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CLASS FEATURE JANUARY 5, 2004 ISSUE

By Paul Krugman

DECEMBER 18, 2003

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The Death of Horatio Alger

Our political leaders are doing everything they can to fortify class

inequality.

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

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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

10/4/2018 The Death of Horatio Alger | The Nation

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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’

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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.

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Paul Krugman 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).

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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.