Politely Neglecting the 500-lb Gorilla in the Corner of the Room

Dear Leader says:

Our economy is healthy and vigorous, and growing faster than other major industrialized nations...

He says it with sincerity in his voice, and Congress reacts like they believe it.

He says that because when you factor in everybody's income, he's right.

This rosy scenario reports the average and neglects the median and the mode of the data.

The reality's more like Bill Moyers says:

...As great wealth has accumulated at the top, the rest of society has not been benefiting proportionally. In 1960 the gap between the top 20% and the bottom 20% was thirtyfold. Now it is seventy-five fold. Thirty years ago the average annual compensation of the top 100 chief executives in the country was 30 times the pay of the average worker. Today it is 1000 times the pay of the average worker. A recent article in The Financial Times reports on a study by the American economist Robert J. Gordon, who finds “little long-term change in workers’ share of U.S. income over the past half century.” Middle-ranking Americans are being squeezed, he says, because the top ten percent of earners have captured almost half the total income gains in the past four decades and the top one percent have gained the most of all – “more in fact, than all the bottom 50 percent.”

No wonder working men and women and their families are strained to cope with the rising cost of health care, pharmaceutical drugs, housing, higher education, and public transportation – all of which have risen faster in price than typical family incomes. The recent book, Economic Apartheid in America: A Primer on Economic Inequality and Insecurity , describes how “thirty zipcodes in America have become fabulously wealthy” while “whole urban and rural communities are languishing in unemployment, crumbling infrastructure, growing insecurity, and fear.”

Paul Krugman, Princeton Economist, ex-Carlyle Group advisor, agreed this way today:

...Mr. Bernanke [the new chairman of the Federal Reserve Bank] 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 Northwestern University, "Where Did the Productivity Growth Go?," gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

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 Tax Policy Center estimates that this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The center doesn't give a number for the 99.99th percentile, but it's probably well over $6 million a year...

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 America pays at least lip service.

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."

Still, you have to be able to understand the concept of average, median, and mode to glean that information. So is it any wonder the education is going increasingly to the best heeled? You can't let the unqualified realize what the game's all about.