All the damning evidence is here!

http://www.alternet.org/story.html?StoryID=17452


The Death of Horatio Alger

By Paul Krugman, The Nation
December 23, 2003

All the damning evidence is here!

http://www.alternet.org/story.html?StoryID=17452


The Death of Horatio Alger

By Paul Krugman, The Nation
December 23, 2003

The other day I found myself reading a leftist rag that made outrageous
claims about America. It said that we are becoming a society in which
the poor tend to stay poor, no matter how hard they work; in which sons
are much more likely to inherit the socioeconomic status of their father
than they were a generation ago.

The name of the leftist rag? Business Week, which published an article
titled "Waking Up From the American Dream." The article summarizes
recent research showing that social mobility in the United States (which
was never as high as legend had it) has declined considerably over the
past few decades. If you put that research together with other research
that shows a drastic increase in income and wealth inequality, you reach
an uncomfortable conclusion: America looks more and more like a
class-ridden society.

And guess what? Our political leaders are doing everything they can to
fortify class inequality, while denouncing anyone who complains ­ or
even points out what is happening ­ as a practitioner of "class
warfare."

Let's talk first about the facts on income distribution. Thirty years
ago we were a relatively middle-class nation. It had not always been
thus: Gilded Age America was a highly unequal society, and it stayed
that way through the 1920s. During the 1930s and '40s, however, America
experienced what the economic historians Claudia Goldin and Robert Margo
have dubbed the Great Compression: a drastic narrowing of income gaps,
probably as a result of New Deal policies. And the new economic order
persisted for more than a generation: Strong unions; taxes on inherited
wealth, corporate profits and high incomes; close public scrutiny of
corporate management ­ all helped to keep income gaps relatively
small. The economy was hardly egalitarian, but a generation ago the
gross inequalities of the 1920s seemed very distant.

Now they're back. According to estimates by the economists Thomas
Piketty and Emmanuel Saez ­ confirmed by data from the Congressional
Budget Office ­ between 1973 and 2000 the average real income of the
bottom 90 percent of American taxpayers actually fell by 7 percent.
Meanwhile, the income of the top 1 percent rose by 148 percent, the
income of the top 0.1 percent rose by 343 percent and the income of the
top 0.01 percent rose 599 percent. (Those numbers exclude capital gains,
so they're not an artifact of the stock-market bubble.) The distribution
of income in the United States has gone right back to Gilded Age levels
of inequality.

Never mind, say the apologists, who churn out papers with titles like
that of a 2001 Heritage Foundation piece, "Income Mobility and the
Fallacy of Class-Warfare Arguments." America, they say, isn't a caste
society ­ people with high incomes this year may have low incomes next
year and vice versa, and the route to wealth is open to all. That's
where those commies at Business Week come in: As they point out (and as
economists and sociologists have been pointing out for some time),
America actually is more of a caste society than we like to think. And
the caste lines have lately become a lot more rigid.

The myth of income mobility has always exceeded the reality: As a
general rule, once they've reached their 30s, people don't move up and
down the income ladder very much. Conservatives often cite studies like
a 1992 report by Glenn Hubbard, a Treasury official under the elder Bush
who later became chief economic adviser to the younger Bush, that
purport to show large numbers of Americans moving from low-wage to
high-wage jobs during their working lives. But what these studies
measure, as the economist Kevin Murphy put it, is mainly "the guy who
works in the college bookstore and has a real job by his early 30s."
Serious studies that exclude this sort of pseudo-mobility show that
inequality in average incomes over long periods isn't much smaller than
inequality in annual incomes.

It is true, however, that America was once a place of substantial
intergenerational mobility: Sons often did much better than their
fathers. A classic 1978 survey found that among adult men whose fathers
were in the bottom 25 percent of the population as ranked by social and
economic status, 23 percent had made it into the top 25 percent. In
other words, during the first thirty years or so after World War II, the
American dream of upward mobility was a real experience for many people.

Now for the shocker: The Business Week piece cites a new survey of
today's adult men, which finds that this number has dropped to only 10
percent. That is, over the past generation upward mobility has fallen
drastically. Very few children of the lower class are making their way
to even moderate affluence. This goes along with other studies
indicating that rags-to-riches stories have become vanishingly rare, and
that the correlation between fathers' and sons' incomes has risen in
recent decades. In modern America, it seems, you're quite likely to stay
in the social and economic class into which you were born.

Business Week attributes this to the "Wal-Martization" of the economy,
the proliferation of dead-end, low-wage jobs and the disappearance of
jobs that provide entry to the middle class. That's surely part of the
explanation. But public policy plays a role ­ and will, if present
trends continue, play an even bigger role in the future.

Put it this way: Suppose that you actually liked a caste society, and
you were seeking ways to use your control of the government to further
entrench the advantages of the haves against the have-nots. What would
you do?

One thing you would definitely do is get rid of the estate tax, so that
large fortunes can be passed on to the next generation. More broadly,
you would seek to reduce tax rates both on corporate profits and on
unearned income such as dividends and capital gains, so that those with
large accumulated or inherited wealth could more easily accumulate even
more. You'd also try to create tax shelters mainly useful for the rich.
And more broadly still, you'd try to reduce tax rates on people with
high incomes, shifting the burden to the payroll tax and other revenue
sources that bear most heavily on people with lower incomes.

Meanwhile, on the spending side, you'd cut back on healthcare for the
poor, on the quality of public education and on state aid for higher
education. This would make it more difficult for people with low incomes
to climb out of their difficulties and acquire the education essential
to upward mobility in the modern economy.

And just to close off as many routes to upward mobility as possible,
you'd do everything possible to break the power of unions, and you'd
privatize government functions so that well-paid civil servants could be
replaced with poorly paid private employees.

It all sounds sort of familiar, doesn't it?

Where is this taking us? Thomas Piketty, whose work with Saez has
transformed our understanding of income distribution, warns that current
policies will eventually create "a class of rentiers in the U.S.,
whereby a small group of wealthy but untalented children controls vast
segments of the US economy and penniless, talented children simply can't
compete." If he's right ­ and I fear that he is ­ we will end up
suffering not only from injustice, but from a vast waste of human
potential.

Goodbye, Horatio Alger. And goodbye, American Dream.