Home > Left Behind Economics
By PAUL KRUGMAN
I’d like to say that there’s a real dialogue taking
place about the state of the U.S. economy, but the
discussion leaves a lot to be desired. In general, the
conversation sounds like this:
Bush supporter: ’Why doesn’t President Bush get credit
for a great economy? I blame liberal media bias.’
Informed economist: ’But it’s not a great economy for
most Americans. Many families are actually losing
ground, and only a very few affluent people are doing
really well.’
Bush supporter: ’Why doesn’t President Bush get credit
for a great economy? I blame liberal media bias.’
To a large extent, this dialogue of the deaf reflects
Upton Sinclair’s principle: it’s difficult to get a man
to understand something when his salary depends on his
not understanding it. But there’s also an element of
genuine incredulity. Many observers, even if they
acknowledge the growing concentration of income in the
hands of the few, find it hard to believe that this
concentration could be proceeding so rapidly as to deny
most Americans any gains from economic growth.
Yet newly available data show that that’s exactly what
happened in 2004.
Why talk about 2004, rather than more recent
experience? Unfortunately, data on the distribution of
income arrive with a substantial lag; the full story of
what happened in 2004 has only just become available,
and we won’t be able to tell the full story of what’s
happening right now until the last year of the Bush
administration. But it’s reasonably clear that what’s
happening now is the same as what happened then: growth
in the economy as a whole is mainly benefiting a small
elite, while bypassing most families.
Here’s what happened in 2004. The U.S. economy grew 4.2
percent, a very good number. Yet last August the Census
Bureau reported that real median family income - the
purchasing power of the typical family - actually fell.
Meanwhile, poverty increased, as did the number of
Americans without health insurance. So where did the
growth go?
The answer comes from the economists Thomas Piketty and
Emmanuel Saez, whose long-term estimates of income
equality have become the gold standard for research on
this topic, and who have recently updated their
estimates to include 2004. They show that even if you
exclude capital gains from a rising stock market, in
2004 the real income of the richest 1 percent of
Americans surged by almost 12.5 percent. Meanwhile, the
average real income of the bottom 99 percent of the
population rose only 1.5 percent. In other words, a
relative handful of people received most of the
benefits of growth.
There are a couple of additional revelations in the
2004 data. One is that growth didn’t just bypass the
poor and the lower middle class, it bypassed the upper
middle class too. Even people at the 95th percentile of
the income distribution - that is, people richer than
19 out of 20 Americans - gained only modestly. The big
increases went only to people who were already in the
economic stratosphere.
The other revelation is that being highly educated was
no guarantee of sharing in the benefits of economic
growth. There’s a persistent myth, perpetuated by
economists who should know better - like Edward Lazear,
the chairman of the president’s Council of Economic
Advisers - that rising inequality in the United States
is mainly a matter of a rising gap between those with a
lot of education and those without. But census data
show that the real earnings of the typical college
graduate actually fell in 2004.
In short, it’s a great economy if you’re a high-level
corporate executive or someone who owns a lot of stock.
For most other Americans, economic growth is a
spectator sport.
Can anything be done to spread the benefits of a
growing economy more widely? Of course. A good start
would be to increase the minimum wage, which in real
terms is at its lowest level in half a century.
But don’t expect this administration or this Congress
to do anything to limit the growing concentration of
income. Sometimes I even feel sorry for these people
and their apologists, who are prevented from
acknowledging that inequality is a problem by both
their political philosophy and their dependence on
financial support from the wealthy. That leaves them no
choice but to keep insisting that ordinary Americans -
who have, in fact, been bypassed by economic growth -
just don’t understand how well they’re doing.
Copyright 2006 The New York Times Company