The Death of Horatio Alger
Our political leaders are
doing everything they can
to fortify class inequality
by Paul Krugman
The Nation magazine, January
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 summaries 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
The economy was hardly egalitarian, but
a generation ago the gross inequalities of the 1920s seemed very
Now they're back. According to estimates
by the economists Thom 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 anew 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
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
Paul Krugman, an economics professor at
Princeton and a columnist at the New York Times, is the author,
most recently, of The Great Unraveling: Losing Our Way in the
New Century (Norton).
Class War watch