February 27, 2006

#198: What to do? What to do?

P. Krugman

KRUGMAN TRUTH SQUAD

Graduates and Oligarchs, (02/27/06), is a mildly interesting column by Paul Krugman as he returns to one of his all-time favorite themes, the growing income inequality in America. What caught our eye was his odd choice of villains. Normally one would expect to read about the usual suspects lurking somewhere in the Bush White House. But in this case he chose his former boss at Princeton University, Ben S. Bernanke, who has been on the job a Chairman of the Federal Reserve for less than a month. What on earth has Ben done to deserve such an early scalding, we wondered. It turns out, not much. He was simply in the wrong place at the wrong time.

Here’s the story. Robert Gordon, the guru of productivity analysis at Northwestern University, has a new paper out [Link. Click on "Where did the Productivity Growth Go?" to view PDF] documenting growing income inequality between high end and low end labor based on detailed IRS data during the 1966-2001 period. Krugman’s problem is that this period does not include the Bush years so there is no one obvious to bash. Even worse, an acceleration in inequality occurred during the Clinton Administration.

What to do? What to do? On the one hand he wants to get the new evidence out because it promotes his redistributionist view of the proper social order, but, on the other hand, having Clinton in his cross hairs does not exactly score partisan points, which after all is Krugman’s main reason for living. Now as it happens Gordon in his paper speculated that the growing income disparity casts doubt on something economists call skill-based-technical-change (SBTC) as the driver of real wage growth. This is the idea that as workers upgrade their skills they will be better able to keep up with the growing prosperity generally than the workers who don’t upgrade. Gordon is skeptical of this hypothesis based on his findings. SBTC would suggest that inequality should be growing between the top 20 percent who have become more skilled (e.g., college graduates) and the 80 percent who have held the same skill level. Instead he finds that inequality has grown most between the top 1 percent (or even the top 0.1 percent) and the rest of the labor force, including the to 20 percent with their presumed higher SBTC. In fact, the real wage growth of anyone below the 90th percentile has not come close to keeping up with economy-wide productivity growth. Arguably this should not be happening in a labor market in which the top 20 percent has a growing skill base.

Enter poor Ben. In his initial testimony before a congressional committee to a question about real wage growth he gave the standard SBTC answer. He hadn’t read Gordon? How dare him! So, Krugman pounced. He needed a victim with some tangential connection with Bush White House and Bernanke was handy. Call it collateral damage.

By the way Gordon’s paper makes clear that the TOTAL labor share of national income has remained roughly constant over his sample period. The return to capital has actually decline somewhat. So it is not a though Daddy Warbucks and his capitalist buddies are walking off with all the money. Instead, the growing inequality is occurring WITHIN the labor share. Gordon attributes this to the superstar phenomenon as entertainers, sports figures and Donald Trump style CEOs command higher income which falls into the wages and salaries category.

So back to Krugman’s title– Graduates and Oligarchs. Can anyone imagine Britney Spears as an oligarch? If so, you have a better imagination than we do.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at February 27, 2006 2:08 PM
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