Disparity Despair (The Hidden Krugman)

Professor Krugman takes issue with new Fed Chairman Ben Bernanke's view on our nation's growing economic inequality in Graduates Versus Oligarchs (full column accessible to Times Select subscribers). Where Bernanke sees an "increased return to education," Krugman sees differently:

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.

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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.

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And I'm with Alan Greenspan, who — surprisingly, given his libertarian roots — has repeatedly warned that growing inequality poses a threat to "democratic society."

There's some more uneasy economic signs on the flip, including a study on falling incomes for young Americans and how fewer buyers want to purchase our debt...

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First, from a Christian Science Monitor article noting that median income for Americans under 45 fell between 2001 and 2004:

Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44. The numbers add new weight to longstanding concerns about whether younger generations of Americans will achieve living standards that are better - or at least equal to - those of their parents.

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[E]vidence of economic challenges also abounds. The signs include:

• Rising debt levels. Over the past decade, the volume of federal student loans tripled, reaching $85 billion in new loans last year, according to a new book by Anya Kamenetz, "Generation Debt." Nearly a quarter of college students are using credit cards to pay some of their tuition costs, she writes.

• The median income for men under age 44 was significantly lower in 1997 than in 1970, after adjusting for inflation, according to a long-term analysis by the Census Bureau in the late 1990s. For those over 45, incomes barely held their own during that period.

• The entry of women into the workforce in those decades has helped push median family incomes up over time. But even when men and women are included together, younger workers (age 25-34) are earning well below what they did in 1970. And at all ages, evidence suggests that families are putting in more hours of work to make their household incomes rise.

• Even with extra time at work, median family income has barely budged since 1995 for householders below 45, up about 5 percent after inflation through 2004.

Last week, Reuters reported that sales of US Treasury bonds (which cover our deficit spending) were less than stellar:

U.S. Treasury debt prices extended losses on Thursday after an auction of five-year notes garnered surprisingly weak demand, including from indirect bidders.

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"It was a terrible auction," summed up one trader at a U.S. primary dealer. "The bid-to-cover stank, the indirect bid was bad -- I would be surprised if the market manages to rally from here."

It's not too comforting that the rest of the global economy is less than bullish on our economy. Reuters, however, reports today that buyers were stepping in to snap up some good buys.