Paul Krugman

Paul Krugman is a professor at Princeton University, an op-ed columnist for the New York Times, and the author of several books, including The Age of Diminished Expectations (1989) and The Great Unraveling: Losing Our Way in the New Century (2003). He was awarded the 2008 Nobel Prize in Economics. The following excerpt from Krugman’s 2007 book is from Chapter 12, “Confronting Inequality.”

Americans still tend to say, when asked, that individuals can make their own place in society. According to one survey 61 percent of Americans agree with the statement that “people get rewarded for their effort,” compared with 49 percent in Canada and only 23 percent in France.¹ In reality, however, America has vast inequality of opportunity as well as results. We may believe that anyone can succeed through hard work and determination, but the facts say otherwise.

There are many pieces of evidence showing that Horatio Alger stories are very rare in real life. One of the most striking comes from a study published by the National Center for Education Statistics, which tracked the educational experience of Americans who were eighth graders in 1988. Those eighth graders were sorted both by apparent talent, as measured by a mathematics test, and by the socioeconomic status of their parents, as measured by occupations, incomes, and education.

The key result is shown in Table 1. Not surprisingly, both getting a high test score and having high-status parents increased a student’s chance of finishing college. But family status mattered more. Students who scored in the bottom fourth on the exam, but came from families whose status put them in the top fourth—what we used to call RDKs, for “rich dumb kids,” when I was a teenager—were more likely to finish college than students who scored in the top fourth but whose parents were in the bottom fourth. What this tells us is that the idea that we have anything close to equality of opportunity is clearly a fantasy. It would be closer to the truth, though not the whole truth, to say that in modern America, class—inherited class—usually trumps talent.

Isn’t that true everywhere? Not to the same extent. International comparisons of “intergenerational mobility,” the extent to which people can achieve higher status than their parents, are tricky because countries don’t collect perfectly comparable data.

TABLE 1

Percentage of 1988 Eighth Graders Finishing College

Source: National Center for Education Statistics, The Condition of Education 2003, p. 47.

Nonetheless it’s clear that Horatio Alger has moved to someplace in Europe: Mobility is highest in the Scandinavian countries, and most results suggest that mobility is lower in the United States than it is in France, Canada, and maybe even Britain. Not only don’t Americans have equal opportunity, opportunity is less equal here than elsewhere in the West.

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It’s not hard to understand why. Our unique lack of universal health care, all by itself, puts Americans who are unlucky in their parents at a disadvantage: Because American children from low-income families are often uninsured, they’re more likely to have health problems that derail their life chances. Poor nutrition, thanks to low income and a lack of social support, can have the same effect. Life disruptions that affect a child’s parents can also make upward mobility hard—and the weakness of the U.S. social safety net makes such disruptions more likely and worse if they happen. Then there’s the highly uneven quality of U.S. basic education, and so on. What it all comes down to is that although the principle of “equality of opportunity, not equality of results” sounds fine, it’s a largely fictitious distinction. A society with highly unequal results is, more or less inevitably, a society with highly unequal opportunity, too. If you truly believe that all Americans are entitled to an equal chance at the starting line, that’s an argument for doing something to reduce inequality.

America’s high inequality, then, imposes serious costs on our society that go beyond the way it holds down the purchasing power of most families. And there’s another way in which inequality damages us: It corrupts our politics. “If there are men in this country big enough to own the government of the United States,” said Woodrow Wilson in 1913, in words that would be almost inconceivable from a modern president, “they are going to own it.”² Well, now there are, and they do. Not completely, of course, but hardly a week goes by without the disclosure of a case in which the influence of money has grotesquely distorted U.S. government policy.

As this book went to press, there was a spectacular example: The way even some Democrats rallied to the support of hedge fund managers, who receive an unconscionable tax break. Through a quirk in the way the tax laws have been interpreted, these managers—some of whom make more than a billion dollars a year—get to have most of their earnings taxed at the capital gains rate, which is only 15 percent, even as other high earners pay a 35 percent rate. The hedge fund tax loophole costs the government more than $6 billion a year in lost revenue, roughly the cost of providing health care to three million children.³ Almost $2 billion of the total goes to just twenty-five individuals. Even conservative economists believe that the tax break is unjustified, and should be eliminated.⁴

Yet the tax break has powerful political support—and not just from Republicans. In July 2007 Sen. Charles Schumer of New York, the head of the Democratic Senatorial Campaign Committee, let it be known that he would favor eliminating the hedge fund loophole only if other, deeply entrenched tax breaks were eliminated at the same time. As everyone understood, this was a “poison pill,” a way of blocking reform without explicitly saying no. And although Schumer denied it, everyone also suspected that his position was driven by the large sums hedge funds contribute to Democratic political campaigns.⁵

The hedge fund loophole is a classic example of how the concentration of income in a few hands corrupts politics. Beyond that is the bigger story of how income inequality has reinforced the rise of movement conservatism, a fundamentally undemocratic force. As I argued [earlier in the book], rising inequality has to an important extent been caused by the rightward shift of our politics, but the causation also runs the other way. The new wealth of the rich has increased their influence, sustaining the institutions of movement conservatism and pulling the Republican Party even further into the movement’s orbit. The ugliness of our politics is in large part a reflection of the inequality of our income distribution.

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More broadly still, high levels of inequality strain the bonds that hold us together as a society. There has been a long-term downward trend in the extent to which Americans trust either the government or one another. In the sixties, most Americans agreed with the proposition that “most people can be trusted”; today most disagree.⁶ In the sixties, most Americans believed that the government is run “for the benefit of all”; today, most believe that it’s run for “a few big interests.”⁷ And there’s convincing evidence that growing inequality is behind our growing cynicism, which is making the United States seem increasingly like a Latin American country. As the political scientists Eric Uslaner and Mitchell Brown point out (and support with extensive data), “In a world of haves and have-nots, those at either end of the economic spectrum have little reason to believe that ‘most people can be trusted’…social trust rests on a foundation of economic equality.”⁸

(2007)

Notes

1. Tom Hertz, Understanding Mobility in America (Center for American Progress, 2006) <http://www.americanprogress.org/issues/2006/04/b1579981.html>.

2. Woodrow Wilson, The New Freedom (Doubleday, 1913), Project Gutenberg <http://www.gutenberg.org/files/14811/14811-h/14811-h.html>.

3. “Tax Breaks for Billionaires,” Economic Policy Institute Policy Memorandum no. 120 <http://www.epi.org/content.cfm/pm120>.

4. See, for example, Jessica Holzer, “Conservatives Break with GOP Leaders on a Tax Bill,” The Hill 18 July 2007 <http://thehill.com/leading-the-news/conservatives-break-with-gop-leaders-on-a-tax-bill-2007-07-18.html>.

5. “In Opposing Tax Plan, Schumer Supports Wall Street Over Party,” New York Times 30 July 2007: A1.

6. Eric M. Uslaner and Mitchell Brown, “Inequality, Trust, and Civic Engagement,” American Politics Research 33.6 (2005): 868–94.

7. The ANES Guide to Public Opinion and Electoral Behavior, table 5A.2 <http://electionsstudies.org/nesguide/toptable/tab5a_htm>.

8. Uslaner and Brown, “Inequality, Trust, and Civic Engagement.”