Don't Forget the Economists Who Predicted This Crisis.

Barack Obama said he is influenced by, "a wonderful book written by Doris Kearns Goodwin called Team of Rivals, in which she talked about how Lincoln basically pulled in all the people who had been running against him into his Cabinet because whatever, you know, personal feelings there were, the issue was, 'How can we get this country through this time of crisis?'" Obama went on to say, "And so, I am very practical minded. I'm a practical-minded guy. And, you know, one of my heroes is Abraham Lincoln."

Let's hope President-elect Obama will not only listen to the many who caused this financial crisis, but that he will also incorporate the ideas of those who predicted this crisis.

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John Edwards Passes the Substance Test According to Paul Krugman

Two presidential elections ago, the conventional wisdom said that George W. Bush was a likable, honest fellow. But those of us who actually analyzed what he was saying about policy came to a different conclusion — namely, that he was irresponsible and deeply dishonest. His numbers didn’t add up, and in his speeches he simply lied about the content of his own proposals.

In the fifth year of the disastrous war Mr. Bush started on false pretenses, it’s clear who was right. What a candidate says about policy, not the supposedly revealing personal anecdotes political reporters love to dwell on, is the best way to judge his or her character.

So what are the current presidential candidates saying about policy, and what does it tell us about them?

Well, none of the leading Republican candidates have said anything substantive about policy. Go through their speeches and campaign materials and you’ll see a lot of posturing, especially about how tough they are on terrorists — but nothing at all about what they actually plan to do.

In fact, I suspect that the real reason most of the Republicans are ducking a YouTube debate is that they’re afraid they would be asked questions about policy, rather than being invited to compare themselves to Ronald Reagan.

But didn’t Rudy Giuliani just announce a health care plan? No, he vaguely described a tax cut proposal that he says would do something good for health care. (Most experts disagree.) But he offered no specifics about how the plan would work, how much it would cost or how he would pay for it.

As Ezra Klein of The American Prospect has pointed out, in the speech announcing his “plan” — and since no policy document has been released, the speech is all we have to go on — Mr. Giuliani never uttered the word “uninsured.” He did, however, repeatedly denounce “socialized medicine” or some variant thereof.

The entire G.O.P. field, then, fails the substance test.

There is, by contrast, a lot of substance on the Democratic side, with John Edwards forcing the pace. Most notably, in February, Mr. Edwards transformed the whole health care debate with a plan that offers a politically and fiscally plausible path to universal health insurance.

Whatever the fate of the Edwards candidacy, Mr. Edwards will deserve a lot of the credit if and when we do get universal care in this country.

Mr. Edwards has also offered a detailed, sensible plan for tax reform, and some serious antipoverty initiatives.

Four months after the Edwards health care plan was announced, Barack Obama followed with a broadly similar but somewhat less comprehensive plan. Like Mr. Edwards, Mr. Obama has also announced a serious plan to fight poverty.

Hillary Clinton, however, has been evasive. She conveys the impression that there’s not much difference between her policy positions and those of the other candidates — but she’s offered few specifics. In particular, unlike Mr. Edwards or Mr. Obama, she hasn’t announced a specific universal care plan, or explicitly committed herself to paying for health reform by letting some of the Bush tax cuts expire.

For those who believe that the time for universal care has come, this lack of specifics is disturbing. In fact, what Mrs. Clinton said about health care in February’s Democratic debate suggested a notable lack of urgency: “Well, I want to have universal health care coverage by the end of my second term.”

On Saturday, at the YearlyKos Convention in Chicago, she sounded more forceful: “Universal health care will be my highest domestic priority as president.” But does this represent a real change in position? It’s hard to know, since she has said nothing about how she would cover the uninsured.

And even if you believe Mrs. Clinton’s contention that her positions could never be influenced by lobbyists’ money — a remark that drew boos and hisses from the Chicago crowd — there’s reason to worry about the big contributions she receives from the insurance and drug industries. Are they simply betting on the front-runner, or are they also backing the Democratic candidate least likely to hurt their profits?

All of the leading Democratic candidates are articulate and impressive. It’s easy to imagine any of them as president. But after what happened in 2000, it worries me that Mrs. Clinton is showing an almost Republican aversion to talking about substance.

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This Conspiracy is No Theory

By Paul Krugman

In 1981, Gary North, a leader of the Christian Reconstructionist movement — the openly theocratic wing of the Christian right — suggested that the movement could achieve power by stealth. “Christians must begin to organize politically within the present party structure,” he wrote, “and they must begin to infiltrate the existing institutional order.”

Today, Regent University, founded by the televangelist Pat Robertson to provide “Christian leadership to change the world,” boasts that it has 150 graduates working in the Bush administration.

Unfortunately for the image of the school, where Mr. Robertson is chancellor and president, the most famous of those graduates is Monica Goodling, a product of the university’s law school. She’s the former top aide to Alberto Gonzales who appears central to the scandal of the fired U.S. attorneys and has declared that she will take the Fifth rather than testify to Congress on the matter.

The infiltration of the federal government by large numbers of people seeking to impose a religious agenda — which is very different from simply being people of faith — is one of the most important stories of the last six years. It’s also a story that tends to go underreported, perhaps because journalists are afraid of sounding like conspiracy theorists.

But this conspiracy is no theory. The official platform of the Texas Republican Party pledges to “dispel the myth of the separation of church and state.” And the Texas Republicans now running the country are doing their best to fulfill that pledge.

Kay Cole James, who had extensive connections to the religious right and was the dean of Regent’s government school, was the federal government’s chief personnel officer from 2001 to 2005. (Curious fact: she then took a job with Mitchell Wade, the businessman who bribed Representative Randy “Duke” Cunningham.) And it’s clear that unqualified people were hired throughout the administration because of their religious connections.

For example, The Boston Globe reports on one Regent law school graduate who was interviewed by the Justice Department’s civil rights division. Asked what Supreme Court decision of the past 20 years he most disagreed with, he named the decision to strike down a Texas anti-sodomy law. When he was hired, it was his only job offer.

Or consider George Deutsch, the presidential appointee at NASA who told a Web site designer to add the word “theory” after every mention of the Big Bang, to leave open the possibility of “intelligent design by a creator.” He turned out not to have, as he claimed, a degree from Texas A&M.

One measure of just how many Bushies were appointed to promote a religious agenda is how often a Christian right connection surfaces when we learn about a Bush administration scandal.

There’s Ms. Goodling, of course. But did you know that Rachel Paulose, the U.S. attorney in Minnesota — three of whose deputies recently stepped down, reportedly in protest over her management style — is, according to a local news report, in the habit of quoting Bible verses in the office?

Or there’s the case of Claude Allen, the presidential aide and former deputy secretary of health and human services, who stepped down after being investigated for petty theft. Most press reports, though they mentioned Mr. Allen’s faith, failed to convey the fact that he built his career as a man of the hard-line Christian right.

And there’s another thing most reporting fails to convey: the sheer extremism of these people.

You see, Regent isn’t a religious university the way Loyola or Yeshiva are religious universities. It’s run by someone whose first reaction to 9/11 was to brand it God’s punishment for America’s sins.

Two days after the terrorist attacks, Mr. Robertson held a conversation with Jerry Falwell on Mr. Robertson’s TV show “The 700 Club.” Mr. Falwell laid blame for the attack at the feet of “the pagans, and the abortionists, and the feminists, and the gays and the lesbians,” not to mention the A.C.L.U. and People for the American Way. “Well, I totally concur,” said Mr. Robertson.

The Bush administration’s implosion clearly represents a setback for the Christian right’s strategy of infiltration. But it would be wildly premature to declare the danger over. This is a movement that has shown great resilience over the years. It will surely find new champions.

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The Right-wing Relies on Little Lies

Paul Krugman's latest op-ed on the right-wing's use of the pseudo-scandal.

Four years into a war fought to eliminate a nonexistent threat, we all have renewed appreciation for the power of the Big Lie: people tend to believe false official claims about big issues, because they can’t picture their leaders being dishonest about such things.

But there’s another political lesson I don’t think has sunk in: the power of the Little Lie — the small accusation invented out of thin air, followed by another, and another, and another. Little Lies aren’t meant to have staying power. Instead, they create a sort of background hum, a sense that the person facing all these accusations must have done something wrong.

For a long time, basically from 9/11 until the last remnants of President Bush’s credibility drowned in New Orleans, the Bush administration was able to go big on its deceptions. Most people found it inconceivable that an American president would, for example, assert without evidence that Saddam and Al Qaeda were allies. Mr. Bush won the 2004 election because a quorum of voters still couldn’t believe he would grossly mislead them on matters of national security.

Before 9/11, however, the right-wing noise machine mainly relied on little lies. And now it has returned to its roots.

The Clinton years were a parade of fake scandals: Whitewater, Troopergate, Travelgate, Filegate, Christmas-card-gate. At the end, there were false claims that Clinton staff members trashed the White House on their way out.

Each pseudoscandal got headlines, air time and finger-wagging from the talking heads. The eventual discovery in each case that there was no there there, if reported at all, received far less attention. The effect was to make an administration that was, in fact, pretty honest and well run — especially compared with its successor — seem mired in scandal.

Even in the post-9/11 environment, little lies never went away. In particular, promoting little lies seems to have been one of the main things U.S. attorneys, as loyal Bushies, were expected to do. For example, David Iglesias, the U.S. Attorney in New Mexico, appears to have been fired because he wouldn’t bring unwarranted charges of voter fraud.

There’s a lot of talk now about a case in Wisconsin, where the Bush-appointed U.S. attorney prosecuted the state’s purchasing supervisor over charges that a court recently dismissed after just 26 minutes of oral testimony, with one judge calling the evidence “beyond thin.” But by then the accusations had done their job: the unjustly accused official had served almost four months in prison, and the case figured prominently in attack ads alleging corruption in the Democratic governor’s administration.

This is the context in which you need to see the wild swings Republicans have been taking at Nancy Pelosi.

First, there were claims that the speaker of the House had demanded a lavish plane for her trips back to California. One Republican leader denounced her “arrogance of extravagance” — then, when it became clear that the whole story was bogus, admitted that he had never had any evidence.

Now there’s Ms. Pelosi’s fact-finding trip to Syria, which Dick Cheney denounced as “bad behavior” — unlike the visit to Syria by three Republican congressmen a few days earlier, or Newt Gingrich’s trip to China when he was speaker.

Ms. Pelosi has responded coolly, dismissing the administration’s reaction as a “tantrum.” But it’s more than that: the hysterical reaction to her trip is part of a political strategy, aided and abetted by news organizations that give little lies their time in the sun.

Fox News, which is a partisan operation in all but name, plays a crucial role in the Little Lie strategy — which is why there is growing pressure on Democratic politicians not to do anything, like participating in Fox-hosted debates, that helps Fox impersonate a legitimate news organization.

But Fox has had plenty of help. Even Time’s Joe Klein, a media insider if anyone is, wrote of the Pelosi trip that “the media coverage of this on CNN and elsewhere has been abysmal.” For example, CNN ran a segment about Ms. Pelosi’s trip titled “Talking to Terrorists.”

The G.O.P.’s reversion to the Little Lie technique is a symptom of political weakness, of a party reduced to trivial smears because it has nothing else to offer. But the technique will remain effective — and the U.S. political scene will remain ugly — as long as many people in the news media keep playing along.

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How to Save the Middle Class from Extinction

The following is excerpted from the keynote speech delivered by Paul Krugman at the Economic Policy Institute's recent conference on The Agenda for Shared Prosperity.

...One thing I've been noticing on multiple debates in public policies -- climate change is another one -- is there seems to be an almost seamless transition from denial to fatalism. That for 15 or 20 years the people would say, "No, what you're saying is not happening." And then almost immediately they'll turn around and say, "Well, yeah, sure it's happening, but there's nothing that can be done about it."

And that's kind of the way a lot of the discussion now goes on inequality. That there is really nothing you can do to arrest this. That it's all the invisible hand driving this growth in inequality, and there's nothing you can do to really change it -- well, maybe better education. But while education is very much a good thing, it's the all-American way of dodging problems. Since everybody approves of it, you say we should have better education but wave away the pretty strong evidence that while it's a good thing, it won't make very much difference. So there's this general sense that you can't do anything.

And I don't think that that's what the historical record suggests. That in fact when we look at it, there appears to be quite a lot that the political process can do about inequality. Just to say, there's the obvious. Obviously, even if you look at the United States right now, the tax and social insurance system makes an enormous difference.

But the amount of inequality in the United States is substantially less than it would be if we did not have still at least somewhat progressive taxation, and still a pretty extensive, though not nearly extensive enough, system of social insurance. And that makes a big difference. Certainly if you're looking at say the United States versus Canada, a lot of the difference between the two countries is just that Canada has more of a better safety net financed by somewhat higher taxation.

And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care.

So, if you say what would I really like if I went into a Rip Van Winkle sleep and woke up ten years from now, I'd like to wake up and discover that we have a national health care in some version with the necessary funding supplied in part by higher taxes on me, or actually, the top two percent of the income distribution. But people a lot richer than me, of course. But it's not the whole story that the only thing you can do is taxes and social insurance. And the arc of history for the United States suggests that there's actually a lot more that can happen.

If you look back across the past 80 years or so of the United States, what you see is that in the 1920s, we were for practical purposes still in the gilded age. That may not be the way the historians cut it, but in terms of the actual distribution of income, so far as we can measure it in terms of the role of status and general feel of the society, we were still an extremely unequal royalist society.

By the time World War II was over, we had become the middle-class society that the baby boomers in this audience grew up in. We had become a much more equal society. That high degree of equality began to go away -- depending on exactly which numbers you look at -- during the late 70's, maybe a little earlier than that. And at this point we're basically back to pre-tax and transfer to the levels of inequality that we had in 1929.

So there is this great arc to the middle class, away from gilded age to middle-class society and then back to the new gilded age, which is now what we're living in. And there are really two puzzles about that. One of them is a political puzzle, which is why instead of leaning against these trends, politics has actually reinforced them. Why it is that U.S. politics moved left in the age of a relatively middle-class society, and moved right as society got more unequal?

A naïve view of politics would say that, "Gee, when a few people are winning a lot and most people are lagging behind, people ought to be voting for more social insurance and more progressive taxation, not less." And we have some understanding of why that doesn't happen. It has to do with the role of money, organization and all of these other things that affect politics. That story also helps us understand why politics gets so nasty.

If you actually look at some of the measures -- I'm really into quantitative political science these days -- of political positions that political scientists calculate, it does look as if what the main thing that moves actually over time is in fact the Republican party. The Democratic Party has not -- at least with northern Democrats -- gotten significantly more liberal over the past. They haven't moved much at all over the past 30 years.

But the Republican Party, which had largely converged on the Democrats in the age of Eisenhower, has moved sharply to the right. And so that one party, in effect, moves with the income of the top 5 percent or 1 percent of the population. So that seems to be the story. I mean, we can think about reasons why that might be true. But the other puzzle, and this comes to the question of the conference, is what drove these changes? How did we become largely middle class?

Why have we become a much more unequal society once again? And the standard, what economists like to say, is "Well, it's all invisible hand. It's all market forces." The history doesn't seem to look like that, if we ask how did the society we had in 1947, which is when a lot of our data start, come into existence.

Was it a gradual process whereas the economy developed and we got out of the early days of the American industrial revolution, we gradually moved towards middle classness? Well, no, historically it happened in an eye blink. In this Claudia Golden and Bob Margot classic paper, they call it the great compression. As late as the late 30s, the income distribution appears to be highly unequal.

By the time you wake up in 1946 or so, it's highly equal. And how did that happen? A lot of it was more or less deliberate compression of wage differentials during World War II. But if you were or had standards, supply and demand for different types of labor, you'd say that should last only as long as the wage controls lasted. It should have sprung back to where it was, but it didn't. It actually stayed quite equal for another 30 years at least. You ask, what buttressed that? Well, partly it's the rise of a powerful union movement, which is at least in large part a change in the political climate, but then remained in place for several decades more.

Other things we're not sure. But it looks more or less as a leveling of the income distribution. Obviously we want to be careful about the words. No one presumably in this room, and certainly not me, is advocating Cuba. We're not calling for a flat income distribution. But the relative equalization that seems to have taken place was engineered by a combination of top-down politics and grassroots organization that made people want a more equal society in the 30s and the 40s, and they got it.

And it remained for quite a long time. Now, that started to come apart roughly 30 years ago, and there's been a large increase in inequality since then. As people probably know, I've written about the part that is sort of polite to talk about, which is the rising premium for highly educated workers. But that's only part of it. Even more spectacular is the increase in inequality of the far-right tail of the income distribution.

The CEOs and high school teachers who got roughly the same number of years of formal education haven't exactly had the same growth in income over the past 30 years. So, there's this vast increase in inequality at the top. What do we think caused that? I actually just had to do a class on that. It was in my international trade class, but we were doing the trade and inequality stuff.

And the question is what do we think is underlying the rise in inequality in the United States? And searching for metaphor, I actually ended up with the "Murder on the Orient Express." Not for what actually happened but for the way we described it. In "Murder on the Orient Express," somebody is killed and there are 12 suspects. The question is which of them did it and the answer actually is all of them. The official economic story about rising inequality is one in which we have a whole bunch of villains, which all seem to be playing a role.

So we've got skill bias and technological change, which is shifting demand towards highly educated workers. We've got growing international trade with increased imports of labor-intensive products further reducing demand for less educated workers. We have immigration, possibly similar in its effect to trade. We have the falling real value of the minimum wage contributing at the bottom end. We have some affected unionization driving the change in income distribution.

Finally, in terms of at least the after-tax distribution, we have changes in taxes which have, in general, reinforced rising inequality. It could be true, but it's kind of funny that all of these different things should be working in the same direction. In "Murder on the Orient Express," there is an elaborate conspiracy that means that all 12 of the potential suspects were actually in collusion. It's a little hard to see how all of these factors and economics are in collusion.

Okay, I think that what we can say is that the political climate matters more for the distribution of income than the economic models that we know how to work with and would seem to suggest more than our models capture. If you ask me practically what I want done now, I think that the most important agenda thing right now is, in fact, to work on the taxes and social insurance side, because that is concrete and you can get stuff.

But there is a lot of reason to believe that a change in the political climate in various ways can do a lot more than you would think just from looking at the taxes and social insurance. Let me give you two pieces of evidence that I looked at. One is that there is some really interesting, though intellectually disturbing, work by my colleague, Larry Bartell who is in the Princeton Politics Department and has just looked at what happens to income growth at different points in the income distribution under administrations of the two parties.

Now there shouldn't be a big difference really because at any given historical period, the visible policies are not all that different. Certainly there is a pretty significant shift from Clinton to Bush and there was, in fact, a pretty significant shift from Bush to Clinton previously. But it's in taxes and it really shouldn't be very obvious at pre-tax distribution of income. And yet what Bartell finds is actually there is a really striking difference. Inequality on average rises under Republicans. At least in the bottom 80 percent of the income distribution, it's stable or falling under Democrats. The top 1 percent just kept on rising right through, but there is at least a surprising, fairly robust correlation.

The other thing I would say is timing. There's a very clear co-movement over time between income inequality and both the political polarization and the rightward tilt of our politics. It's pretty clear that the rising inequality over the past 30 years has been associated with a rightward shift of the political center of gravity, mainly because of the Republican Party shifting to the right.

You might say that's the causation running from income distribution to politics. But if you actually then just start to look at it through history, the timing actually seems to be reversed. The rise of an aggressive or rightwing movement and the rise of a really major assault on the New Deal great society legacy both come before the big shift in income distribution takes place.

The emergence of the modern right is something that obviously dates back to Goldwater, but really becomes a political force in the '70s. You don't really see the big changes in income distribution until the '80s. So it looks almost as if, just in this crude sense, politics is leading the economic changes. How could that operate? I just want to talk about two things. I suspect that there are quite a few channels that we don't really perceive, but there are two that are fairly clear. One of them is unionization.

Obviously, private sector unions were very important in the U.S. 30 years ago and have very nearly -- not completely, but very nearly -- collapsed, and they are down to eight percent of private employment. Why did that happen? You will often see people saying -- well, that's because of de-industrialization, and because of the decline of manufacturing. But that is actually not right. It's not right in two ways.

First of all, arithmetically, most of the decline in unionization is a result not of the decline in manufacturing share, but of the decline of the unionization of manufacturing itself. So the big thing that happens is that there is a collapse of unionization within the manufacturing sector and then of course also a smaller share of manufacturing in the economy, but it's much more dramatic on the collapse within the sector.

The other is that there is no law that says that unionization should be a manufacturing phenomenon. What it really is, to the extent that there is a story, is that large enterprises are more likely to be to be unionized. The reason why the high tend of unionization was also a period when manufacturing was the core of the union movement, is that at that time, large enterprises were largely a manufacturing phenomenon.

Now we have a service economy in which there are a lot of large service sector enterprises. Not to put too fine a point on it, but why exactly couldn't Wal-Mart be unionized? It doesn't face international competition. There is no obvious reason why it wouldn't be possible to have a strong union in Wal-Mart and in the big box sector and other parts of the economy. And just think of how different the whole political economy would look if the service sector enterprises were unionized.

Not necessarily all the effects would be positive, but it would certainly be very, very different. What happened? Why did manufacturing unionization collapse? Why didn't the emerging service sector get unionized? And the answer is actually pretty straightforward and pretty brutal. It's politics and aggressive employer behavior enabled by politics.

I have seen estimates of a fraction of workers who voted for a union and who were fired in the early '80s. They range from a low of one in 20 to a high of one in eight. There is no question that aggressive, often illegal, union busting is the reason the union movement declined. And the change in the political climate that began in the '70s clearly played a role in making that possible.

Now how important is all of that? You may have seen that there have been a number of estimates of the effects of unions on income distribution. It's funny. People will often say that those estimates are small and actually they typically are roughly comparable in size to typical estimates to the effect of international trade on income distribution. So these are both in secondary and the standard accounting to technological change, but both fairly significant.

What is more, there are a lot of reasons to think that those estimates are not capturing a lot of the story. As the people who do them will concede, what they basically do is say: What if the workers were paid, unionized and non-unionized workers were paid the same as they are now, and just do a sort of shift share analysis. What that doesn't capture -- and they know it, but there is just no way to do it better -- is the effect of a strong union movement on the bargaining position of workers who are not unionized, but might be.

It doesn't capture the effect of a strong union movement and possibly disciplining insider behavior by executives and so on down the line. So it is likely that that is a much more important story than we typically give it credit for being. Let me just give you my other piece of the story, executive compensation. There's a raging debate now of how much of the soaring executive compensation is insider self-dealing, and how much of it is just market forces.

I went back and was looking at what people said about executive compensation when it was low, just 40 or 50 times the average worker salary. [Here are] some quotes: "Managerial labor contracts are not, in fact, a private matter between employers and employees." "Parties such as employees' labor unions, consumer groups, Congress and the media create forces in the political media that constrain the types of contracts." And so on down the line.

A lot of discussion was of the role of the political climate that was basically hostile to outrageous paychecks and constrained it. Where are these quotes from? They are actually from [economists] Michael Jensen and Kevin Murphy writing, saying people have complained that there are not enough incentives in executive pay. They are saying that what we really need is to have executives get more stock options and stake in the firm -- in other words, all of the stuff that has happened since then.

So back when executive pay was low, 40 or 50 times average pay, it was actually the defenders of higher executive pay that complained that it was actually non-market forces that were constraining executive pay. Now of course that disclosing of pay has happened, the same side of the debate says it's ridiculous to claim that social norms and political forces have any role in this. But I think it's actually quite clear that it did. We can argue about which is the natural market outcome. But the point is, in fact, that we had a society 25 years ago in which there were some constraints imposed by public opinion, by strong unions, by a general sense that there were things that you don't do.

And maybe that led firms to make a decision to think of there being a sort of tradeoff between a "let's have a happy high morale" workforce, or let's have a super star CEO and squeeze the workers for all we can. There were some things that tilted the balance in that decision.

Okay, are we going to do another great compression? Hopefully not. The reason I say hopefully not is even FDR needed World War II to be able to carry out that sort of wholesale social engineering that took place. I am not looking forward to having a replay of that. I think that if we get serious, as some of us hope we do, and we actually do have a swing back in the political pendulum that -- in addition to the direct stuff -- we can do a lot to change the climate in the many small ways that add up to a lot of impact on the bargaining power of workers.

The ability of the bottom 80 percent of the population to get a bigger share of the total pie -- I think that if we get there, we may be surprised at just how successful we are at moving ourselves back, at least part of the way, to the kind of middle-class society that people like me grew up in.

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THE GREAT WEALTH TRANSFER

It's the biggest untold economic story of our time: more of the nation's bounty held in fewer and fewer hands. And Bush's tax cuts are only making the problem worse

PAUL KRUGMAN
Why doesn't Bush get credit for the strong economy?" That question has been asked over and over again in recent months by political pundits. After all, they point out, the gross domestic product is up; unemployment, at least according to official figures, is low by historical standards; and stocks have recovered much of the ground they lost in the early years of the decade, with the Dow surpassing 12,000 for the first time. Yet the public remains deeply unhappy with the state of the economy. In a recent poll, only a minority of Americans rated the economy as "excellent" or "good," while most consider it no better than "fair" or "poor."

Are people just ungrateful? Is the administration failing to get its message out? Are the news media, as conservatives darkly suggest, deliberately failing to report the good news?

None of the above. The reason most Americans think the economy is fair to poor is simple: For most Americans, it really is fair to poor. Wages have failed to keep up with rising prices. Even in 2005, a year in which the economy grew quite fast, the income of most non-elderly families lagged behind inflation. The number of Americans in poverty has risen even in the face of an official economic recovery, as has the number of Americans without health insurance. Most Americans are little, if any, better off than they were last year and definitely worse off than they were in 2000.

But how is this possible? The economic pie is getting bigger -- how can it be true that most Americans are getting smaller slices? The answer, of course, is that a few people are getting much, much bigger slices. Although wages have stagnated since Bush took office, corporate profits have doubled. The gap between the nation's CEOs and average workers is now ten times greater than it was a generation ago. And while Bush's tax cuts shaved only a few hundred dollars off the tax bills of most Americans, they saved the richest one percent more than $44,000 on average. In fact, once all of Bush's tax cuts take effect, it is estimated that those with incomes of more than $200,000 a year -- the richest five percent of the population -- will pocket almost half of the money. Those who make less than $75,000 a year -- eighty percent of America -- will receive barely a quarter of the cuts. In the Bush era, economic inequality is on the rise.

Rising inequality isn't new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth -- and they know it.

America has never been an egalitarian society, but during the New Deal and the Second World War, government policies and organized labor combined to create a broad and solid middle class. The economic historians Claudia Goldin and Robert Margo call what happened between 1933 and 1945 the Great Compression: The rich got dramatically poorer while workers got considerably richer. Americans found themselves sharing broadly similar lifestyles in a way not seen since before the Civil War.

But in the 1970s, inequality began increasing again -- slowly at first, then more and more rapidly. You can see how much things have changed by comparing the state of affairs at America's largest employer, then and now. In 1969, General Motors was the country's largest corporation aside from AT&T, which enjoyed a government-guaranteed monopoly on phone service. GM paid its chief executive, James M. Roche, a salary of $795,000 -- the equivalent of $4.2 million today, adjusting for inflation. At the time, that was considered very high. But nobody denied that ordinary GM workers were paid pretty well. The average paycheck for production workers in the auto industry was almost $8,000 -- more than $45,000 today. GM workers, who also received excellent health and retirement benefits, were considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with 1.3 million employees. H. Lee Scott, its chairman, is paid almost $23 million -- more than five times Roche's inflation-adjusted salary. Yet Scott's compensation excites relatively little comment, since it's not exceptional for the CEO of a large corporation these days. The wages paid to Wal-Mart's workers, on the other hand, do attract attention, because they are low even by current standards. On average, Wal-Mart's non-supervisory employees are paid $18,000 a year, far less than half what GM workers were paid thirty-five years ago, adjusted for inflation. And Wal-Mart is notorious both for how few of its workers receive health benefits and for the stinginess of those scarce benefits.

The broader picture is equally dismal. According to the federal Bureau of Labor Statistics, the hourly wage of the average American non-supervisory worker is actually lower, adjusted for inflation, than it was in 1970. Meanwhile, CEO pay has soared -- from less than thirty times the average wage to almost 300 times the typical worker's pay.

The widening gulf between workers and executives is part of a stunning increase in inequality throughout the U.S. economy during the past thirty years. To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income -- the richer they are, the taller they are.

Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line -- representing those Americans living in extreme poverty -- is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.

Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle -- the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.

What's useful about this image is that it explodes several comforting myths we like to tell ourselves about what is happening to our society.

MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
According to this view, most Americans are sharing in the economy's growth, with only a small minority at the bottom left behind. That places the onus for change on middle-class Americans who -- so the story goes -- will have to sacrifice some of their prosperity if they want to see poverty alleviated.

But as our line illustrates, that's just plain wrong. It's not only the poor who have fallen behind -- the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.

MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION.
This view -- which I think of as the eighty-twenty fallacy -- is expressed by none other than Alan Greenspan, former chairman of the Federal Reserve. Last year, Greenspan testified that wage gains were going primarily to skilled professionals with college educations -- "essentially," he said, "the top twenty percent." The other eighty percent -- those with less education -- are stuck in routine jobs being replaced by computers or lost to imports. Inequality, Greenspan concluded, is ultimately "an education problem."

It's a good story with a comforting conclusion: Education is the answer. But it's all wrong. A closer look at our line of Americans reveals why. The richest twenty percent are those standing between 800 and 1,000. But even those standing between 800 and 950 -- Americans who earn between $80,000 and $120,000 a year -- have done only slightly better than everyone to their left. Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.

MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
In this view, America is the land of opportunity, where a poor young man or woman can vault into the upper class. In fact, while modest moves up and down the economic ladder are common, true Horatio Alger stories are very rare. America actually has less social mobility than other advanced countries: These days, Horatio Alger has moved to Canada or Finland. It's easier for a poor child to make it into the upper-middle class in just about every other advanced country -- including famously class-conscious Britain -- than it is in the United States.

Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be -- their opportunities to do so are actually shrinking. As best we can tell, pretax incomes are now as unequally distributed as they were in the 1920s -- wiping out virtually all of the gains made by the middle class during the Great Compression.

There's a famous scene in the 1987 movie Wall Street in which Gordon Gekko, the corporate predator played by Michael Douglas, tells a meeting of stunned shareholders that greed is good, that the unbridled pursuit of individual wealth serves the interests of the company and the nation. In the movie, Gekko gets his comeuppance; in real life, the Gordon Gekkos took over both corporate America and, eventually, our political system.

Oliver Stone didn't conjure Gekko's "greed" line out of thin air. It was based on a real speech given by corporate raider Ivan Boesky -- and it reflected what many corporate executives, conservative intellectuals and right-wing politicians were saying at the time.

It's no coincidence that ringing endorsements of greed began to be heard at the same time that the actual incomes of America's rich began to soar. In part, the new pro-greed ideology was a way of rationalizing what was already happening. But it was also, to an important extent, a cause of the phenomenon. In the past thirty years, right-wing foundations have devoted enormous resources to promoting this agenda, building a far-reaching network of think tanks, media outlets and conservative scholars to legitimize higher levels of inequality. "On average, corporate America pays its most important leaders like bureaucrats," the Harvard Business Review lamented in 1990, calling for higher pay for top executives. "Is it any wonder then that so many CEOs act like bureaucrats?"

Although corporate executives have always had the power to pay themselves lavishly, their self-enrichment was limited by what Lucian Bebchuk, Jesse Fried and David Walker -- the leading experts on exploding executive paychecks -- call the "outrage constraint." What they mean is that a conspicuously self-dealing CEO would be forced to moderate his greed by unions, the press and politicians: The social climate itself condemned executive salaries that seem immodest.

Lately, however, we have experienced a death of outrage. Thanks to the right's well-funded and organized effort, corporate executives now feel no shame in lining their pockets with huge bonuses and gigantic stock options. Such self-dealing is justified, they say: Greed is what made America great, and greedy executives are exactly what corporate America needs.

At the same time, there has been a concerted attack on the institutions that have helped moderate inequality -- in particular, unions. During the Great Compression, the rate of unionization nearly tripled; by 1945, more than one in three American workers belonged to a union. A lot of what made General Motors the relatively egalitarian institution it was in the 1960s had to do with its powerful union, which was able to demand high wages for its members. Those wages, in turn, set a standard that elevated the income of workers who didn't belong to unions. But today, in the era of Wal-Mart, fewer than one in eleven workers in the private sector is organized -- effectively preventing hundreds of thousands of working Americans from joining the middle class.

Why isn't Wal-Mart unionized? The answer is simple and brutal: Business interests went on the offensive against unions. And we're not talking about gentle persuasion; we're talking about hardball tactics. During the late 1970s and early 1980s, at least one in every twenty workers who voted for a union was illegally fired; some estimates put the number as high as one in eight. And once Ronald Reagan took office, the anti-union campaign was aided and abetted by political support at the highest levels.

Unions weren't the only institution that fostered income equality during the generation that followed the Great Compression. The creation of a national minimum wage also set a benchmark for the entire economy, boosting the bargaining position of workers. But under Reagan, Congress failed to raise the minimum wage, allowing its value to be eroded by inflation. Between 1981 and 1989, the minimum wage remained the same in dollar terms -- but inflation shrank its purchasing power by twenty-five percent, reducing it to the lowest level since the 1950s.

After Reagan left office, there was a partial reversal of his anti-labor policies. The minimum wage was increased under the elder Bush and again under Clinton, restoring about half the ground it lost under Reagan. But then came Bush the Second -- and the balance of power shifted against workers and the middle class to a degree not seen since the Gilded Age.

During the 2000 election campaign, George W. Bush joked that his base consisted of the "haves and the have mores." But it wasn't much of a joke. Not only has the Bush administration favored the interests of the wealthiest few Americans over those of the middle class, it has consistently shown a preference for people who get their income from dividends and capital gains, rather than those who work for a living.

Under Bush, the economy has been growing at a reasonable pace for the past three years. But most Americans have failed to benefit from that growth. All indicators of the economic status of ordinary Americans -- poverty rates, family incomes, the number of people without health insurance -- show that most of us were worse off in 2005 than we were in 2000, and there's little reason to think that 2006 was much better.

So where did all the economic growth go? It went to a relative handful of people at the top. The earnings of the typical full-time worker, adjusted for inflation, have actually fallen since Bush took office. Pay for CEOs, meanwhile, has soared -- from 185 times that of average workers in 2003 to 279 times in 2005. And after-tax corporate profits have also skyrocketed, more than doubling since Bush took office. Those profits will eventually be reflected in dividends and capital gains, which accrue mainly to the very well-off: More than three-quarters of all stocks are owned by the richest ten percent of the population.

Bush wasn't directly responsible for the stagnation of wages and the surge in profits and executive compensation: The White House doesn't set wage rates or give CEOs stock options. But the government can tilt the balance of power between workers and bosses in many ways -- and at every juncture, this government has favored the bosses. There are four ways, in particular, that the Bush administration has helped make the poor poorer and the rich richer.

First, like Reagan, Bush has stood firmly against any increase in the minimum wage, even as inflation erodes the value of a dollar. The minimum wage was last raised in 1997; since then, inflation has cut the purchasing power of a minimum-wage worker's paycheck by twenty percent.

Second, again like Reagan, Bush has used the government's power to make it harder for workers to organize. The National Labor Relations Board, founded to protect the ability of workers to organize, has become for all practical purposes an agent of employers trying to prevent unionization. A spectacular example of this anti-union bias came just a few months ago. Under U.S. labor law, legal protections for union organizing do not extend to supervisors. But the Republican majority on the NLRB ruled that otherwise ordinary line workers who occasionally tell others what to do -- such as charge nurses, who primarily care for patients but also give instructions to other nurses on the same shift -- will now be considered supervisors. In a single administrative stroke, the Bush administration stripped as many as 8 million workers of their right to unionize.

Third, the administration effectively blocked what might have been a post-Enron backlash against self-dealing corporate insiders. Corporate scandals dominated the news in the first half of 2002 -- but then the subject was changed to the urgent need to invade Iraq, and the drive for reform was squelched. With Americans focused on the war, CEOs are once again rewarding themselves at impressive -- and unprecedented -- levels.

Finally, there's the government's most direct method of affecting incomes: taxes. In this arena, Bush has made sure that the rich pay lower taxes than they have in decades. According to the latest estimates, once the Bush tax cuts have taken full effect, more than a third of the cash will go to people making more than $500,000 a year -- a mere 0.8 percent of the population.

It's easy to get confused about the Bush tax cuts. For one thing, they are designed to confuse. The core of the Bush policy involves cutting taxes on high incomes, especially on the income wealthy Americans receive from capital gains and dividends. You might say that the Bush administration favors people who live off their wealth over people who have a job. But there are some middle-class "sweeteners" thrown in, so the administration can point to a few ordinary American families who have received significant tax cuts.

Furthermore, the administration has engaged in a systematic campaign of disinformation about whose taxes have been cut. Indeed, one of Bush's first actions after taking office was to tell the Treasury Department to stop producing estimates of how tax cuts are distributed by income class -- that is, information on who gained how much. Instead, official reports on taxes under Bush are textbook examples of how to mislead with statistics, presenting a welter of confusing numbers that convey the false impression that the tax cuts favor middle-class families, not the wealthy.

In reality, only a few middle-class families received a significant tax cut under Bush. But every wealthy American -- especially those who live off of stock earnings or their inheritance -- got a big tax cut. To picture who gained the most, imagine the son of a very wealthy man, who expects to inherit $50 million in stock and live off the dividends. Before the Bush tax cuts, our lucky heir-to-be would have paid about $27 million in estate taxes and contributed 39.6 percent of his dividend income in taxes. Once Bush's cuts go into effect, he could inherit the whole estate tax-free and pay a tax rate of only fifteen percent on his stock earnings. Truly, this is a very good time to be one of the have mores.

It's worth noting that Bush doesn't simply favor the upper class: It's the upper-upper class he cares about. That became clear last fall, when the House and Senate passed rival tax-cutting bills. (What were they doing cutting taxes yet again in the face of a huge budget deficit and an expensive war? Never mind.) The Senate bill was devoted to providing relief to middle-class wage earners: According to the Tax Policy Center, two-thirds of the Senate tax cut would have gone to people with incomes of between $100,000 and $500,000 a year. Those making more than $1 million a year would have received only eight percent of the cut.

The House bill, by contrast, focused on extending tax cuts on capital gains and dividends. More than forty percent of the House cuts would have flowed to the $1 million-plus group; only thirty percent to the 100K to 500K taxpayers.

The White House favored the House bill -- and the final, reconciled measure wound up awarding a quarter of the benefits to America's millionaires. That, in a nutshell, is the politics of income inequality under Bush.

Oh, one last thing: What about the claim that the Bush tax cuts did wonders for economic growth? In fact, job creation has been much slower under Bush than under Clinton, and overall growth since 2003 is largely the result of the huge housing boom, which has more to do with low interest rates than with taxes. But the biggest irony of all is that the real boom -- the one in the 1990s -- followed tax changes that were the reverse of Bush's policies. Clinton raised taxes on the rich, and the economy prospered.

A generation ago the distribution of income in the United States didn't look all that different from that of other advanced countries. We had more poverty, largely because of the unresolved legacy of slavery. But the gap between the economic elite and the middle class was no larger in America than it was in Europe.

Today, we're completely out of line with other advanced countries. The share of income received by the top 0.1 percent of Americans is twice the share received by the corresponding group in Britain, and three times the share in France. These days, to find societies as unequal as the United States you have to look beyond the advanced world, to Latin America. And if that comparison doesn't frighten you, it should.

The social and economic failure of Latin America is one of history's great tragedies. Our southern neighbors started out with natural and human resources at least as favorable for economic development as those in the United States. Yet over the course of the past two centuries, they fell steadily behind. Economic historians such as Kenneth Sokoloff of UCLA think they know why: Latin America got caught in an inequality trap. For historical reasons -- the kind of crops they grew, the elitist policies of colonial Spain -- Latin American societies started out with much more inequality than the societies of North America. But this inequality persisted, Sokoloff writes, because elites were able to "institutionalize an unequal distribution of political power" and to "use that greater influence to establish rules, laws and other government policies that advantaged members of the elite relative to non-members." Rather than making land available to small farmers, as the United States did with the Homestead Act, Latin American governments tended to give large blocks of public lands to people with the right connections. They also shortchanged basic education -- condemning millions to illiteracy. The result, Sokoloff notes, was "persistence over time of the high degree of inequality." This sharp inequality, in turn, doomed the economies of Latin America: Many talented people never got a chance to rise to their full potential, simply because they were born into the wrong class.

In addition, the statistical evidence shows, unequal societies tend to be corrupt societies. When there are huge disparities in wealth, the rich have both the motive and the means to corrupt the system on their behalf. In The New Industrial State, published in 1967, John Kenneth Galbraith dismissed any concern that corporate executives might exploit their position for personal gain, insisting that group decision-making would enforce "a high standard of personal honesty." But in recent years, the sheer amount of money paid to executives who are perceived as successful has overridden the restraints that Galbraith believed would control executive greed. Today, a top executive who pumps up his company's stock price by faking high profits can walk away with vast wealth even if the company later collapses, and the small chance he faces of going to jail isn't an effective deterrent. What's more, the group decision-making that Galbraith thought would prevent personal corruption doesn't work if everyone in the group can be bought off with a piece of the spoils -- which is more or less what happened at Enron. It is also what happens in Congress, when corporations share the spoils with our elected representatives in the form of generous campaign contributions and lucrative lobbying jobs.

As the past six years demonstrate, such political corruption only worsens as economic inequality rises. Indeed, the gap between rich and poor doesn't just mean that few Americans share in the benefits of economic growth -- it also undermines the sense of shared experience that binds us together as a nation. "Trust is based upon the belief that we are all in this together, part of a 'moral community,' " writes Eric Uslaner, a political scientist at the University of Maryland who has studied the effects of inequality on trust. "It is tough to convince people in a highly stratified society that the rich and the poor share common values, much less a common fate."

In the end, the effects of our growing economic inequality go far beyond dollars and cents. This, ultimately, is the most pressing question we face as a society today: Will the United States go down the path that Latin America followed -- one that leads to ever-growing disparity in political power as well as in income? The United States doesn't have Third World levels of economic inequality -- yet. But it is not hard to foresee, in the current state of our political and economic scene, the outline of a transformation into a permanently unequal society -- one that locks in and perpetuates the drastic economic polarization that is already dangerously far advanced.

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