Victors and Spoils

excerpted from the book

The Great Unraveling

Losing our way in the new century

by Paul Krugman

WW Norton, 2003, hardcover

... the (truly) nonpartisan Congressional Budget Office recently found: Adjusting for inflation, the income of families in the middle of the U.S. income distribution rose from $41,400 in 1979 to $45,100 in 1997, a 9 percent increase. Meanwhile the income of families in the top 1 percent rose from $420,200 to $1.016 million, a 140 percent increase. Or to put it another way, the income of families in the top 1 percent was 10 times that of typical families in 1979, and 23 times and rising in 1997.

It would be surprising indeed if this tectonic shift in the economic landscape weren't reflected in politics.

You might have expected the concentration of income at the top to provoke populist demands to soak the rich. But ... the Democrats haven't moved left, the Republicans' have moved right. Indeed, the Republicans have moved so far to the right that ordinary voters have trouble taking it in; as I pointed out in an earlier column, focus groups literally refused to believe accurate descriptions of the stimulus bill that House Republican leaders passed on a party-line vote back in October.

Why has the response to rising inequality been a drive to reduce taxes on the rich? Good question. It's not a simple matter of rich people voting themselves a better deal: there just aren't enough of them. To understand political trends in the United States we probably need to think about campaign finance, lobbying and the general power of money to shape political debate.

In any case, the moral of this story is that the political struggles in Washington right now are not petty squabbles. The right is on the offensive; the left-occupying the position formerly known as the center-wants to hold the line .

November 22, 2002

America, we all know, is the land of opportunity. Your success in life depends on your ability and drive, not on who your father was.

Just ask the Bush brothers. Talk to Elizabeth Cheney, who holds a specially created State Department job, or her husband, chief counsel of the Office of Management and Budget.

Interview Eugene Scalia, the top lawyer at the Labor Department, and Janet Rehnquist, inspector general at the Department of Health and Human Services. And don't forget to check in with William Kristol, editor of The Weekly Standard, and the conservative commentator John Podhoretz.

What's interesting is how little comment, let alone criticism, this roll call has occasioned. It might be just another case of kid-gloves treatment by the media, but I think it's a symptom of a broader phenomenon: inherited status is making a comeback.

It has always been good to have a rich or powerful father. Last week my Princeton colleague Alan Krueger wrote a column for The Times surveying statistical studies that debunk the mythology of American social mobility. "If the United States stands out in comparison with other countries," he wrote, "it is in having a more static distribution of income across generations with fewer opportunities for advancement." And Kevin Phillips, in his book Wealth and Democracy, shows that robber baron fortunes have been far more persistent than legend would have it.

But the past is only prologue. According to one study cited by Mr. Krueger, the heritability of status has been increasing in recent decades. And that's just the beginning. Underlying economic, social and political trends will give the children of today's wealthy a huge advantage over those who chose the wrong parents.

For one thing, there's more privilege to pass on. Thirty years ago the C.E.O. of a major company was a bureaucrat-well paid, but not truly wealthy. He couldn't give either his position or a large fortune to his heirs. Today's imperial C.E.O.'s, ... will leave vast estates behind-and they are often able to give their children lucrative jobs, too. More broadly, the spectacular increase in American inequality has made the gap between the rich and the middle class wider, and hence more difficult to cross, than it was in the past.

... Also, the heritability of status will be mightily reinforced by the repeal of the estate tax-a prime example of the odd way in which public policy and public opinion have shifted in favor of measures that benefit the wealthy, even as our society becomes increasingly class-ridden.

It wasn't always thus. The influential dynasties of the 20th century, like the Kennedys, the Rockefellers and, yes, the Sulzbergers, faced a public suspicious of inherited position; they overcame that suspicion by demonstrating a strong sense of noblesse oblige, justifying their existence by standing for high principles. Indeed, the Kennedy legend has a whiff of Bonnie Prince Charlie about it; the rightful heirs were also perceived as defenders of the downtrodden against the powerful.

But today's heirs feel no need to demonstrate concern for those less fortunate. On the contrary, they are often avid defenders of the powerful against the downtrodden. Mr. Scalia's principal personal claim to fame is his crusade against regulations that protect workers from ergonomic hazards, while Ms. Rehnquist has attracted controversy because of her efforts to weaken the punishment of health-care companies found to have committed fraud.

The official ideology of America's elite remains one of meritocracy, just as our political leadership pretends to be populist. But that won't last. Soon enough, our society will rediscover the importance of good breeding, and the vulgarity of talented upstarts.

For years, opinion leaders have told us that it's all about family values. And it is-but it will take a while before most people realize that they meant the value of coming from the right family.

December 3, 2002

... Emboldened by the midterm election, key conservative ideologues have now declared their support for tax increases-but only for people with low incomes.

The public debut of this idea came, as such things often do, on the editorial page of The Wall Street Journal. The page's editors, it seems, are upset that some low-income people pay little or nothing in income taxes. Not, mind you, because of the lost revenue, but because these "lucky duckies"-the Journal's term, not mine-might not be feeling a proper hatred for the government.

The Journal considers a hypothetical ducky who earns only $12,000 a year-some guys have all the luck!-and therefore, according to the editorial, "pays a little less than 4% of income in taxes." Not surprisingly, that statement is a deliberate misrepresentation; the calculation refers only to income taxes. If you include payroll and sales taxes, a worker earning $12,000 probably pays well over 20 percent of income in taxes. But who's counting?

What's interesting, however, is what the Journal finds wrong with this picture: The worker's taxes aren't "enough to get his or her blood boiling with rage."

In case you're wondering what this is about, it's an internal squabble of the right. The Journal is terrified that future tax cuts might include token concessions to ordinary families; it wants to ensure that everything goes to corporations and the wealthy. But the political theory revealed by the editorial-policy should be nasty to people with low incomes, lest they have any good feelings about government-may explain a lot of what has been happening lately.

For example, House Republicans recently refused to extend unemployment insurance. Their inaction means that later this month more than 800,000 workers will receive Merry Christmas letters from the government, telling them that their benefits have been cut off. This would have been a harsh decision under any circumstances. At a time when the administration says we need further tax cuts to stimulate demand, slashing the incomes of the very households most likely to cut their spending sounds like a lose-lose proposition. But once you realize that pain is good because it makes citizens hate their government, it all makes sense.

An even better example is the failure of Congress to provide adequate funds for the State Children's Health Insurance Program. The details of the legislative maneuvering are complex, but what it comes down to is that conservatives showed no interest in maintaining adequate funding for this highly successful program. The sums involved are not large, by Washington standards. But the results will be dramatic: according to Office of Management and Budget estimates, 900,000 children will lose health insurance over the next three years.

We are, of course, now living in what George W. Bush has called the "era of personal responsibility": if a child chooses to have parents who can't afford health care, that child will have to accept the consequences. But there may also be political calculation involved. Again, the government mustn't do anything good, because then people might not realize that government is bad. Understand?

What do we learn from this catalog of cruelties? We learn that "compassionate conservatism" and "leave no child behind" were empty slogans-but while this may have come as a surprise to the faith-based John J. Dilulio, some of us thought it was obvious all along. More important, we learn how relentless and extremist today's conservative movement really is.

Some people-moderate Republicans who aren't ready to admit what has happened to their party, and Democrats who think their party can appease the right by making its own promises of smaller government-still don't get it. They imagine that at some point the right will decide that it has gotten what it wants.

But the right's ambitions have no limits, and nothing moderates can offer will appease it.

The Bush administration is an extremely elitist clique trying to maintain a populist facade. Its domestic policies are designed to benefit a very small number of people-basically ' those who earn at least $300,000 a year ...

... some U.S. media outlets-operating in an environment in which anyone who questions the administration's foreign policy is accused of being unpatriotic-have taken it as their assignment to sell the war, not to present a mix of information that might call the justification for war into question.


March 28, 2003

In spring 2001 the lights were going out all over California. There were blackouts and brownouts, and the price of electricity was soaring. The Cheney task force was convened in the midst of that crisis. It concluded, in brief, that the energy crisis was a long-term problem caused by meddling bureaucrats and pesky environmentalists, who weren't letting big companies do what needed to be done. The solution? Scrap environmental rules, and give the energy industry multibillion-dollar subsidies.

Along the way, Mr. Cheney sneeringly dismissed energy conservation as a mere "sign of personal virtue" and scorned California officials who called for price controls and said the crisis was being exacerbated by market manipulation. To be fair, Mr. Cheney's mocking attitude on that last point was shared by almost everyone in politics and the media-and yes, I am patting myself on the back for getting it right.

For we now know that everything Mr. Cheney said was wrong.

In fact, the California energy crisis had nothing to do with environmental restrictions, and a lot to do with market manipulation. In 2001 the evidence for manipulation was basically circumstantial. But now we have a new report from the Federal Energy Regulatory Commission, which until now has discounted claims of market manipulation. No more: the new report concludes that market manipulation was pervasive, and offers a mountain of direct evidence, including phone conversations, e-mail and memos. There's no longer any doubt: California's power shortages were largely artificial, created by energy companies to drive up prices and profits.

Oh, and what ended the crisis? Key factors included energy conservation and price controls. Meanwhile, what happened to that long-term shortage of capacity, which required scrapping environmental rules and providing lots of corporate welfare? Within months after the Cheney report's release, stock analysts were downgrading energy companies because of a looming long-term-capacity glut.

In short, Mr. Cheney and his tough-minded realists were blowing smoke: their report described a fantasy world that bore no relation to reality. How did they get it so wrong?

One answer is that Mr. Cheney made sure that his task force included only like-minded men: as far as we can tell, he didn't consult with anyone except energy executives. So the task force was subject to what military types call "incestuous amplification," defined by Jane's Defence Weekly as "a condition in warfare where one only listens to those who are already in lockstep agreement, reinforcing set beliefs and creating a situation ripe for miscalculation."

Another answer is that Mr. Cheney basically drew his advice about how to end the energy crisis from the very companies creating the crisis, for fun and profit. But was he in on the joke?

We may never know what really went on in the energy task force since the Bush administrat`ion has gone to extraordinary lengths to keep us from finding out. At first the nonpartisan General Accounting Office, which is supposed to act as an internal watchdog, seemed determined to pursue the matter. But after the midterm election, according to the newsletter The Hill, Congressional Republicans approached the agency's head and threatened to slash his budget unless he backed off.

And therein lies the broader moral. In the last two years Mr. Cheney and other top officials have gotten it wrong again and again-on energy, on the economy, on the budget. But political muscle has insulated them from any adverse consequences. So they, and the country, don't learn from their mistakes-and the mistakes keep getting bigger.

January 1, 2002

Although images of the riots in Argentina have flickered across our television screens, hardly anyone in the U.S. cares. It's just another disaster in a small, faraway country of which we know nothing-a country as remote and unlikely to affect our lives as, say, Afghanistan.

I don't make that comparison lightly. Most people here may think that this is just another run-of-the-mill Latin American crisis-hey, those people have them all the time, don't they? -- but in the eyes of much of the world, Argentina's economic policies had "made in Washington" stamped all over them. The catastrophic failure of those policies is first and foremost a disaster for Argentines, but it is also a disaster for U.S. foreign policy.

Here's how the story looks to Latin Americans: Argentina, more than any other developing country, bought into the promises of U.S.-promoted "neoliberalism" (that's liberal as in free markets, not as in Ted Kennedy). Tariffs were slashed, state enterprises were privatized, multinational corporations were welcomed and the peso was pegged to the dollar. Wall Street cheered, and money poured in; for a while, free-market economics seemed vindicated, and its advocates weren't shy about claiming credit.

Then things began to fall apart. It wasn't surprising that the 1997 Asian financial crisis had repercussions in Latin America, and at first Argentina seemed less affected than its neighbors.

But while Brazil bounced back, Argentina's recession just went on and on.

I could explain at length the causes of Argentina's slump: it had more to do with monetary policy than with free markets. But Argentines, understandably, can't be bothered with such fine distinctions-especially because Wall Street and Washington told them that free markets and hard money were inseparable.

Moreover, when the economy went sour, the International Monetary Fund-which much of the world, with considerable justification, views as a branch of the U.S. Treasury Department-was utterly unhelpful. I.M.F. staffers have known for months, perhaps years, that the one-peso-one-dollar policy could not be sustained. And the I.M.F. could have offered Argentina guidance on how to escape from its monetary trap, as well as political cover for Argentina's leaders as they did what had to be done. Instead, however, I.M.F. officials-like medieval doctors who insisted on bleeding their patients, and repeated the procedure when the bleeding made them sicker -- prescribed austerity and still more austerity, right to the end.

Now Argentina is in utter chaos-some observers are even likening it to the Weimar Republic. And Latin Americans do not regard the United States as an innocent bystander.

I'm not sure how many Americans, even among the policy elite, understand this. The people who encouraged Argentina in its disastrous policy course are now busily rewriting history, blaming the victims. Anyway, we are notoriously bad at seeing ourselves as others see us. A recent Pew survey of "opinion leaders" found that 52 percent of the Americans think that our country is liked because it "does a lot of good"; only 21 percent of foreigners and 12 percent of Latin Americans, agreed.

... the U.S. is the Scrooge of the Western world-the least generous rich nation on the planet... WHO report shows the share of GNP given in foreign aid by advanced countries; the United States ranks dead last ...

... the U.S. currently spends 0.11 percent of GDP on foreign aid; Canada and major European countries are about three times as generous.

The Great Unraveling

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