

Posted by: Cody | Sep 19, 2007 2:59:47 PM

by that i mean, all boats are not raised by tax cuts as it evident here.

Posted by: Cody | Sep 19, 2007 3:01:03 PM

Who is making the big bucks today? Does anybody know? Who are those top 10%?

Posted by: Floccina | Sep 19, 2007 3:09:59 PM

Cody: that's because only the richest people in the country ever paid 90%, so of course, cutting their tax rate is going to allow them to grow richer.

The only way to stop the rich from getting richer is to confiscate their income like we did in the old days. Whenever you tax something, you encourage people to avoid it. Gas tax discourages driving; Cigarette tax discourages smoking; and a bigger income tax on the rich will discourage the working and investing that allows them to make so much more than the rest of us.

Of course, if we really want to stop the rich from working and investing and becoming rich, we could up the old 90% rate to 100% and put a cap on income. This would be the most effective way to try to increase equality. In fact, the lower the income cap, the more equal we would all be. If we cap income at $200,000 (more than enough for any one person to get buy, you must admit), then Krugman's chart will start to reflect a much more equal society. The only reason that we haven't done this already is that rich people buy off politicians. Believe me, if we capped political contributions at $200 a person (and really enforced this), the politicians would no longer be the instruments of the rich, and we'd finally have a government that responds to the will of the people. Chavez has been doing this in Venezuela and he's been enormously popular with the masses. The people of his country may be just as poor or poorer than they were a few years ago, but there is no question that they are more equal.

And before anyone attacks "equality" as a proper goal and brings up that old Rawls tripe, let's remember that we do not live behind a veil of ignorance--we can see what each other owns and it's foolish to ignore that the amount that someone else has can make us feel bad. A distribution of 1 and 1 and 1 might not seem as good as a distribution of 2 and 3 and 10, but it is. We feel better when things are distributed equally. Republicans and libertarians always discount the importance of feelings, just like they always overstate the importance of things like property rights.

Posted by: Jeff | Sep 19, 2007 3:20:07 PM

Krugman, the Krog -- love it! I also like the way the Times talked around the reason for dropping Times Select without ever quite getting to the point: Without ever using the word blog, the NYT admits bloggers were right.

Posted by: Madison Guy | Sep 19, 2007 3:50:23 PM

Massive inequality (I prefer to call it a "wage depression" -- inequality sounds to newcomers to the issue like the few are being squeezed by the many instead of the other way 'round) in a modern economy exists -- uniquely -- in the USA because Americans are uniquely complacent about the so-called "hidden hand" fairly sorting out the relative worth of labor for them in the (otherwise remarkable) free market.

My current one-note-tune, in answer: the free market should be seen only as the operating system (OS) of the economic price computer with the default program historically being the race to the bottom. There has been a lot of unnecessary economic misery since A. Smith noticed the supposedly automatic fair working of the hidden hand.

Americans need to be shaken out of their complacency. There are many stories that if reported by our progressive press would shake them to their shoes but even the likes of Paul Krugman wont cover them.

Who reports that the federal poverty line is off by half (meaning 100% up, 50% down), the poverty line being officially defined as three times the cost of an emergency diet of all things. If everyone only knew that the genuine poverty level had reached 25% -- up from 15% at the start of LBJ's war on poverty -- it would shake economic fairness discussion in sleepy America wide awake.

Why don't progressive types flail away at the fact that the minimum wage was $9.50/hr ($1.60, adjusted CPI-U) in 1968 -- when average income was half of today's (partly explains poverty growing by 10%)? (Would add 3% to the cost of GDP output to raise the minimum wage from $7/hr to 12.50/hr.)

Just beat away with those two issues for a while and watch America at least begin waking up to the idea of re-balancing labor power in the free market -- to the idea of adults keeping needing to keep their eyes open where their economic well being is concerned (which these days means sector-wide agreements -- the modern, world-wide answer in some form to the race to the bottom, which actually makes life simpler for employers overseas).

Paul Krugman once wrote that if one political side announced that the world was flat that the press would treat that side of the issue to equal credibility. Why do he and other progressive writers continue to use the decades outdated federal poverty line -- thereby doing their part to hide the shocking truth from the American people? If you guys feel sheepish, you can start off going the 50% down route instead of the 100% up. It's time to raise the federal poverty line six times the price of an emergency diet with no more delay. :-)

Posted by: Denis Drew | Sep 19, 2007 4:01:34 PM

Denis, if I understand what you're saying - admittedly, I'm not as conversant with the stats you cite - you seem to be suggesting that if we move the goalposts, people will see that we're losing the game. I think the problem with redefining the poverty line is that people won't necessarily understand why, or agree to the change. As well, I think the point to all of this is that people (outside of accountants, probably) don't usually see in numbers. If the number of people in poverty is now 25% we need to show what that means, not just give a number. Who is the face of this poverty? How can we get people to see what the experience is like? As someone who's actually concerned about poverty, the fact that I can't entirely visualize what that percentage means suggests to me that people who don't even believe there's a problem have no idea what we're talking about - making a change means showing it to them, I think, before we can begin to do the things needed to address it. In that sense the media really is nowhere near where it needs to be either - meaning we don't just need to help them see what poverty means, we also need to change the way we look at wealth... which is probably even harder.

Posted by: weboy | Sep 19, 2007 4:24:43 PM

It is not a matter of moving the goal posts -- unless of course that is a way to wake up oh, so complacent Americans wake up and make them realize that something is very, very wrong -- and that they could be making a lot more money they are presently earning if they took the common sense steps (take around the better paid world) to set things right: IOW, protect themselves everyday, in every way in the manner of Europeans.

Europeans are not left wing ideologues; they just understand that they must insist on high minimum wages, proper union representation, etc. -- or they wont get it -- adult time. Here we take too literally Adam Smith's mis-statement that the free market automatically means justice for all (Adam overstated to say the least).

If we could somehow have predicted to Americans of 1968 that, by now, 25% of our workforce would be earning less than the minimum wage of their era they would have thought it would take a small nuclear war, or a series of depressions to explain such an seemingly impossible event -- Americans of an earlier era never would have suspected the simple explanation of the race to the bottom.

Ever hear that if you put a frog into boiling water it will jump right out but if you put it in cold water and then gradually raise the temperature to boiling it wont notice? Something like that happened to American labor over the last 34 years (the old fair distribution scheme started to break down after 1973 according to the stats). Jumping the goal posts (to an honest measure of poverty) would just be one way to get them to take notice.

Posted by: Denis Drew | Sep 19, 2007 7:03:32 PM

One thing that infuriates me about the globalization/skills explanation is that while it probably is at least part of the story for the top 20-25% pulling away from the bottom 75-80%, it says absolutely nothing about the top 0.01% pulling WAY away from everyone else. That's a reflection of enormous political power; there's no way skills/education can explain that away.

Posted by: beckya57 | Sep 19, 2007 9:52:32 PM

Actually its just about all about the top 1% pulling away.

From 90-95 percentile incomes have kept up with economic growth since 1973 (the turn year) and a little better. From 95-99% a little better then them. But, 10% of that 15% shift in income went all to the top 1% -- disproportionately to the top 1/10th of 1%.

Posted by: Denis Drew | Sep 19, 2007 11:45:34 PM

Beckya57 has hit the nail on the head. Look at golf, for instance. Yes, Tiger Woods is a great golfer, but there are lot of great golfers. When Woods plays 18 holes, he might only be one or two or three strokes better than everyone else. Yet he makes a ton more money than any other golfer. Your average professional golfer is very good, but Woods makes 100 times more money than he does, probably much more. Is golf talent the sole cause of his income disparity. Obviously not. It has to be politics.

Okay, if you think I've picked on slanted example to make my point, look at the guys who started Google. There are a ton of search websites. Google's is just a little better than the others. They guys who started Google lucked into a slightly better algorithm than everyone else, and as a result, they've become billionaires. Altavista was a great search site before Google, but Google was just a little better. And yet the Google guys are billionaires and the Altavista guys are nobodies, I'd guess. If Google was only a little better than Altavista, then the Google guys should become only a little more rich than the guys from Altavista. That didn't happen, and there is only one explanation---Politics!!!!

Everyone above is right . . . that top 1% is pulling very far away. These people are supermen. They don't wear capes and fly. They are made of flesh and blood just like us. So obviously, you'd expect them to have success of a nature similar to our, but they don't. Warren Buffet is talented and smart, but he's not 10000000 times smarter or more talented than me. So why does he have 10000000 times more money than me? Do the math, people. The answer is politics.

Posted by: Jeff | Sep 20, 2007 8:00:55 AM

"Beckya57 has hit the nail on the head. Look at golf, for instance. Yes, Tiger Woods is a great golfer, but there are lot of great golfers. When Woods plays 18 holes, he might only be one or two or three strokes better than everyone else. Yet he makes a ton more money than any other golfer. Your average professional golfer is very good, but Woods makes 100 times more money than he does, probably much more. Is golf talent the sole cause of his income disparity. Obviously not. It has to be politics."

Err, no, it's globalisation. Vijay Singh earned $10 million one year as a golfer. That obviously made Fijian income inequality greater. And he certainly couldn't have made that playing only in Fiji. Because he was able to pay against the rest of the world, and win, so it's globalisation that has increased Fijian income inequality. As with the US: Tiger competes on the world stage and makes more than he could if he only earned money from Americans. As with Speilberg. Oprah and so on. And, yes, there are more of such people, entertainers and celebrities in the top 0.1% of the P&S figures than there are CEOs.

"Few doubt that we have the tools -- using something called "the tax code" -- to engage in some redistribution."

Sure Ezra. But don't you think we should measure how much redistribution there already is before we do that? The P&S figures are pre tax.

Posted by: Tim Worstall | Sep 20, 2007 8:59:55 AM

But Tim, politics is what lets us trade with other countries. If the Government banned Tiger from competing overseas, or banned Google from operating overseas, they'd make a lot less money.

If you think about it, everything is politics. If you have a job, it's only because the Government didn't ban you from taking a job. If you own a house, it's only because the government didn't ban you from owning a house.

In fact, it is the Government (run by politicians) that prints the money that these really rich people have. If the Government didn't print the money in the first place, then these rich people wouldn't have any money at all.

But then again, I'm wasting everyone's time with this. Everyone who reads Ezra's blog already knows all of these things. No one here talks in code, using works like "freedom" or "individual rights" to justify mutual, agreeable exchanges that allow people to accumulate wealth. There isn't any such thing as a voluntary transaction--it's all just politics. And the great thing about that is, when everything is politics, then you majority can do anything it wants. Once you accept that people's choices aren't their own, then you can choose for them. That's why we are trying to limit the Wal-Mart stores, or stop people from smoking in restaurants. The great thing about today's political environment is that everything is up for grabs if you get enough votes.

Posted by: Jeff | Sep 20, 2007 9:32:43 AM

I can envision a tax on the top 1%'s runaway income -- only in so far as we cannot get the income distribution back to (1973, Europe) normality by the more normal routes. I would tax over 50% of the excess (I don't blame the top .1% earners - I blame us for being too complacent to be properly unionized or even properly informed about what is happening to us economically) and possibly redistribute it the way Alaska distributes its excess oil tax money: by individual check.

Bottom 20 percentile earners share something like 2.5% of overall income. Can you imagine what redistributing a quarter of the "missing" 10% could do for them: it would double their income: we wouldn't have any poor anymore.

Actually, a $12.50/hr minimum wage would be the healthiest/natural way to get that 2.5% back to the bottom 20 percentile. The federal minimum wage was already $9.50/hr almost 40 years -- and 100% increase in average income ago -- so not so crazy. Crazy is what the folks in 1968 would have called anybody then who predicted that the minimum wage would fall almost in half over their next 40 years. A jump from $5.15/hr (already worked out numbers for old minimum wage) to $12.50/hr would add less than 3.5% to the cost of GDP output (and presumably to prices) -- so, again, not so crazy -- not to end most poverty in America.

The Alaska type redistribution tax come after the normal approaches failed to regain the entire 10% excess from the top .1 percentile (by raising the minimum wage and reunionizing, etc.). It would be a last grasp until the top got used to normal rich levels again -- and gave up on being super-rich. :-)

Posted by: Denis Drew | Sep 20, 2007 3:31:52 PM

Denis, I feel you're too timid here. $12.50 an hour may be a living wage in the midwest, but it doesn't cut it on the east coast or west coast. If we made the minimum wage something like $20 an hour, then we might finally be able to end poverty. And if you want to be serious about equality and not just make a small dent--why not just have an "equal wage"--which would require that everyone be paid $50 an hour, no matter what they did. Of course, you'd have to require that everyone work the same number of hours too, but we could do that. Let's say everyone works 2000 hours in the year at $50 an hour. We'd all make $100,000--and that's a living wage. And before an looneytarians complaint that this is socialism, notice that I'm not proposing that we actually nationalize any industries. And okay, McDonalds and Wal-mart probably can't stay in business if they have to pay $50 an hour, but that's a feature, not a bug.

I don't understand why some people only want to go back to equality levels of 1973--that wasn't some magical year, and back in 1973, things were still pretty unequal, even in Europe. Everyone agrees that equality is good, so why isn't more equality even better?

Posted by: Jeff | Sep 20, 2007 6:53:23 PM

I should have included the above post -- assuming that anyone is still out there listening -- that a $12.50/hr minimum wage would give 40% of US workers a raise -- a $450 billion a year shift in personal income, about 2.5% of the total; which together with other wages being pushed up would still not put that much of a dent in the overall shift of 15% of income to top 10 percentile earners (which includes the 10% shifting to the to 1 percentile)...

...the reason for conjuring an ideas like an -- at least temporary -- Alaska type, excess redistribution tax (or excess tax redistribution which is what it it in Alaska).

Posted by: Denis Drew | Sep 20, 2007 6:54:45 PM

First, there is only $35/hr income available if we paid everyone the exactly equal hourly wage for 2000 hours -- even if we include investment and capital gains income. (Pro-labor folks may note that the median wage is only half the mean wage above, for some reason.)

Second, $12.50/hr seems practicable in 2007. It would not have been practicable in 1956 when per capita income was only 40% of today's. In 1956, President Eisenhower signed into law a $7.50/hr minimum wage ($1.00/hr adjusted CPI-U) which majority leader LBJ snuck past opponents when they were out of the Senate chamber. Senator Humphrey and his liberals wanted $1.25/hr, or $9.50 in today's money, in 1956 but that would have to wait for LBJ's presidency in 1968 when per person income was up to 50% of today's. (Prolabor folks may note that the recent Democrat minimum wage, when fully phased in, will probably fall .50/hr short of Eisenhower's in then current dollars.)

Third, I am not looking for a living wage -- I am looking for all the traffic will bear. What do I care about minimum wage workers: because they are me -- or at least too many grossly underpaid people that I know!

Why is 1973 the big year? That is when income growth stopped being shared symmetrically in the US -- actually the bottom 20 percentile family income had been growing about 20 percent faster than average up until then.

Who put the squeeze on bottom incomes -- and why? 1973 happens to be the year that productivity finally slowed (2.5% is fast; 1.5% is slow) after decades of high growth. My guess is that by 1973 the winners and losers had sorted themselves out (after the "great compression of the depression and WWII noted by Krugman) -- and when everybody stops making money the squeeze is usually on. IOW, by 1973 there was both somebody to squeeze and a motive for doing so.

Asking why we should raise the minimum wage as high as possible is like asking why most people in this country would want to use the power available to them (finally!) to take as big a share of the economic pie for themselves as they can. Answer: greed is good for the majority of us too! :-)-

Posted by: Denis Drew | Sep 20, 2007 7:40:33 PM

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