The Death of Horatio Alger (Krugman Alert)

The other day I found myself reading a leftist rag that made outrageous claims about America. It said that we are becoming a society in which the poor tend to stay poor, no matter how hard they work; in which sons are much more likely to inherit the socioeconomic status of their father than they were a generation ago.

The name of the leftist rag? Business Week, which published an article titled "Waking Up From the American Dream." The article summarizes recent research showing that social mobility in the United States (which was never as high as legend had it) has declined considerably over the past few decades. If you put that research together with other research that shows a drastic increase in income and wealth inequality, you reach an uncomfortable conclusion: America looks more and more like a class-ridden society.

And guess what? Our political leaders are doing everything they can to fortify class inequality, while denouncing anyone who complains--or even points out what is happening--as a practitioner of "class warfare."

Let's talk first about the facts on income distribution. Thirty years ago we were a relatively middle-class nation. It had not always been thus: Gilded Age America was a highly unequal society, and it stayed that way through the 1920s. During the 1930s and '40s, however, America experienced what the economic historians Claudia Goldin and Robert Margo have dubbed the Great Compression: a drastic narrowing of income gaps, probably as a result of New Deal policies. And the new economic order persisted for more than a generation: Strong unions; taxes on inherited wealth, corporate profits and high incomes; close public scrutiny of corporate management--all helped to keep income gaps relatively small. The economy was hardly egalitarian, but a generation ago the gross inequalities of the 1920s seemed very distant.

Now they're back. According to estimates by the economists Thomas Piketty and Emmanuel Saez--confirmed by data from the Congressional Budget Office--between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent. Meanwhile, the income of the top 1 percent rose by 148 percent, the income of the top 0.1 percent rose by 343 percent and the income of the top 0.01 percent rose 599 percent. (Those numbers exclude capital gains, so they're not an artifact of the stock-market bubble.) The distribution of income in the United States has gone right back to Gilded Age levels of inequality.

Never mind, say the apologists, who churn out papers with titles like that of a 2001 Heritage Foundation piece, "Income Mobility and the Fallacy of Class-Warfare Arguments." America, they say, isn't a caste society--people with high incomes this year may have low incomes next year and vice versa, and the route to wealth is open to all. That's where those commies at Business Week come in: As they point out (and as economists and sociologists have been pointing out for some time), America actually is more of a caste society than we like to think. And the caste lines have lately become a lot more rigid.

The myth of income mobility has always exceeded the reality: As a general rule, once they've reached their 30s, people don't move up and down the income ladder very much. Conservatives often cite studies like a 1992 report by Glenn Hubbard, a Treasury official under the elder Bush who later became chief economic adviser to the younger Bush, that purport to show large numbers of Americans moving from low-wage to high-wage jobs during their working lives. But what these studies measure, as the economist Kevin Murphy put it, is mainly "the guy who works in the college bookstore and has a real job by his early 30s." Serious studies that exclude this sort of pseudo-mobility show that inequality in average incomes over long periods isn't much smaller than inequality in annual incomes.

It is true, however, that America was once a place of substantial intergenerational mobility: Sons often did much better than their fathers. A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people.

Now for the shocker: The Business Week piece cites a new survey of today's adult men, which finds that this number has dropped to only 10 percent. That is, over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence. This goes along with other studies indicating that rags-to-riches stories have become vanishingly rare, and that the correlation between fathers' and sons' incomes has risen in recent decades. In modern America, it seems, you're quite likely to stay in the social and economic class into which you were born.

Business Week attributes this to the "Wal-Martization" of the economy, the proliferation of dead-end, low-wage jobs and the disappearance of jobs that provide entry to the middle class. That's surely part of the explanation. But public policy plays a role--and will, if present trends continue, play an even bigger role in the future.

Put it this way: Suppose that you actually liked a caste society, and you were seeking ways to use your control of the government to further entrench the advantages of the haves against the have-nots. What would you do?

One thing you would definitely do is get rid of the estate tax, so that large fortunes can be passed on to the next generation. More broadly, you would seek to reduce tax rates both on corporate profits and on unearned income such as dividends and capital gains, so that those with large accumulated or inherited wealth could more easily accumulate even more. You'd also try to create tax shelters mainly useful for the rich. And more broadly still, you'd try to reduce tax rates on people with high incomes, shifting the burden to the payroll tax and other revenue sources that bear most heavily on people with lower incomes.

Meanwhile, on the spending side, you'd cut back on healthcare for the poor, on the quality of public education and on state aid for higher education. This would make it more difficult for people with low incomes to climb out of their difficulties and acquire the education essential to upward mobility in the modern economy.

And just to close off as many routes to upward mobility as possible, you'd do everything possible to break the power of unions, and you'd privatize government functions so that well-paid civil servants could be replaced with poorly paid private employees.

Where is this taking us? Thomas Piketty, whose work with Saez has transformed our understanding of income distribution, warns that current policies will eventually create "a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the US economy and penniless, talented children simply can't compete." If he's right--and I fear that he is--we will end up suffering not only from injustice, but from a vast waste of human potential.

This is from the Nation, by Paul Krugman, two sources I don't assign high credibility to.

However, this is on a topic that concerns me: the apparent shrinking of the middle class. Rather than a thoughful discusstion of different causes of this shrinkage, he uses this to push some of his pet peeves: elimination of estate taxes, the lessening of the strength of unions.

He doesn't mention the decrease in the number of manufacturing jobs.

He doesn't mention the high tax burden on the middle class: income taxes, property taxes, sales taxes, and payroll taxes.

He doesn't mention the immigration of large numbers of uneducated, non-english speaking people in this country. Can anyone honestly expect the large numbers of less-than eighth grade education, non-english speaking immigrants to become members of the middle class? To my thinking, with this large population group, a large amount of poverty is to be expected

He mentions the correlation between "father's and son's" income, which seems to me to be terminology from a couple of decades ago. There is a epidemic of fatherlessness in this country, with an estimated 35% of all births illegitimate. If a father is not involved in his sons life, he can't really encourage upward mobility in his son.

I would turn his point around a bit, and say if you wanted to encourage a caste system, you would encourage illegitimacy, and discourage education.

I'll also mention I registered for the Business Week site and searched around for the article he mentioned, "Waking up from the American Dream", and couldn't find it. If someone else can find the article, I'd appreciate it if they could post it.

I suspect Krugman is more right than wrong on this. The main thing he misses is that a lot of immigrants come in and do very well, so the color/ethnicity of those that are doing very well has become more variegated. What this means is that the competition is a lot tougher. When I was young, getting into the University of California university system was a piece of cake, and we used those schools as our "safe" schools, while trying for the Ivy League, or some such. No more. It is very difficult indeed to get into the U of C system.

Another thing Krugman does not touch on, because he is so busy bashing the plutocrats, is that the globalization of the economy has indeed squeezed, and sqeezed hard, those with relatively low skill levels. And that is just the way it is. The genie will not be put back into the bottle. To do well in this society, now more than ever, one must be highly literate, with honed reasoning skills, and/or a real and relatively rare expertise in a field with high barriers to entry, and/or be one of those very personable chaps, who can connect with people.

Having said that, the CPI substantially overstates the real cost of things, and until recently the error was quite large. Probably in the last 30 years, the median income has gone up in real terms by about 30%. Not fantastic, but when combined with more woman working, the median family is substantially better off then they were 30 years ago, particularly when you consider all the rather amazing medical advances, that someone has to pay for. Krugman ignored all that too. Krugman is a glass half empty kind of guy.

I couldn't find the article Krugman cites, either. It may have been in a print-only version, of course...

Your points are all very good. I would especially like to see the correlation between economic stratification and illegitimacy.

Another interesting issue would be the decline in the work ethic due to self-esteem oriented education and general leftist defeatism. How many of those people stuck in the lower "classes" are Democrats do you think? And which direction does the cause-effect arrow go?

I suspect Krugman is more wrong than right on this. Pick any one of the jobs that he describes as "dead-end" jobs in this era of "Wal-Martization," and ask yourself if you've ever met anyone who made a career out of working in a job like that.

My first two jobs were like this, and the vast majority of the people I worked with in those jobs were either young, inexperienced students like me, women working part-time while their kids were in school, and retirees or semi-retirees looking to supplement their retirement income. I don't think I came across a single person whom I would describe as a "head of household" who was working in that job to support a family.

In glancing at the numbers, while since 1973, inter-generationally, the percentage of those born at the bottom getting to the top, has declined substantially (I suspect much of that has to due with talented immigrants arriving, and so many of them are), but the percentage of those that are stuck in the bottom fifth hasn't changed much. The income rings have become less porous, but by no means impervious, particularly between adjacent rings, or close to it.

Another statistical issue is the gross inaccuracy of many of these "income distribution" figures that are based on household income instead of individual income. Household income among the poorest Americans tends to be lowest primarily because there are generally fewer workers per household in these families.

If anything, I think there is more social mobility in the U.S. today than at any time in the past -- because most people who are truly "socially immobile" are in this position for reasons that have nothing to do with economics (poor moral decisions and career choices, language barriers, physical and/or mental impairment, etc.).

In the words of one recent immigrant I knew some years ago (he said this with total sincerity and humility): "This is the only place I've ever lived where even stupid people can make a lot of money."

This business of men's incomes not going up in their thirties is bunk. I'm 39, soon to be forty, and just in the last couple of years my income has shot up to half again what I have ever made before. The reason? I got married and had a baby- before, it didnt' matter to me if I was succesful or not- now it does. Since my little girl was born, I've become *lots* more ambitious.
Heck, as soon as Christmas is over, I'm going to start work on my first book (to be self-published), and I've already got my next five or six titles planned, cause I want to be able to quit my job and stay home to help home-school my daughter!
So, I'll be at least 40 before my most productive and succesful years begin.

However, this is on a topic that concerns me: the apparent shrinking of the middle class.

The 'middle class' has been shrinking, but not nefariously. Most of them (~94%) are moving into the 'upper class'.link

"In 1969, 51 percent of individuals in families were middle class. By 1993, that share had declined to 40 percent. The decline in the middle class was primarily the result of growth in the share of individuals in upper class families. By 1993, onethird more individuals in families had incomes more than 40 percent above the U.S. median than in 1969. A much smaller share of the decline in the middle class, only 6 percent, was the result of a 3 percentage point increase in the lower class."

I think a good place to start in the road toward egalitarianism is to reduce the salaries of social-science college professors. There's no reason why they should make ten times the minimum wage when there are people in this country struggling to make ends meet who have to pay taxes to cover such outrageous salaries. I think we should put a cap of $50,000 a year on the salaries of economics professors. What are they going to do? Leave the university and night clerk at 7-11?

Another statistical issue is the higher percentage of women in the work force, who tend to drop in and out of work more than men, and that may mess the numbers up a bit.

That may mess up the numbers a whole bunch. It is not by accident that Krugman's analysis concentrates on fathers and sons. Social mobility for females has historically operated orthogonal to the economy. Any Diana can be plucked from obscurity and turned into a princess... or Mrs. William Gates. Or marry a nice doctor. Now roughly half of the economically-generated upward mobility goes directly to women, who do not marry "down," and so do not operate the same kind of social-mobility pump that highly successful men do. It is likely that the people getting squeezed by this are precisely the sons, since 3/4 of the available upward mobility now goes to women.

Excellent point. A majority of law school students were female as of a decade ago (it is probably pushing 60% now), and just this year, a majority of medical school students for the first time in history in the US were female. Thus, there are less slots available to men, and thus stats that focus just on men are highly skewed. That is just a statistical fact, not a commentary on the stunning relative success of women in many professional fields.

In 1969, 51 percent of individuals in families were middle class. By 1993, that share had declined to 40 percent.

That in and of itself is a pretty meaningless statement, because I would contend that definitions of terms like "middle class" and "poor" are very arbitrary. Especially when you consider that a typical American living at the poverty line has a higher standard of living than anyone in the history of mankind except for Americans living above the poverty line.

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