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
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
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 .
THE SONS ALSO RISE
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.
HEY, LUCKY DUCKIES!
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
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
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
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.
WHEN MARKETS GO BAD
DELUSIONS OF POWER
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
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
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.
CRYING WITH ARGENTINA
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
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,
... 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.