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Special Report
Obama's Drive for "Equality"
Paul Krugman won the Nobel Prize this week and that tells you all you have to know about how politicized the award has become. American writers no longer win prizes for literature because they are "no longer mainstream," but Paul Krugman -- well, he hates the Bush Administration! He's one of us.
There's more to Krugman's fame, though, than just pandering to European aristocrats. In one of the shallowest intellectual gambits of recent decades, Krugman has been the point man for the bizarre thesis that America has become the "land of inequality." For the last five years Krugman has used his New York Times column to trumpet the theory that nearly all the wealth creation since the Reagan Era has accrued to approximately 13,000 families at the top while the rest of America wallows in squalor. Here's the way he puts it on his website:
Krugman's thesis -- "Income inequality in America is now the greatest since the 1920s" -- has become an article of faith in liberal politics, endlessly reiterated in New York Times editorials and among Democratic politicians. And it has become the main impetus for Barack Obama's "spread the wealth" tax plan that will supposedly lower everyone's taxes except that undeserving top 5 percent, who have been hogging all the wealth since 1980. So let's see where Krugman gets his information and what the effect of Obama's plan is going to be.
Although crusading American economists have been massaging the numbers ever since Bill Clinton left office, the chef d'oeuvre was performed by two Frenchmen, Thomas Piketty and Emmanuel Saez, in a 2001 paper written for the National Bureau of Economic Research and titled "Income Inequality in the United States, 1913-1998," At the time Piketty had barely visited the United States and Saez had parachuted into Berkeley where he found a warm welcome. Without taking much time to examine American society the pair reached the astounding conclusion that 90 percent of Americans were living on an average income of $25,000 a year -- barely above the poverty line of $20,000 -- while the rest of America's wealth was concentrated at the very top. In other words, conditions were not much different from France at the outbreak of the French Revolution.
NOW LET'S START with a little common sense. Look around you. Does America seem to you like a country where 90 percent of the population is living barely above the poverty line? One out of every twelve Americans annually visits Disney World, making Orlando the nation's 9th busiest airport. With children in tow, the trip easily costs several thousand dollars yet the place is always packed. Eighty percent of American homes now have air conditioning. Almost everyone owns a television set. Seventy-five percent have a cell phone. The poorest in America -- the people in the bottom "quintile" -- live as well as the average American did in 1970. Calorie intake is now perfectly level across all classes in America -- meaning we have reached the millennial dream where everyone has enough to eat.
In fact if the rich suffer at all today it is because what were once considered exclusive luxuries have become accessible to the masses. Nantucket, once a hideaway for the rich, has been invaded by McDonald's. BMW now sells a luxury car for downscale buyers. Americans now employ 9,000 personal chefs, as opposed to only 400 a decade ago. Godiva chocolate, once available only in Neiman Marcus, has now invaded Hallmark Card. The situation got so bad that Godiva finally brought out a special "G" line of handmade chocolates at $100 a pound in order to keep its richest customers happy.
So how did Piketty and Saez get things so wrong? Probably a third grade math teacher could figure it out.
First of all, they measured income by looking at individiual income tax returns. Right away you can see the problem. People working part time file income tax returns. Teenagers with summer jobs file returns. Babies in their crib with college funds file. This wildly distorts the picture. Say you're a married couple making $150,000 a year with three teenagers in the house. All three have summer jobs each making $3,333.33. That makes your household income $160,000. You'll have to file four income tax returns. That makes the average income $40,000 and the median $3.333.33. It's easy to see why personal tax returns do not reflect family or household income.
In fact the average household income has risen from $44,000 in 1980 to $57,000 in 2006, a 30 percent increase. Yet even that doesn't really capture rising affluence. Over the same period the size of the average household has shrunk from 3.2 persons to 2.6. That's because families are smaller, elderly persons live more independently, and children are more likely to move out on their own. Alan Reynolds, who has critiqued the entire Piketty/Saez/Krugman axis in his book Income and Wealth, points out that Krugman and other interpreters continually misrepresent P&S by saying they measured "household" and "family" income rather than individual tax filings. Reynolds probably won't win the Nobel Prize for his effort.
Another amazing distortion is that Piketty and Saez's database does not reflect taxes, Social Security or any other government transfers. The "rising inequality" Democrats have detected over the past eight years doesn't include those government programs designed specifically to redistribute income. When these are included the "Gini coefficient," a mathematical equation that expresses income inequality, falls 25 percent.
Still, the biggest distortion is yet to come. It turns out that the "individual income tax filings" no longer represent only individuals. Half the corporations in America now file "personal" income tax returns under Subchapter S. The big switch came after the 1986 tax reform, which lowered personal rates from 64 to 70 percent down to 28 percent, while corporate rates remained at 30 percent. At the time thousands of doctors, lawyers and farmers were forming C corporations so they could file at the lower corporate rate. All that changed after 1986 and corporations began switching to subchapter S to file personal returns. In 1986 S-corporations with up to 35 stockholders were eligible. This was expanded to 100 stockholders in 1990 and the Small Business Protection Act of 1994 allowed banks to file under subchapter-S. One-quarter of all business profits in the country now file under personal income taxes. These are the figures Piketty, Saez and Krugman are reading when they discover the "super-rich" who have been hogging America's income over the last twenty years.
AND SO WE COME to the crux of why Barack Obama's "share-the-wealth" program will stifle the economy and why John McCain is absolutely right when he says small businesses are the real target. Most of the supposed "growing inequality" in America simply reflects the migration of small businesses into personal income filings. Now Barack Obama is going to try to punish these job-generators by going after them with higher taxes. As everyone now knows after Wednesday's Hofstra debate, the plan was on display this week when Joseph Wurzelbacher, a self-employed Ohio plumber, told Obama, "I work 10 or 12 hours a day to build my business. Don't you believe in the American dream? Why do you want to raise my taxes?" To which Obama responded: "I want to make sure that everybody who is behind you, that they've got a chance for success, too. I think when you spread the wealth around it's good for everybody."
Good for everyone, that is, except those who work hard. As Reynolds points out, 80 percent of the high earners in the upper quintile are career couples holding down two full-time jobs. People in the top quintile work the longest hours in the economy while people in the bottom quintile work the least. High-income households now have an average of three people in the work force while those in the bottom quintile have only .5. Of course much of this only means that people in the bottom quintile are retired people living on pensions and Social Security or young people just starting out on their own. Forty-six percent of people living in poverty own their own homes and the poverty rate -- 11 percent -- is now the lowest in history.
So what will be the outcome of this misguided effort to redress a problem that doesn't exist? Small businesses will simply migrate back to C-corporation status, where the tax rate of 35 percent is still the second-highest in the world. Tax revenues will fall. Job creation will decline and more work will be outsourced. Two-career couples will cut back on their grueling workload and start looking for tax shelters instead. Meanwhile, the welfare system will be reinvented as a "refundable tax credit" that is nothing but a government check. People at the bottom will once again find it more rewarding to live on the dole while people like Joseph Wurzelbacher will decide maybe the American Dream isn't worth all that work after all. Poverty rates will increase because, in a strange way, poverty has become more attractive. Stagflation is the probable result. And all because crusading economists decided to play a few new tricks with numbers.
Is there a recall system for Nobel Prizes? Maybe it's time to start considering one.
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Kevin| 10.17.08 @ 1:55PM
Ironically, after Obama's plans fail and we fall into a deeper recession / depression, I can already hear the lament of the Democrats as they decry the inept Bush administration for the continued crisis. If only most Americans weren't so selfish in thinking "What's in it for me?" rather than "What's in the best interest of my country?" Kennedy had it right - and we have become a nation of welfare and wealth redistribution.
Rick| 10.17.08 @ 2:15PM
"Nantucket, once a hideaway for the rich, has been invaded by McDonald's. "
No. No McDonald's on Nantucket. How many other false assertions here?
David J| 10.17.08 @ 3:52PM
Just got back from eating at MDonald's in Nantucket. Boy was that good!
Mike| 10.17.08 @ 4:55PM
Hmmm. So let's see. We're trillions of dollars in debt, because a bunch of "middle-class" Americans with "diverse backgrounds", have been "livin' above their means" for the last 10 years or so. They bought houses they couldn't afford, cars they couldn't afford, 100" 1080p HDTVs they couldn't afford, sent their kids to schools they couldn't afford... Shame on them... Those "wannabe rich folks" have gotten the whole world into the worse global economic crisis ever... Com'n dude. There ain't no way that even a billion of these supposed "wannabe rich folks", could amass enough clout to mess up the entire world economy! "Real, rich folks" (not "wannabes") are the only ones with that kind of clout. What has happened here, is the same thing that happens in Vegas. Some "real, high-rollers" (figuratively, not literally, of course) basically didn't get up from the table when they started losing! The casino owners (again, figuratively) couldn't resist the opportunity to "milk these poor saps blind", so they just let them keep gambling. They even let them "make up new gambling games of their own", in order to keep them gambling and losing :-) Anyway, a couple of these casinos owners eventually ask their CPA "Yo, Berstein! How much money have I a made so far, ova here?" Berstein replies, "Don't know yet, boss? Those suckers are still losing double-or-nuthin' bets left and right, though." Pretty soon the casino owners realize that the "double-or-nuthin'" bets are so high, they themselves can't afford to lose one. All the casino owners agree to stop all the betting and say, "Okay, no more double-or-nuthin' bets. You've bums have lost, so pay up!". The trouble is that they can't pay up, because the casinos themselves are now "part of the bounty". They get desperate, and go looking for the "wannabe, rich folks" (to play the 25 cent slot machines), but those "shameful people" are now too broke to even think about going to the casino! Barack Obama's "tax the rich, folks" plan isn't the culprit, here. Obama is just playing the role of both Dan Aykroyd and Eddie Murphy, in the movie "Trading Places". The "casino owners" are Randolph and Mortimer Duke :-)
Heather| 10.17.08 @ 6:21PM
We can all thank FDR, Carter, ACORN, Frank, Raines, Dobbs, and Clinton for the current economic mess. If government had not become involved in banking/lending this would not have happened - and it never should have been involved. Typical of what happens when the government is given money and more power than the Constitution allows. And yes many many people have overextended themselves financially, as the assumption in this day and age is that someone will bail you out when you get in over your head. Personal responsibility is not called into question anymore. Of course the popular and unfortunately future historical spin will be that like everything else in the world, it's George Bush's fault. Liberals could not stand the fact that he won a second term by a large margin and have gone out of their way (to put it mildly) to destroy his presidency.
Thurly| 10.17.08 @ 10:37PM
Your last paragraph is a scream! In the same way you look around to see that the progressive economists are, on the face of it, wrong, if you looked around during the 8 years of the Clinton administration, you didn't see everybody quitting and going on the public dole. Your overstatements, over simplifications reek of partisanship.
Wayne| 10.17.08 @ 11:15PM
STOP blaming the politicians, stop blaming the 'so called' rich. Point the finger at yourself. This started before Clinton, he never stopped it, before Bush I, he never stopped it, before Reagan, he never stopped it...Thomas Jefferson warned about giving over monetary policy to central bankers, he and Adams fought over this very topic...Did we listen 225 years ago? No? Why not? Cuz people back then are like people are now, lazy and stupid and always looking for the easy way out. Well, guess what the easy ways are barred and there's fire at the door. I think American's in particular should take a good hard look at what they are doing with their money, start keeping a little cash around, not be so quick to spend and approach investing with some common sense (do not listen to Wall Street experts (is that now an oxymoron?)..they are more worried about how they are going to be perceived than worried about how to make you money). I'm tired of the whining, especially from Democrats, Nancy PILL osie, can tell her @$$ from a hole 'n th groun'...every time she starts to talk about the economy her eyes get kinda glassy and scary...I'm not as much afraid of Obama as I am of her...
Mike| 10.18.08 @ 6:23AM
I agree Heather. "Government" (make that plural, "governments") are what I'm calling "casinos", in my previous comment. India, China, Britian, the US. The leaders of these "casinos" (the "casino owners") are not their supreme decision-makers, so it really doesn't matter who wins on Nov 4th. The short-sellers on Wall Street (and in all the investmest arms of the previously mentioned "casinos"), are the true source of the current economic crisis. They are the who I'm calling "real, high-rollers", in my previous comment. There have been several events in recent weeks, which provide a sound basis for this line of thinking. "DOW Experiences Biggest 1-day % Drop in History!". "NIKKEI Experiences Biggest 1-day Drop in History!". "DOW Experiences Biggest 1-day % Gain in History". "NIKKEI Experiences Biggest 1-day Gain in History!". In other words, you can replace the first word in the previous two sentences, with at least 2-3 other names. Anyway, none of these "biggest ever" events happened immediately after the U.S. signed their "rescue plan" bill, so it's clear that the U.S. "casino owner" doesn't control the entire "strip" :-) And as far as Bush is concerned...he's even incompetent at being a "morally-right, casino owner". Tell me one other time in human history, when engaing in an act that essentially tries to achieve a "moral objective" by eradicating members of one's own species (while also wreaking a healthy dose of havoc on the only planet that we know is capable of supporting said species), hasn't led to economic prosperity for the "good guys"? As other's here have said, it's time for everyone to "look inward" for answers.
grissie| 10.19.08 @ 1:00PM
Wayne hit it squarely ! The one to fear is the Cosmetic Surgery Queen Madam Speaker Pelosi. This is one hate filled, leftist kook. The word "Scarry" takes on new definition with "The Great One" in the Oval office.
Ray| 10.19.08 @ 2:28PM
The Nobel prize in no longer meaningful except as a cash cow for liberals, the far left, nee Paul Krugman, and terrorist supporters.
Clarence F. Weavers| 10.19.08 @ 5:35PM
I think your magazine is shameful and a black eye on America. I am a patriot, a Christian and a proud American liberal who has just happened upon your magazine on the web and am dismayed at your views. You should be ashamed of yourselves.
Mike Kennedy| 10.19.08 @ 6:52PM
Mr. Weaver:
You sound just like a typical liberal. You don't approve of someone's views -- what a shock. You sir, are the one who should be ashamed. So you disagree? So what? I'm sure we disagree on almost everything. But you have every right to read the Daily Kos and the rest of the left's drivel. I just choose not to go there, and you can choose another website, if you like. THIS IS AMERICA, land of the free -- until the left gets a hold of it.
Wolverb| 10.19.08 @ 10:24PM
Weaver, why don't you shut up and maybe you'll learn something.
The facts are the reason for this massive mortgage lending crisis is because the democrats decided to allow minorites to buy houses when they weren't qualified, even if they didn't have jobs and the dems told the banks to loan them money and they would back it up with Fannie and Freddie. Now the government is going to give the houses to the minorites and force us whites who pay our bills and taxes to pay for them. We might as well get used to this because if Obama and the dems win big, they will screw us workers even more. Frankly I think everyone who is getting screwed on this deal should refuse to file any taxes next year. They can't arrest us all. We've got to do something drastic or they will just keep screwing us more and more.
Mac| 10.20.08 @ 12:06AM
Everyone wants simple answers to the whys and wherefores of the current financial crisis. There are none. The subprime mortgage market was foisted upon the lenders of this country by the actions and policies of the federal government. The bundling of these mortgages was a predictable result as institutions dumped this bad paper. Then as the housing market went into a correction, first real estate speculators began to default, then actual homeowners followed as banks tried to salvage some liquidity. Then the crash of the financial giants began.
Unfortunately, this was not something that caught either the government or the financial market by surprise. The government (Treasury) was ready with a bail-out plan. It had already been sold to the President. The only sticking point were certain Republicans who voted against the first House bill. And the financial world waited for the Government to hand them boatloads of cash.
Look for much more far reaching socialist policies and practices to come out of a Democrat controlled Congress and White House. The Golden Rule is at work here. He, who has the gold, makes the rules. The financial movers and shakers are in a position to not only buy their way into the new socialist hierarchy, but to control it. Just another merger and acquisition. But, one whose outcome may not prove to be to their liking.
Becky| 10.20.08 @ 12:46AM
It takes a village ............ Obama, Biden, Reid, Pelosi. Possibly they thought it was It takes a Pillage. Pillage or village, whatever they takes, we'll be poor, but happy.
D3| 10.20.08 @ 2:39AM
Thurly said: " if you looked around during the 8 years of the Clinton administration, you didn’t see everybody quitting and going on the public dole"
Look up "Contract With America", "Welfare Reform", "National Debt Repayment", "Republican Congress", and "Newt Gingrich"--then cross-reference with what happened during the Clinton years.
There's a reason why the % of people on the dole shrunk during those years.