Graduates versus Oligarchs
By Paul Krugman
The New York Times
Monday 27 February 2006
Ben Bernanke's maiden Congressional testimony as chairman of the Federal Reserve was, everyone agrees, superb. He didn't put a foot wrong on monetary or fiscal policy.
But Mr. Bernanke did stumble at one point. Responding to a question from Representative Barney Frank about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education."
That's a fundamental misreading of what's happening to American society. What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.
I think of Mr. Bernanke's position, which one hears all the time, as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group - that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don't have these skills.
The truth is quite different. Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.
So who are the winners from rising inequality? It's not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that.
A new research paper by Ian Dew-Becker and Robert
Gordon of
But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint.
Just to give you a sense of who
we're talking about: the nonpartisan
Why would someone as smart and well informed as Mr.
Bernanke get the nature of growing inequality wrong? Because the fallacy he
fell into tends to dominate polite discussion about income trends, not because
it's true, but because it's comforting. The notion that it's all about returns
to education suggests that nobody is to blame for rising inequality, that it's
just a case of supply and demand at work. And it also suggests that the way to
mitigate inequality is to improve our educational system - and better education
is a value to which just about every politician in
The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.
Should we be worried about the increasingly
oligarchic nature of American society? Yes, and not just because a rising
economic tide has failed to lift most boats. Both history and modern experience
tell us that highly unequal societies also tend to be highly corrupt. There's
an arrow of causation that runs from diverging income trends to Jack Abramoff and the
And I'm with Alan Greenspan, who - surprisingly, given his libertarian roots - has repeatedly warned that growing inequality poses a threat to "democratic society."
It may take some time before we muster the political will to counter that threat. But the first step toward doing something about inequality is to abandon the 80-20 fallacy. It's time to face up to the fact that rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates.