Chart of the week: mean vs median

Daniel Gross asks in today's New York Times why so few people think the US economy is doing well, despite a string of robust-looking statistics: When Sweet Statistics Clash With a Sour Mood (free registration required). But it was the accompanying chart which really made the point.

To see how typical workers are doing, it's better to look at median wages and incomes — the midpoint that separates the top 50 percent from the lower 50 percent. And median income, which was stagnant during President Bush's first term, is struggling to keep pace with inflation. "Median household income has gone nowhere since the turn of the decade," said Mark Zandi, chief economist at Moody's Economy.com.

...This dichotomy accurately describes the economy. From 2001 to 2004, the average net worth of an American family rose 6.3 percent, according to the Federal Reserve's Survey of Consumer Finances. But not everybody grew richer. For the bottom 40 percent of families by income, the median net worth fell. "It just doesn't resonate with people when the Treasury secretary says everything is fine," Mr. Zandi said. "It's fine for half the population, and it's clearly not for the other half."

Comments

[Ernie Held]

That has always been the case in the United States, because most immigrants start poor. The chart says nothing about mobility. The rich save and the poor spend. Although home ownership is at all time high and home prices are way up under Bush, the poorer spent the equity. You look at lottery winners thst were broke and won big and they spend millions fast.

[George J. Georganas]

"It's fine for half the population, and it's clearly not for the other half."
Sure, but in majority rule politics one needs to get the votes of one half plus one. This should be the outcome to expect.

[Blissex]

«"It's fine for half the population, and it's clearly not for the other half."
Sure, but in majority rule politics one needs to get the votes of one half plus one. This should be the outcome to expect.»

I strongly suspect that this has been an outcome that was intentionally targeted, via social engineering, and it is not quite half/half.

Perhaps it is little known, but in the 1980s an English conservative think tank published a study about what makes people vote for the right.

The answer was exceptionally simple: home and car owners vote for the right, no matter how small their assets are. The UK government of the time as a result did whatever they could to turn as many people as possible into home and car owners, at the same time discouraging home rentals and public transport. The result has been in the UK a permanent right wing voter majority for the past 20 years.

Now that 70% of voters in both the USA and the UK are car and home owners they regard themselves firmly as petty ''gentry'' and vote as a block for the right, with very simple agendas: low interest rates, ''better safe than sorry'' authoritarian policies, low taxes on capital gains.

The problem is the 30% who do not own assets and cannot really afford cars. Well, they are not a problem, they can't do anything.

At least in the UK the Labour government, while pandering without shame to the prejudices and interests of the 70% petty ''gentry'', majority have been clumsily and stealthily helping the 30% minority with tax credits. In the USA the Republic government instead has been hammering them as hard as possible.

[Lord]

Yes, half and half is an overstate by far. It is closer to lower 90% and upper 10%, or even 99% and 1%, but that upper class control the election financing pursestrings and generally dictate policy.

[kharris]

Ernie,

While much of what you say may be broadly true over time, it is not necessarily true and contrary to fact in many instances. Greenspan, when he was trying to get a better handle on the wealth effect during the stock market boom of the late 1990s, had staff cobble together a couple of data series so that it would be possible to see at what wealth level the impact of stock market windfalls was greatest on spending. Contrary to the "rich save and poor spend" view, those who had the greatest wealth holdings did the most spending out of stock windfalls.

The US has more than its share of immigrants, but it also has less than its share of income mobility, as demonstrated in a couple of recent studies. Several countries with larger government sectors, higher tax rates and less extreme distributions of income also had greater income mobility. Apparently, being really well off allows one to defend ones high wealth and income status. Not a surprise. Neither the "rich save and poor spend" view nor the "give us your tired, your poor, and we'll make 'em rich" view is the entire story in the US.

[Arthur Eckart]

Americans have a strange philosophical view that income should be dependent on ability and work, which is how most Americans became rich. Also, Americans know there are opportunities to become wealthy in emerging industries, starting a business, acquiring an education, purchasing a home, etc. Union power and government welfare in the U.S. have declined, which most likely contributed to greater income inequality and skewed some wealth charts. Nonetheless, it seems, most Americans know the opportunities for upward income mobility exist and it's an individual choice.

[Blissex]

«Yes, half and half is an overstate by far. It is closer to lower 90% and upper 10%, or even 99% and 1%, but that upper class control the election financing pursestrings and generally dictate policy.»

Ahh, here you are looking at winners as to income. The problem is that most people consider their income only part of the equation, and voting seems to depends on the 70% of voters who are home owners and car owners.

Especially the home owners, who have been able to feel flush despite shrinking real wages for most thanks to low interest rates and large capital gains over the past 10 years.

Also, when people become landlords, petty ''gentry'', their way of thinking about many things changes quite drastically...

[G]

The consequence of growing income inequality is clear to anyone with a rudimentary grasp of “tried and true” Keynesian economic policy . The” Keynesian model was used to guide this country through its most prosperous periods ,in contrast to the free trade laze fare economic models which preceded the adoption of Keynes’ thinking , models brought back from the dead by the Reagan camp and expanded during the 1990's

A real irony is , Reagan himself grew-up under the model which preceded Keynes , a period marked by choking income inequality and economic instability ; conditions which probably contributed to his own father’s substance abuse problems .

In truth , economic theory in the hands of many of our current generation of corporate compradores and politicos is noting more then a veil to obscure greed and corruption , as our economic and trade policies are nether free and fair or designed for the benefit of the American people or the Nation . Witness the .54/gallon tariff on imported ethanol for example , where the only winners are ADM and big oil , not American citizens .

Current policy seems designed to concentrate vast wealthy in the hands of the few , i.e. , like America circa 1900 , an America that was not a pretty place or the land of opportunity we tend to over romanticize . Many in leadership positions pretend all is fine and immune to a devastating collapse . Anyone feeling so contented should not forget that the path to steep economic decline is well trodden and is accessible to us .

The Keysian model is straightforward and intuitive : a capitalistic economy requires a critical mass of consumer spending both to maintain itself and to grow . In America approximately 70% of our economic pie is based on broadbased consumer spending . We shrink the pie with every worker/consumer we displace via layoff or wage cut .

In his new book, "The Disposable American: Layoffs and Their Consequences," Louis Uchitelle tells us that since 1984, when the U.S. Bureau of Labor Statistics started monitoring "worker displacement," at least 30 million full-time workers have been "permanently separated from their jobs and their paychecks against their wishes." ; the words "at least" only hint at the decline .

The rule of holes advises : If you are in a hole quit digging .
Thus far , we just keep sending in more workers and devoting our
resources to increasing the hole’s depth .

[Arthur Eckart]

G, the most prosperous period in the U.S. was the Economic Classical period from 1871-1914 when the U.S. had strong deflationary growth. Also, in that period, innovation, invention, and morality were at their heights. Keynesian economics didn't help the U.S. out of the Great Depression (however WWII did) and failed to help Japan out of its Liquidity Trap (which took over 10 years). There's much evidence NeoKeynesian economics has stunted economic growth and created immorality. Reagan stated he saw the immorality of social philosophies reflected in NeoKeynesian economics. Generating value for society is not greedy or corrupt. There are market failures that need to be regulated. However, generally, when people are unleashed, you'll learn they're moral and capable.

[G]

Arthur you'll learn as well . perhaps ?

October 20, 2002
For Richer
By PAUL KRUGMAN
. The Disappearing Middle
When I was a teenager growing up on Long Island, one of my favorite excursions was
a trip to see the great Gilded Age mansions of the North Shore. Those mansions weren't
just pieces of architectural history. They were monuments to a bygone social era, one in
which the rich could afford the armies of servants needed to maintain a house the size of
a European palace. By the time I saw them, of course, that era was long past. Almost
none of the Long Island mansions were still private residences. Those that hadn't been
turned into museums were occupied by nursing homes or private schools.
For the America I grew up in -- the America of the 1950's and 1960's -- was a middleclass
society, both in reality and in feel. The vast income and wealth inequalities of the
Gilded Age had disappeared. Yes, of course, there was the poverty of the underclass --
but the conventional wisdom of the time viewed that as a social rather than an economic
problem. Yes, of course, some wealthy businessmen and heirs to large fortunes lived far
better than the average American. But they weren't rich the way the robber barons who
built the mansions had been rich, and there weren't that many of them. The days when
plutocrats were a force to be reckoned with in American society, economically or
politically, seemed long past.
Daily experience confirmed the sense of a fairly equal society. The economic disparities
you were conscious of were quite muted. Highly educated professionals -- middle
managers, college teachers, even lawyers -- often claimed that they earned less than
unionized blue-collar workers. Those considered very well off lived in split-levels, had a
housecleaner come in once a week and took summer vacations in Europe. But they sent
their kids to public schools and drove themselves to work, just like everyone else.
But that was long ago. The middle-class America of my youth was another country.
We are now living in a new Gilded Age, as extravagant as the original. Mansions have
made a comeback. Back in 1999 this magazine profiled Thierry Despont, the ''eminence
of excess,'' an architect who specializes in designing houses for the superrich. His
creations typically range from 20,000 to 60,000 square feet; houses at the upper end of
his range are not much smaller than the White House. Needless to say, the armies of
servants are back, too. So are the yachts. Still, even J.P. Morgan didn't have a
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Gulfstream.
As the story about Despont suggests, it's not fair to say that the fact of widening
inequality in America has gone unreported. Yet glimpses of the lifestyles of the rich and
tasteless don't necessarily add up in people's minds to a clear picture of the tectonic shifts
that have taken place in the distribution of income and wealth in this country. My sense
is that few people are aware of just how much the gap between the very rich and the rest
has widened over a relatively short period of time. In fact, even bringing up the subject
exposes you to charges of ''class warfare,'' the ''politics of envy'' and so on. And very few
people indeed are willing to talk about the profound effects -- economic, social and
political -- of that widening gap.
Yet you can't understand what's happening in America today without understanding the
extent, causes and consequences of the vast increase in inequality that has taken place
over the last three decades, and in particular the astonishing concentration of income and
wealth in just a few hands. To make sense of the current wave of corporate scandal, you
need to understand how the man in the gray flannel suit has been replaced by the
imperial C.E.O. The concentration of income at the top is a key reason that the United
States, for all its economic achievements, has more poverty and lower life expectancy
than any other major advanced nation. Above all, 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.
But before we get to all that, let's take a look at who gets what.
II. The New Gilded Age
he Securities and Exchange Commission hath no fury like a woman scorned. The
messy divorce proceedings of Jack Welch, the legendary former C.E.O. of General
Electric, have had one unintended benefit: they have given us a peek at the perks of the
corporate elite, which are normally hidden from public view. For it turns out that when
Welch retired, he was granted for life the use of a Manhattan apartment (including food,
wine and laundry), access to corporate jets and a variety of other in-kind benefits, worth
at least $2 million a year. The perks were revealing: they illustrated the extent to which
corporate leaders now expect to be treated like ancien regime royalty. In monetary terms,
however, the perks must have meant little to Welch. In 2000, his last full year running
G.E., Welch was paid $123 million, mainly in stock and stock options.
Is it news that C.E.O.'s of large American corporations make a lot of money? Actually, it
is. They were always well paid compared with the average worker, but there is simply no
comparison between what executives got a generation ago and what they are paid today.
Over the past 30 years most people have seen only modest salary increases: the average
annual salary in America, expressed in 1998 dollars (that is, adjusted for inflation), rose
from $32,522 in 1970 to $35,864 in 1999. That's about a 10 percent increase over 29
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years -- progress, but not much. Over the same period, however, according to Fortune
magazine, the average real annual compensation of the top 100 C.E.O.'s went from $1.3
million -- 39 times the pay of an average worker -- to $37.5 million, more than 1,000
times the pay of ordinary workers.
The explosion in C.E.O. pay over the past 30 years is an amazing story in its own right,
and an important one. But it is only the most spectacular indicator of a broader story, the
reconcentration of income and wealth in the U.S. The rich have always been different
from you and me, but they are far more different now than they were not long ago --
indeed, they are as different now as they were when F. Scott Fitzgerald made his famous
remark.
That's a controversial statement, though it shouldn't be. For at least the past 15 years it
has been hard to deny the evidence for growing inequality in the United States. Census
data clearly show a rising share of income going to the top 20 percent of families, and
within that top 20 percent to the top 5 percent, with a declining share going to families in
the middle. 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.
The concerted effort to deny that inequality is increasing is itself a symptom of the
growing influence of our emerging plutocracy (more on this later). So is the fierce
defense of the backup position, that inequality doesn't matter -- or maybe even that, to
use Martha Stewart's signature phrase, it's a good thing. Meanwhile, politically
motivated smoke screens aside, the reality of increasing inequality is not in doubt. In
fact, the census data understate the case, because for technical reasons those data tend to
undercount very high incomes -- for example, it's unlikely that they reflect the explosion
in C.E.O. compensation. And other evidence makes it clear not only that inequality is
increasing but that the action gets bigger the closer you get to the top. That is, it's not
simply that the top 20 percent of families have had bigger percentage gains than families
near the middle: the top 5 percent have done better than the next 15, the top 1 percent
better than the next 4, and so on up to Bill Gates.
Studies that try to do a better job of tracking high incomes have found startling results.
For example, a recent study by the nonpartisan Congressional Budget Office used
income tax data and other sources to improve on the census estimates. The C.B.O. study
found that between 1979 and 1997, the after-tax incomes of the top 1 percent of families
rose 157 percent, compared with only a 10 percent gain for families near the middle of
the income distribution. Even more startling results come from a new study by Thomas
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Piketty, at the French research institute Cepremap, and Emmanuel Saez, who is now at
the University of California at Berkeley. Using income tax data, Piketty and Saez have
produced estimates of the incomes of the well-to-do, the rich and the very rich back to
1913.
The first point you learn from these new estimates is that the middle-class America of
my youth is best thought of not as the normal state of our society, but as an interregnum
between Gilded Ages. America before 1930 was a society in which a small number of
very rich people controlled a large share of the nation's wealth. We became a middleclass
society only after the concentration of income at the top dropped sharply during the
New Deal, and especially during World War II. The economic historians Claudia Goldin
and Robert Margo have dubbed the narrowing of income gaps during those years the
Great Compression. Incomes then stayed fairly equally distributed until the 1970's: the
rapid rise in incomes during the first postwar generation was very evenly spread across
the population.
Since the 1970's, however, income gaps have been rapidly widening. Piketty and Saez
confirm what I suspected: by most measures we are, in fact, back to the days of ''The
Great Gatsby.'' After 30 years in which the income shares of the top 10 percent of
taxpayers, the top 1 percent and so on were far below their levels in the 1920's, all are
very nearly back where they were.
And the big winners are the very, very rich. One ploy often used to play down growing
inequality is to rely on rather coarse statistical breakdowns -- dividing the population
into five ''quintiles,'' each containing 20 percent of families, or at most 10 ''deciles.''
Indeed, Greenspan's speech at Jackson Hole relied mainly on decile data. From there it's
a short step to denying that we're really talking about the rich at all. For example, a
conservative commentator might concede, grudgingly, that there has been some increase
in the share of national income going to the top 10 percent of taxpayers, but then point
out that anyone with an income over $81,000 is in that top 10 percent. So we're just
talking about shifts within the middle class, right?
Wrong: the top 10 percent contains a lot of people whom we would still consider middle
class, but they weren't the big winners. Most of the gains in the share of the top 10
percent of taxpayers over the past 30 years were actually gains to the top 1 percent,
rather than the next 9 percent. In 1998 the top 1 percent started at $230,000. In turn, 60
percent of the gains of that top 1 percent went to the top 0.1 percent, those with incomes
of more than $790,000. And almost half of those gains went to a mere 13,000 taxpayers,
the top 0.01 percent, who had an income of at least $3.6 million and an average income
of $17 million.
A stickler for detail might point out that the Piketty-Saez estimates end in 1998 and that
the C.B.O. numbers end a year earlier. Have the trends shown in the data reversed?
Almost surely not. In fact, all indications are that the explosion of incomes at the top
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continued through 2000. Since then the plunge in stock prices must have put some crimp
in high incomes -- but census data show inequality continuing to increase in 2001,
mainly because of the severe effects of the recession on the working poor and near poor.
When the recession ends, we can be sure that we will find ourselves a society in which
income inequality is even higher than it was in the late 90's.
So claims that we've entered a second Gilded Age aren't exaggerated. In America's
middle-class era, the mansion-building, yacht-owning classes had pretty much
disappeared. According to Piketty and Saez, in 1970 the top 0.01 percent of taxpayers
had 0.7 percent of total income -- that is, they earned ''only'' 70 times as much as the
average, not enough to buy or maintain a mega-residence. But in 1998 the top 0.01
percent received more than 3 percent of all income. That meant that the 13,000 richest
families in America had almost as much income as the 20 million poorest households;
those 13,000 families had incomes 300 times that of average families.
And let me repeat: this transformation has happened very quickly, and it is still going on.
You might think that 1987, the year Tom Wolfe published his novel ''The Bonfire of the
Vanities'' and Oliver Stone released his movie ''Wall Street,'' marked the high tide of
America's new money culture. But in 1987 the top 0.01 percent earned only about 40
percent of what they do today, and top executives less than a fifth as much. The America
of ''Wall Street'' and ''The Bonfire of the Vanities'' was positively egalitarian compared
with the country we live in today.
III. Undoing the New Deal
In the middle of the 1980's, as economists became aware that something important was
happening to the distribution of income in America, they formulated three main
hypotheses about its causes.
The ''globalization'' hypothesis tied America's changing income distribution to the
growth of world trade, and especially the growing imports of manufactured goods from
the third world. Its basic message was that blue-collar workers -- the sort of people who
in my youth often made as much money as college-educated middle managers -- were
losing ground in the face of competition from low-wage workers in Asia. A result was
stagnation or decline in the wages of ordinary people, with a growing share of national
income going to the highly educated.
A second hypothesis, ''skill-biased technological change,'' situated the cause of growing
inequality not in foreign trade but in domestic innovation. The torrid pace of progress in
information technology, so the story went, had increased the demand for the highly
skilled and educated. And so the income distribution increasingly favored brains rather
than brawn.
Finally, the ''superstar'' hypothesis -- named by the Chicago economist Sherwin Rosen --
offered a variant on the technological story. It argued that modern technologies of
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communication often turn competition into a tournament in which the winner is richly
rewarded, while the runners-up get far less. The classic example -- which gives the
theory its name -- is the entertainment business. As Rosen pointed out, in bygone days
there were hundreds of comedians making a modest living at live shows in the borscht
belt and other places. Now they are mostly gone; what is left is a handful of superstar TV
comedians.
The debates among these hypotheses -- particularly the debate between those who
attributed growing inequality to globalization and those who attributed it to technology --
were many and bitter. I was a participant in those debates myself. But I won't dwell on
them, because in the last few years there has been a growing sense among economists
that none of these hypotheses work.
I don't mean to say that there was nothing to these stories. Yet as more evidence has
accumulated, each of the hypotheses has seemed increasingly inadequate. Globalization
can explain part of the relative decline in blue-collar wages, but it can't explain the 2,500
percent rise in C.E.O. incomes. Technology may explain why the salary premium
associated with a college education has risen, but it's hard to match up with the huge
increase in inequality among the college-educated, with little progress for many but
gigantic gains at the top. The superstar theory works for Jay Leno, but not for the
thousands of people who have become awesomely rich without going on TV.
The Great Compression -- the substantial reduction in inequality during the New Deal
and the Second World War -- also seems hard to understand in terms of the usual
theories. During World War II Franklin Roosevelt used government control over wages
to compress wage gaps. But if the middle-class society that emerged from the war was an
artificial creation, why did it persist for another 30 years?
Some -- by no means all -- economists trying to understand growing inequality have
begun to take seriously a hypothesis that would have been considered irredeemably
fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to
inequality. According to this view, the New Deal had a more profound impact on
American society than even its most ardent admirers have suggested: it imposed norms
of relative equality in pay that persisted for more than 30 years, creating the broadly
middle-class society we came to take for granted. But those norms began to unravel in
the 1970's and have done so at an accelerating pace.
Exhibit A for this view is the story of executive compensation. In the 1960's, America's
great corporations behaved more like socialist republics than like cutthroat capitalist
enterprises, and top executives behaved more like public-spirited bureaucrats than like
captains of industry. I'm not exaggerating. Consider the description of executive
behavior offered by John Kenneth Galbraith in his 1967 book, ''The New Industrial
State'': ''Management does not go out ruthlessly to reward itself -- a sound management
is expected to exercise restraint.'' Managerial self-dealing was a thing of the past: ''With
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the power of decision goes opportunity for making money. . . . Were everyone to seek to
do so . . . the corporation would be a chaos of competitive avarice. But these are not the
sort of thing that a good company man does; a remarkably effective code bans such
behavior. Group decision-making insures, moreover, that almost everyone's actions and
even thoughts are known to others. This acts to enforce the code and, more than
incidentally, a high standard of personal honesty as well.''
Thirty-five years on, a cover article in Fortune is titled ''You Bought. They Sold.'' ''All
over corporate America,'' reads the blurb, ''top execs were cashing in stocks even as their
companies were tanking. Who was left holding the bag? You.'' As I said, we've become a
different country.
Let's leave actual malfeasance on one side for a moment, and ask how the relatively
modest salaries of top executives 30 years ago became the gigantic pay packages of
today. There are two main stories, both of which emphasize changing norms rather than
pure economics. The more optimistic story draws an analogy between the explosion of
C.E.O. pay and the explosion of baseball salaries with the introduction of free agency.
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.
But then why weren't executives paid lavishly 30 years ago? Again, it's a matter of
corporate culture. For a generation after World War II, fear of outrage kept executive
salaries in check. Now the outrage is gone. That is, the explosion of executive pay
represents a social change rather than the purely economic forces of supply and demand.
We should think of it not as a market trend like the rising value of waterfront property,
but as something more like the sexual revolution of the 1960's -- a relaxation of old
strictures, a new permissiveness, but in this case the permissiveness is financial rather
than sexual. Sure enough, John Kenneth Galbraith described the honest executive of
1967 as being one who ''eschews the lovely, available and even naked woman by whom
he is intimately surrounded.'' By the end of the 1990's, the executive motto might as well
have been ''If it feels good, do it.''
How did this change in corporate culture happen? Economists and management theorists
are only beginning to explore that question, but it's easy to suggest a few factors. One
was the changing structure of financial markets. In his new book, ''Searching for a
Corporate Savior,'' Rakesh Khurana of Harvard Business School suggests that during the
1980's and 1990's, ''managerial capitalism'' -- the world of the man in the gray flannel
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suit -- was replaced by ''investor capitalism.'' Institutional investors weren't willing to let
a C.E.O. choose his own successor from inside the corporation; they wanted heroic
leaders, often outsiders, and were willing to pay immense sums to get them. The subtitle
of Khurana's book, by the way, is ''The Irrational Quest for Charismatic C.E.O.'s.''
But fashionable management theorists didn't think it was irrational. Since the 1980's
there has been ever more emphasis on the importance of ''leadership'' -- meaning
personal, charismatic leadership. When Lee Iacocca of Chrysler became a business
celebrity in the early 1980's, he was practically alone: Khurana reports that in 1980 only
one issue of Business Week featured a C.E.O. on its cover. By 1999 the number was up
to 19. And once it was considered normal, even necessary, for a C.E.O. to be famous, it
also became easier to make him rich.
Economists also did their bit to legitimize previously unthinkable levels of executive
pay. During the 1980's and 1990's a torrent of academic papers -- popularized in business
magazines and incorporated into consultants' recommendations -- argued that Gordon
Gekko was right: greed is good; greed works. In order to get the best performance out of
executives, these papers argued, it was necessary to align their interests with those of
stockholders. And the way to do that was with large grants of stock or stock options.
It's hard to escape the suspicion that these new intellectual justifications for soaring
executive pay were as much effect as cause. I'm not suggesting that management
theorists and economists were personally corrupt. It would have been a subtle,
unconscious process: the ideas that were taken up by business schools, that led to nice
speaking and consulting fees, tended to be the ones that ratified an existing trend, and
thereby gave it legitimacy.
What economists like Piketty and Saez are now suggesting is that the story of executive
compensation is representative of a broader story. Much more than economists and freemarket
advocates like to imagine, wages -- particularly at the top -- are determined by
social norms. What happened during the 1930's and 1940's was that new norms of
equality were established, largely through the political process. What happened in the
1980's and 1990's was that those norms unraveled, replaced by an ethos of ''anything
goes.'' And a result was an explosion of income at the top of the scale.
IV. The Price of Inequality
It was one of those revealing moments. Responding to an e-mail message from a
Canadian viewer, Robert Novak of ''Crossfire'' delivered a little speech: ''Marg, like most
Canadians, you're ill informed and wrong. The U.S. has the longest standard of living --
longest life expectancy of any country in the world, including Canada. That's the truth.''
But it was Novak who had his facts wrong. Canadians can expect to live about two years
longer than Americans. In fact, life expectancy in the U.S. is well below that in Canada,
Japan and every major nation in Western Europe. On average, we can expect lives a bit
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shorter than those of Greeks, a bit longer than those of Portuguese. Male life expectancy
is lower in the U.S. than it is in Costa Rica.
Still, you can understand why Novak assumed that we were No. 1. After all, we really
are the richest major nation, with real G.D.P. per capita about 20 percent higher than
Canada's. And it has been an article of faith in this country that a rising tide lifts all
boats. Doesn't our high and rising national wealth translate into a high standard of living
-- including good medical care -- for all Americans?
Well, no. Although America has higher per capita income than other advanced countries,
it turns out that that's mainly because our rich are much richer. And here's a radical
thought: if the rich get more, that leaves less for everyone else.
That statement -- which is simply a matter of arithmetic -- is guaranteed to bring
accusations of ''class warfare.'' If the accuser gets more specific, he'll probably offer two
reasons that it's foolish to make a fuss over the high incomes of a few people at the top of
the income distribution. First, he'll tell you that what the elite get may look like a lot of
money, but it's still a small share of the total -- that is, when all is said and done the rich
aren't getting that big a piece of the pie. Second, he'll tell you that trying to do anything
to reduce incomes at the top will hurt, not help, people further down the distribution,
because attempts to redistribute income damage incentives.
These arguments for lack of concern are plausible. And they were entirely correct, once
upon a time -- namely, back when we had a middle-class society. But there's a lot less
truth to them now.
First, the share of the rich in total income is no longer trivial. These days 1 percent of
families receive about 16 percent of total pretax income, and have about 14 percent of
after-tax income. That share has roughly doubled over the past 30 years, and is now
about as large as the share of the bottom 40 percent of the population. That's a big shift
of income to the top; as a matter of pure arithmetic, it must mean that the incomes of less
well off families grew considerably more slowly than average income. And they did.
Adjusting for inflation, average family income -- total income divided by the number of
families -- grew 28 percent from 1979 to 1997. But median family income -- the income
of a family in the middle of the distribution, a better indicator of how typical American
families are doing -- grew only 10 percent. And the incomes of the bottom fifth of
families actually fell slightly.
Let me belabor this point for a bit. We pride ourselves, with considerable justification,
on our record of economic growth. But over the last few decades it's remarkable how
little of that growth has trickled down to ordinary families. Median family income has
risen only about 0.5 percent per year -- and as far as we can tell from somewhat
unreliable data, just about all of that increase was due to wives working longer hours,
with little or no gain in real wages. Furthermore, numbers about income don't reflect the
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growing riskiness of life for ordinary workers. In the days when General Motors was
known in-house as Generous Motors, many workers felt that they had considerable job
security -- the company wouldn't fire them except in extremis. Many had contracts that
guaranteed health insurance, even if they were laid off; they had pension benefits that did
not depend on the stock market. Now mass firings from long-established companies are
commonplace; losing your job means losing your insurance; and as millions of people
have been learning, a 401(k) plan is no guarantee of a comfortable retirement.
Still, many people will say that while the U.S. economic system may generate a lot of
inequality, it also generates much higher incomes than any alternative, so that everyone
is better off. That was the moral Business Week tried to convey in its recent special issue
with ''25 Ideas for a Changing World.'' One of those ideas was ''the rich get richer, and
that's O.K.'' High incomes at the top, the conventional wisdom declares, are the result of
a free-market system that provides huge incentives for performance. And the system
delivers that performance, which means that wealth at the top doesn't come at the
expense of the rest of us.
A skeptic might point out that the explosion in executive compensation seems at best
loosely related to actual performance. Jack Welch was one of the 10 highest-paid
executives in the United States in 2000, and you could argue that he earned it. But did
Dennis Kozlowski of Tyco, or Gerald Levin of Time Warner, who were also in the top
10? A skeptic might also point out that even during the economic boom of the late
1990's, U.S. productivity growth was no better than it was during the great postwar
expansion, which corresponds to the era when America was truly middle class and
C.E.O.'s were modestly paid technocrats.
But can we produce any direct evidence about the effects of inequality? We can't rerun
our own history and ask what would have happened if the social norms of middle-class
America had continued to limit incomes at the top, and if government policy had leaned
against rising inequality instead of reinforcing it, which is what actually happened. But
we can compare ourselves with other advanced countries. And the results are somewhat
surprising.
Many Americans assume that because we are the richest country in the world, with real
G.D.P. per capita higher than that of other major advanced countries, Americans must be
better off across the board -- that it's not just our rich who are richer than their
counterparts abroad, but that the typical American family is much better off than the
typical family elsewhere, and that even our poor are well off by foreign standards.
But it's not true. Let me use the example of Sweden, that great conservative bete noire.
A few months ago the conservative cyberpundit Glenn Reynolds made a splash when he
pointed out that Sweden's G.D.P. per capita is roughly comparable with that of
Mississippi -- see, those foolish believers in the welfare state have impoverished
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themselves! Presumably he assumed that this means that the typical Swede is as poor as
the typical resident of Mississippi, and therefore much worse off than the typical
American.
But life expectancy in Sweden is about three years higher than that of the U.S. Infant
mortality is half the U.S. level, and less than a third the rate in Mississippi. Functional
illiteracy is much less common than in the U.S.
How is this possible? One answer is that G.D.P. per capita is in some ways a misleading
measure. Swedes take longer vacations than Americans, so they work fewer hours per
year. That's a choice, not a failure of economic performance. Real G.D.P. per hour
worked is 16 percent lower than in the United States, which makes Swedish productivity
about the same as Canada's.
But the main point is that though Sweden may have lower average income than the
United States, that's mainly because our rich are so much richer. The median Swedish
family has a standard of living roughly comparable with that of the median U.S. family:
wages are if anything higher in Sweden, and a higher tax burden is offset by public
provision of health care and generally better public services. And as you move further
down the income distribution, Swedish living standards are way ahead of those in the
U.S. Swedish families with children that are at the 10th percentile -- poorer than 90
percent of the population -- have incomes 60 percent higher than their U.S. counterparts.
And very few people in Sweden experience the deep poverty that is all too common in
the United States. One measure: in 1994 only 6 percent of Swedes lived on less than $11
per day, compared with 14 percent in the U.S.
The moral of this comparison is that even if you think that America's high levels of
inequality are the price of our high level of national income, it's not at all clear that this
price is worth paying. The reason conservatives engage in bouts of Sweden-bashing is
that they want to convince us that there is no tradeoff between economic efficiency and
equity -- that if you try to take from the rich and give to the poor, you actually make
everyone worse off. But the comparison between the U.S. and other advanced countries
doesn't support this conclusion at all. Yes, we are the richest major nation. But because
so much of our national income is concentrated in relatively few hands, large numbers of
Americans are worse off economically than their counterparts in other advanced
countries.
And we might even offer a challenge from the other side: inequality in the United States
has arguably reached levels where it is counterproductive. That is, you can make a case
that our society would be richer if its richest members didn't get quite so much.
I could make this argument on historical grounds. The most impressive economic growth
in U.S. history coincided with the middle-class interregnum, the post-World War II
generation, when incomes were most evenly distributed. But let's focus on a specific
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case, the extraordinary pay packages of today's top executives. Are these good for the
economy?
Until recently it was almost unchallenged conventional wisdom that, whatever else you
might say, the new imperial C.E.O.'s had delivered results that dwarfed the expense of
their compensation. But now that the stock bubble has burst, it has become increasingly
clear that there was a price to those big pay packages, after all. In fact, the price paid by
shareholders and society at large may have been many times larger than the amount
actually paid to the executives.
It's easy to get boggled by the details of corporate scandal -- insider loans, stock options,
special-purpose entities, mark-to-market, round-tripping. But there's a simple reason that
the details are so complicated. All of these schemes were designed to benefit corporate
insiders -- to inflate the pay of the C.E.O. and his inner circle. That is, they were all
about the ''chaos of competitive avarice'' that, according to John Kenneth Galbraith, had
been ruled out in the corporation of the 1960's. But while all restraint has vanished
within the American corporation, the outside world -- including stockholders -- is still
prudish, and open looting by executives is still not acceptable. So the looting has to be
camouflaged, taking place through complicated schemes that can be rationalized to
outsiders as clever corporate strategies.
Economists who study crime tell us that crime is inefficient -- that is, the costs of crime
to the economy are much larger than the amount stolen. Crime, and the fear of crime,
divert resources away from productive uses: criminals spend their time stealing rather
than producing, and potential victims spend time and money trying to protect their
property. Also, the things people do to avoid becoming victims -- like avoiding
dangerous districts -- have a cost even if they succeed in averting an actual crime.
The same holds true of corporate malfeasance, whether or not it actually involves
breaking the law. Executives who devote their time to creating innovative ways to divert
shareholder money into their own pockets probably aren't running the real business very
well (think Enron, WorldCom, Tyco, Global Crossing, Adelphia . . . ). Investments
chosen because they create the illusion of profitability while insiders cash in their stock
options are a waste of scarce resources. And if the supply of funds from lenders and
shareholders dries up because of a lack of trust, the economy as a whole suffers. Just ask
Indonesia.
The argument for a system in which some people get very rich has always been that the
lure of wealth provides powerful incentives. But the question is, incentives to do what?
As we learn more about what has actually been going on in corporate America, it's
becoming less and less clear whether those incentives have actually made executives
work on behalf of the rest of us.
V. Inequality and Politics
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n September the Senate debated a proposed measure that would impose a one-time
capital gains tax on Americans who renounce their citizenship in order to avoid
paying U.S. taxes. Senator Phil Gramm was not pleased, declaring that the proposal was
''right out of Nazi Germany.'' Pretty strong language, but no stronger than the metaphor
Daniel Mitchell of the Heritage Foundation used, in an op-ed article in The Washington
Times, to describe a bill designed to prevent corporations from rechartering abroad for
tax purposes: Mitchell described this legislation as the ''Dred Scott tax bill,'' referring to
the infamous 1857 Supreme Court ruling that required free states to return escaped
slaves.
Twenty years ago, would a prominent senator have likened those who want wealthy
people to pay taxes to Nazis? Would a member of a think tank with close ties to the
administration have drawn a parallel between corporate taxation and slavery? I don't
think so. The remarks by Gramm and Mitchell, while stronger than usual, were
indicators of 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.
You don't need a political scientist to tell you that modern American politics is bitterly
polarized. But wasn't it always thus? No, it wasn't. From World War II until the 1970's --
the same era during which income inequality was historically low -- political
partisanship was much more muted than it is today. That's not just a subjective
assessment. My Princeton political science colleagues Nolan McCarty and Howard
Rosenthal, together with Keith Poole at the University of Houston, have done a statistical
analysis showing that the voting behavior of a congressman is much better predicted by
his party affiliation today than it was 25 years ago. In fact, the division between the
parties is sharper now than it has been since the 1920's.
What are the parties divided about? The answer is simple: economics. McCarty,
Rosenthal and Poole write that ''voting in Congress is highly ideological -- onedimensional
left/right, liberal versus conservative.'' It may sound simplistic to describe
Democrats as the party that wants to tax the rich and help the poor, and Republicans as
the party that wants to keep taxes and social spending as low as possible. And during the
era of middle-class America that would indeed have been simplistic: politics wasn't
defined by economic issues. But that was a different country; as McCarty, Rosenthal and
Poole put it, ''If income and wealth are distributed in a fairly equitable way, little is to be
gained for politicians to organize politics around nonexistent conflicts.'' Now the
conflicts are real, and our politics is organized around them. In other words, the growing
inequality of our incomes probably lies behind the growing divisiveness of our politics.
But the politics of rich and poor hasn't played out the way you might think. Since the
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incomes of America's wealthy have soared while ordinary families have seen at best
small gains, you might have expected politicians to seek votes by proposing to soak the
rich. In fact, however, the polarization of politics has occurred because the Republicans
have moved to the right, not because the Democrats have moved to the left. And actual
economic policy has moved steadily in favor of the wealthy. The major tax cuts of the
past 25 years, the Reagan cuts in the 1980's and the recent Bush cuts, were both heavily
tilted toward the very well off. (Despite obfuscations, it remains true that more than half
the Bush tax cut will eventually go to the top 1 percent of families.) The major tax
increase over that period, the increase in payroll taxes in the 1980's, fell most heavily on
working-class families.
The most remarkable example of how politics has shifted in favor of the wealthy -- an
example that helps us understand why economic policy has reinforced, not countered, the
movement toward greater inequality -- is the drive to repeal the estate tax. The estate tax
is, overwhelmingly, a tax on the wealthy. In 1999, only the top 2 percent of estates paid
any tax at all, and half the estate tax was paid by only 3,300 estates, 0.16 percent of the
total, with a minimum value of $5 million and an average value of $17 million. A quarter
of the tax was paid by just 467 estates worth more than $20 million. Tales of family
farms and businesses broken up to pay the estate tax are basically rural legends; hardly
any real examples have been found, despite diligent searching.
You might have thought that a tax that falls on so few people yet yields a significant
amount of revenue would be politically popular; you certainly wouldn't expect
widespread opposition. Moreover, there has long been an argument that the estate tax
promotes democratic values, precisely because it limits the ability of the wealthy to form
dynasties. So why has there been a powerful political drive to repeal the estate tax, and
why was such a repeal a centerpiece of the Bush tax cut?
There is an economic argument for repealing the estate tax, but it's hard to believe that
many people take it seriously. More significant for members of Congress, surely, is the
question of who would benefit from repeal: while those who will actually benefit from
estate tax repeal are few in number, they have a lot of money and control even more
(corporate C.E.O.'s can now count on leaving taxable estates behind). That is, they are
the sort of people who command the attention of politicians in search of campaign funds.
But it's not just about campaign contributions: much of the general public has been
convinced that the estate tax is a bad thing. If you try talking about the tax to a group of
moderately prosperous retirees, you get some interesting reactions. They refer to it as the
''death tax''; many of them believe that their estates will face punitive taxation, even
though most of them will pay little or nothing; they are convinced that small businesses
and family farms bear the brunt of the tax.
These misconceptions don't arise by accident. They have, instead, been deliberately
promoted. For example, a Heritage Foundation document titled ''Time to Repeal Federal
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Death Taxes: The Nightmare of the American Dream'' emphasizes stories that rarely, if
ever, happen in real life: ''Small-business owners, particularly minority owners, suffer
anxious moments wondering whether the businesses they hope to hand down to their
children will be destroyed by the death tax bill, . . . Women whose children are grown
struggle to find ways to re-enter the work force without upsetting the family's estate tax
avoidance plan.'' And who finances the Heritage Foundation? Why, foundations created
by wealthy families, of course.
The point is that it is no accident that strongly conservative views, views that militate
against taxes on the rich, have spread even as the rich get richer compared with the rest
of us: in addition to directly buying influence, money can be used to shape public
perceptions. The liberal group People for the American Way's report on how
conservative foundations have deployed vast sums to support think tanks, friendly media
and other institutions that promote right-wing causes is titled ''Buying a Movement.''
Not to put too fine a point on it: as the rich get richer, they can buy a lot of things besides
goods and services. Money buys political influence; used cleverly, it also buys
intellectual influence. A result is that growing income disparities in the United States, far
from leading to demands to soak the rich, have been accompanied by a growing
movement to let them keep more of their earnings and to pass their wealth on to their
children.
This obviously raises the possibility of a self-reinforcing process. 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.
VI. Plutocracy?
In 1924, the mansions of Long Island's North Shore were still in their full glory, as was
the political power of the class that owned them. When Gov. Al Smith of New York
proposed building a system of parks on Long Island, the mansion owners were bitterly
opposed. One baron -- Horace Havemeyer, the ''sultan of sugar'' -- warned that North
Shore towns would be ''overrun with rabble from the city.'' ''Rabble?'' Smith said. ''That's
me you're talking about.'' In the end New Yorkers got their parks, but it was close: the
interests of a few hundred wealthy families nearly prevailed over those of New York
City's middle class.
America in the 1920's wasn't a feudal society. But it was a nation in which vast privilege
-- often inherited privilege -- stood in contrast to vast misery. It was also a nation in
which the government, more often than not, served the interests of the privileged and
ignored the aspirations of ordinary people.
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Those days are past -- or are they? Income inequality in America has now returned to the
levels of the 1920's. Inherited wealth doesn't yet play a big part in our society, but given
time -- and the repeal of the estate tax -- we will grow ourselves a hereditary elite just as
set apart from the concerns of ordinary Americans as old Horace Havemeyer. And the
new elite, like the old, will have enormous political power.
Kevin Phillips concludes his book ''Wealth and Democracy'' with a grim warning:
''Either democracy must be renewed, with politics brought back to life, or wealth is likely
to cement a new and less democratic regime -- plutocracy by some other name.'' It's a
pretty extreme line, but we live in extreme times. Even if the forms of democracy
remain, they may become meaningless. It's all too easy to see how we may become a
country in which the big rewards are reserved for people with the right connections; in
which ordinary people see little hope of advancement; in which political involvement
seems pointless, because in the end the interests of the elite always get served.
Am I being too pessimistic? Even my liberal friends tell me not to worry, that our system
has great resilience, that the center will hold. I hope they're right, but they may be
looking in the rearview mirror. Our optimism about America, our belief that in the end
our nation always finds its way, comes from the past -- a past in which we were a
middle-class society. But that was another country.
Paul Krugman is a Times columnist and a professor at Princeton.
Copyright The New York Times Company | Permissions | Privacy Policy
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[Arthur Eckart]

G, yes I've learned. You have nothing to debate and take up too much space (which I suspected before).

[G]

Funny how the thin skinned among us are quick to perceive insult when faced with their own words ; your tossed out the little “ you will learn “ presumption . I suggest that if it offends you , that you not use it so readily – olde chap . After all , insults are the refuge of closed minded gas bags.

Moreover , I have facts and you beliefs .And the only space limitation which matters in this discussion is your limitation to absorb facts . Anyone who says the 1870’s –1914 , a period notorious for : crushing poverty , child labor , corruption and scandal was prosperous is either delusional , the product of a very bad educational experience and /or a proponent of antisocial Darwinism , someone likely not capable of serious debate .

[Arthur Eckart]

G, you confirm what I suspected. Obviously, you believe the opinons of a New York Times NeoKeynesian are facts. Clinging to being wrong, without knowing it, is nothing to brag about. I'm not going to state my educational background to you, because I don't want to appear that I'm bragging, and prove you wrong again. Below is a link to a completely opposite opinion. Also, I may add, your responses have no logical connnection to my statements.

http://www.wallstreetdigest.com/sample/viewStory.php?id=306&issue_id=25

[S. A. White]

Has anyone considered the fact that baby boomers are a LARGE generation, and their children are just now coming into the "household" category on their own, after going to college and graduate/professional school and coming out with student loan debt? That's a lot of people just starting out with little or no net worth (or negative net worth) in 2001 and 2004, and incomes that were in the entry-level phase. That doesn't have anything to do with the economy.

[Arthur Eckart]

Net worth is a poor measure of living standards. Billionaire Donald Trump had a negative net worth about 10 years ago. Yet, he continued to live like a billionaire. Net worth is assets minus liabilities. You can own a lot more assets and yet your net worth can fall. Perhaps, debt levels rose from the sharp increase in home ownership. The recent low interest rates (including zero percent financing at GM and Ford) may have induced borrowing, which can lower net worth.

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Current policy seems designed to concentrate vast wealthy in the hands of the few , i.e. , like America circa 1900 , an America that was not a pretty place or the land of opportunity we tend to over romanticize . Many in leadership positions pretend all is fine and immune to a devastating collapse . Anyone feeling so contented should not forget that the path to steep economic decline is well trodden and is accessible to us .

The Keysian model is straightforward and intuitive : a capitalistic economy requires a critical mass of consumer spending both to maintain itself and to grow . In America approximately 70% of our economic pie is based on broadbased consumer spending . We shrink the pie with every worker/consumer we displace via layoff or wage cut .

In his new book, "The Disposable American: Layoffs and Their Consequences," Louis Uchitelle tells us that since 1984, when the U.S. Bureau of Labor Statistics started monitoring "worker displacement," at least 30 million full-time workers have been "permanently separated from their jobs and their paychecks against their wishes." ; the words "at least" only hint at the decline

[erotic shop]

The Keysian model is straightforward and intuitive : a capitalistic economy requires a critical mass of consumer spending both to maintain itself and to grow . In America approximately 70% of our economic pie is based on broadbased consumer spending . We shrink the pie with every worker/consumer we displace via layoff or wage cut .

In his new book, "The Disposable American: Layoffs and Their Consequences," Louis Uchitelle tells us that since 1984, when the U.S. Bureau of Labor Statistics started monitoring "worker displacement," at least 30 million full-time workers have been "permanently separated from their jobs and their paychecks against their wishes." ; the words "at least" only hint at the decline .

The rule of holes advises : If you are in a hole quit digging .
Thus far , we just keep sending in more workers and devoting our
resources to increasing the hole’s depth

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