Sorry Krugman, America Is Not an Oligarchy
In today’s New York Times, Paul Krugman shares his thoughts on Institutional Investor’s survey of the 25 highest-paid hedge fund managers. The survey found this group’s earnings were a combined $21 billion in 2013.
Krugman invokes the Gilded Age and repeats Thomas Piketty’s well-known thesis that, without a global tax on wealth, the rich will only continue to get richer and economic inequality will increase.
Krugman’s solution, similar to Piketty’s, is to increase taxes for those with high incomes. He blames current income distribution on a trend that began during the Reagan years.
As Krugman argues, “Conservatives want you to believe that the big rewards in modern America go to innovators and entrepreneurs, people who build businesses and push technology forward. But that’s not what those hedge fund managers do for a living; they’re in the business of financial speculation.”
This attitude is nothing new. In the past, Krugman has characterized those who work in financial markets as “wheeler-dealers” who “push money around.” In Krugman’s world, these individuals then use their undeserved wealth to enact disproportionate influence on the democratic process, at the expense of the rest of the country.
Krugman mischaracterizes the financial sector and the value it provides to Americans. Innovative companies require funding to get their ideas off the ground. No matter how great potential products are, the companies that wish to develop them rely on others who are willing to take financial risks and invest.
Additionally, Americas of all income levels own $6.5 trillion in individual retirement accounts and $4.2 trillion in 401(k) accounts. The value of these accounts is dependent on financial markets and those who work in them.
Krugman has another, more fundamental, mistake in his analysis of the American rich. The question of whether people can move around income classes is more important than the difference between rich and poor, but is consistently ignored by Krugman.
According to a paper published in the flagship American Economics Review last year by U.S. Treasury Department economists Gerald Auten, Geoffrey Gee, and Nicholas Turner, there is significant mobility across American income levels. They find that about half of those in the top and bottom quintiles moved up or down. Also, of those that were in the top 1 percent in 1996, fewer than half, only 41.5 percent, were there 10 years later.
Other Treasury data show that of the 3,869 people who appeared in the top 400 U.S. taxpayers by adjusted gross income over the period 1992 to 2009, only 87 people appeared there for 10 or more years—the rich are not a static class of oligarchs.
A significant part of the income mobility story that both Krugman and Piketty ignore is the life cycle of income. That is, incomes are typically lowest for people in their first jobs, rise with seniority and promotions, and then decline after retirement. During their prime working years, people may have very high earnings, but that in no way creates a class of “plutocrats” who use their accumulated capital to get rich off of others’ efforts.
Though blaming the rich may work as a political talking point, it is a distraction from meaningful economic reform. Sorry Paul Krugman, America is not a country of oligarchs.
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