The Accidental Theorist (5 page)

Sometimes you have to give points for sheer
chutzpah
. I can’t help admiring the fortitude of veteran supply-sider Paul Craig Roberts—who recently declared in his
BusinessWeek
column that the prosperity of the American economy under Bill Clinton proves the validity of, yes, supply-side economics. After all, back in 1993 Roberts, in lockstep with other supply-siders, predicted nothing but disaster from Clintonomics: “a bigger deficit, higher unemployment, rising inflation, and a currency crisis to boot.” Faced with the reality of a Dow near 8,000, the lowest unemployment rate in a generation, and the smallest deficit since, well, Ronald Reagan’s first budget, some people would have tried to change the subject. Roberts, however, is made of sterner stuff.

But then, what choice did he have? The standard (and true) riposte to Clintonian triumphalism is that Clinton presides over a prosperity he did not create, that the credit for the good news belongs partly to Alan Greenspan but mainly to the resilience and flexibility of America’s private sector. This escape route is not, however, available to supply-siders. If they concede that six years and counting of noninflationary growth in the nineties have had little if anything to do with the policies of Bill Clinton, they can hardly avoid the implication that seven years of expansion during the eighties may have had equally little to do with the policies of Ronald Reagan. And the legend of Reaganomics—which is gradually losing its magic anyway as “morning in America” recedes ever further into the mists, while the debts Reagan left us remain—is about all the supply-siders have left.

What is supply-side economics? It is not, as some of its apologists would have it, simply the recognition that the supply side of the economy matters; one would be hard-pressed to find a card-carrying economist who disagrees with that proposition. Nor is there anything distinctive about the recognition that high marginal tax rates can hurt economic growth—this, too, is an utterly conventional insight. For example, the effect of taxes on savings, investment, and growth was a central preoccupation of the youthful research of Deputy Treasury Secretary Lawrence Summers. Yet Summers is not now and has never been a supply-sider—because he has always thought that other things matter, too.

What defines supply-side economics, in other words, is not what it includes but what it excludes. Supply-siders believe that
only
the supply side matters. You may think that a recession has something to do with inadequate demand, and that the Fed can help jump-start a recovery by cutting interest rates; but supply-siders, at least when they are being consistent, do not (although in practice they have been known to blame the Fed when things go wrong). And they believe not only that taxes affect growth, but that virtually all bad things that happen to the economy are the result of tax increases, all good things the result of tax reductions. The implication of these views, of course, is that supply-siders think that tax cuts are always a good idea—whatever the state of the economy or the government’s budget outlook.

This may sound too good to be true, and it is. But for many years now supply-siders have had a stock answer for skeptics: the economic recovery that followed Reagan’s tax cuts, which supposedly proved conventional economics wrong and supply-side economics right.

This was always a disingenuous claim, since the events of the 1980s played out according to a thoroughly conventional script. Try, for example, checking out the scenario for disinflation presented in the best-selling mainstream macroeconomics textbook of the late 1970s, by Rudiger Dornbusch and Stanley Fischer: It shows an initial sharp rise in unemployment, followed by a prolonged period of growth during which inflation and unemployment decline together. In other words, the scenario looks pretty much like the actual path of the U.S. economy from 1979 to 1990. But most people have only a vague idea of what conventional economics actually says, and anyway it is hard to argue with success; so for a long time the supply-side movement was able to get away with a misrepresentation both of what actually happened in the eighties and of what it said about the way the world works.

To deny that the experience of the last few years represents a debacle for supply-side ideas, however, requires a heroic act of selective memory. The truth is that supply-siders went very far out on a limb, and that limb came crashing down. Never mind politics: Suppose that you had managed your personal finances based on what you heard four years ago from Newt Gingrich, read in
Forbes
, or for that matter saw on this very page. You would have sold all your stocks, and probably put your money into gold. If the supply-siders were fund managers, not only would you have fired them, you would have sued them for lack of due diligence.

Indeed, you have to turn to Marxism to find a forecasting fiasco on the same scale. Economists often make bad predictions. But it is one thing to fail to predict something hardly anyone else predicts: Most economists didn’t see the stagflation of the 1970s coming, but who did? It is something quite different to make a firm prediction, deeply rooted in your ideology—a prediction that is totally at odds with what mainstream economists say, and accompanied by frequent denunciations of those who disagree with you as knaves and fools—and then to get it completely wrong while the mainstream gets it mostly right. That, one might expect, would make it hard for people to take you seriously ever again. Supply-siders said that Clinton’s tax increase would cause disaster; conventional economists said it wouldn’t. What do you think happened?

But of course supply-side economics will not vanish in a puff of smoke. Economic fallacies never die—at best, they slowly fade away. Human nature being what it is, it is too much to expect someone whose career or sense of self-worth is based on his identification with some doctrine to abandon that doctrine merely because it has been falsified by events. Moreover, any ideology whose main policy prescription is lower taxes on the rich is likely to have extra staying power: Those who preach it are not going to have trouble putting bread on the table. The supply-siders will be with us for a long time to come.

It may be that the spectacular failure of their predictions has contributed to the eccentricity of some recent supply-side pronouncements. It seemed strange when Jack Kemp claimed (during his debate with Al Gore) that he could double the economy’s size in fifteen years—that is, achieve fifteen years of 5 percent growth, starting from near-full employment. He must think that Ronald Reagan, who started with double-digit unemployment yet managed only seven years at less than 4 percent, was an economic wimp. It seems even stranger that Jude Wanniski, who can lay as good a claim as anyone to being the doctrine’s creator—and remains inseparable from Kemp—insists that despite all appearances the rich have actually become impoverished. Stock prices, you see, are still lower than they were thirty years ago—if you measure them in gold.

But we should never be surprised when prominent people say foolish things about economics. The history of economic doctrines teaches us that the influence of an idea may have nothing to do with its quality—that an ideology can attract a devoted following, even come to control the corridors of power, without a shred of logic or evidence in its favor. Supply-side economics may have had a meteoric career in the world of politics, but it never did make any sense. And failure may have brought out the silly streak in some supply-siders, but they have not suddenly become cranks. They always were.

To a naive reader, Edward N. Wolff’s
Top Heavy: A Study of the Increasing Inequality of Wealth in America
might seem unlikely to provoke strong emotional reactions. Wolff, a professor of economics at New York University, provides a rather dry, matter-of-fact summary of trends in wealth distribution, followed by a low-key case for a modest wealth tax. Although Wolff has done a commendable technical job in combining data from a number of sources to produce a fuller picture—in particular, his book tells us more about both long-term trends and international comparisons than has previously been available—the rough outlines of this story have been familiar and uncontroversial among economists for at least the past five years.

And yet Wolff’s book was the target of an astonishing barrage of conservative attacks: multiple op-eds in the
Wall Street Journal,
hostile book reviews, and so on. Why should such a mild-mannered little volume provoke such rage?

The answer is that this is a subject on which many conservatives are unable to hold a rational discussion. Make a mere statement of fact—say, for example, that the top 20 percent of households in the United States own 85 percent of the marketable wealth—and conservatives will insist that you rephrase it as “20 percent of the households have
created
85 percent of the wealth.” Try to assess long-term trends in income distribution using the standard, apolitical device of comparing incomes at the same stage of successive business cycles, such as 1973 and 1989, and you will be accused of an outrageous attempt to distort Ronald Reagan’s record by mixing in the Carter years.

Conservatives are wrong about wealth inequality, but they are not irrational. There is a method and political purpose to their maddened reaction—a determination to deny the facts that is dramatically illustrated by House majority leader Richard Armey’s new book,
The Freedom Revolution
. Put simply, conservatives don’t want the public to know too much because they fear it would hurt them politically.

To understand the significance of Wolff’s book, consider this simple parable: There are two societies. In one, everyone makes a living at some occupation—say, fishing—in which the amount people earn over the course of a year is fairly closely determined by their skill and effort. Incomes will not be equal in this society—some people are better at fishing than others, some people are willing to work harder than others—but the range of incomes will not be that wide. And there will be a sense that those who catch a lot of fish have earned their success.

In the other society, the main source of income is gold prospecting. A few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working hard for very little reward. The result will be a very unequal distribution of income. Some of this will still reflect effort and skill: Those who are especially alert to signs of gold, or willing to put in longer hours prospecting, will on average do better than those who are not. But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so.

Surely the great majority of Americans, no matter how conservative, instinctively feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. Yet there is also no question that our nation today is much less like the benign society of fishermen—and much more like the harsh society of prospectors—than it was a generation ago. The evidence is overwhelming, and it comes from many sources—from government agencies like the Bureau of the Census, from
Fortune
’s annual survey of executive compensation, and so on. And, of course, there’s the evidence that confronts anyone with open eyes. Tom Wolfe is neither an economist nor a liberal, but he is an acute observer. When he wanted to portray what was happening in American society he came up with the world of
The Bonfire of the Vanities
.

Here’s a rough (and reasonably certain) picture of what has happened: The standard of living of the poorest 10 percent of American families is significantly lower today than it was a generation ago. Families in the middle are, at best, slightly better off. Only the wealthiest 20 percent of Americans have achieved income growth at anything like the rates nearly everyone experienced between the forties and early seventies. Meanwhile, the income of families high in the distribution has risen dramatically, with something like a doubling of the real incomes of the top 1 percent.

These widening disparities are often attributed to the increasing importance of education. But while it’s true that, on average, workers with a college education have done better than those without, the bulk of the divergence has been among those with similar levels of education. High-school teachers have not done as badly as janitors but they have fallen dramatically behind corporate CEOs, even though they have about the same amount of education.

Also, the growth of inequality cannot be described simply as the rise of some group, such as the college educated or the top 20 percent, compared with the rest; the top 5 percent have gotten richer compared with the next 15, the top 1 percent compared with the next 4, the top 0.25 percent compared with the next 0.75, and onwards all the way to Bill Gates. The important contribution of Wolff’s book is that it reinforces the evidence that much of the important action in American inequality has taken place way up the scale, among the extremely well-off.

Wolff focuses on wealth rather than income—on assets rather than cash flow. This has some advantages over annual income as an indicator of a family’s economic position, especially among the rich. Someone with a very high income may be having an unusually good year, while it is not unheard of for wealthy families to have negative income if they make a bad investment; in each case their assets will be a better clue to where they really fit in the rankings. More important, however, wealth is in some ways a better indicator than income data of what is happening to the very successful—simply because it is so narrowly held: In 1989, the top 1 percent of families owned 39 percent of the wealth but received only (a still impressive) 16 percent of the income.

A particularly striking statistic in Wolff’s book should put an end to the still-widespread tendency to discuss the growth of inequality in America by tracking the fortunes of the top 20 percent, or of college-educated workers. Between 1983 and 1989, while the wealth share of the top 20 percent of families rose substantially, the share of percentiles 80 to 99 actually fell. In other words, when we say that America’s rich have gotten richer, by the “rich” we do not mean garden variety yuppies—we mean true plutocrats.

Many conservatives have probably stopped reading by now, or at least stopped being able to respond to this article with anything other than blind anger, but for those who are still with me let me make a crucial point about these statistics:
They say nothing about who, if anyone, is to blame.
To say that America was a far more unequal society in 1989 than it was in 1973 is a simple statement of fact, not an attack on Ronald Reagan. Think about the parable of the fishermen and the prospectors: The greater inequality of the latter society did not come about because it has worse leadership but because it lives in a different environment. And changes in the environment—in world markets, or in technology—might change a society of middle-class fishermen into a society with dismaying extremes of wealth and poverty, without it necessarily being the result of deliberate policies.

In fact, it’s pretty certain that this is what has happened in the United States. Ronald Reagan did not single-handedly cause the incomes of the rich to soar and those of the poor to decline. He did cut taxes at the top and social programs at the bottom, but most of the growth in inequality took place in the marketplace, in the pretax incomes of families. (There is a wide range of opinion as to just what happened with the markets, though clearly technology and the changing international trade scene played big roles.) Furthermore, the upward trend in inequality began in the seventies under Nixon, Ford, and Carter and continues in the nineties under Clinton; similar trends, if not so dramatic, are visible in many other countries.

Yet income distribution is a politicized subject all the same. The reason is obvious: The extent of inequality is relevant for policymaking. In the fisherman society, for example, people might feel that only invalids, widows, and orphans deserve public support. In the vastly unequal prospecting world, however, it is easy to imagine a broad public demand that those who have been lucky enough to find gold be required to share a significant fraction of their winnings with those who have not. Indeed, it is hard to see how such a redistributionist program would
not
be popular—if the public understood just what was going on.

It is in the light of this possibility—that a redistributionist policy would have broad support if people understood the realities—that we should consider Armey’s
The Freedom Revolution
. It is not, to say the least, a carefully written or argued book; it consists largely of standard conservative bromides, backed by a number of unsupported assertions. But despite the book’s sloppiness, it is an important document, because of what it says about the majority leader’s intellectual processes. Armey, a former economics professor, could have made the case that there is nothing that can or should be done about growing inequality. But instead he tries to claim, in essence, that nothing has happened—that we
really are
still a society of middle-class fishermen.

First, Armey denies that the eighties were a period in which the rich got richer and the poor got poorer. “The statisticians,” he writes, “break our population into five income groups, called quintiles. During the eighties they gained in average real income as follows:

The source for this data, not cited, is the Bureau of the Census’s
Current Population Report
. This is helpful to know, because if you check Armey’s facts you will find he is fibbing a bit. These figures are not income gains for all of the eighties, but only from 1983 to 1989. Immediately preceding that recovery, the economy experienced a savage recession, the worst since the Great Depression, that affected the poor much more severely than the rich. The first column of the table below gives the percentage changes for the slump years from 1979 to 1983.

Conservatives will say, “The recession was Carter’s fault, while the recovery proved the success of Reagan’s policies.” But put politics aside for a moment and accept this simple fact: At the end of the 1983 to 1989 recovery, the bottom quintile was still worse off than it was in 1979, while the only really large gains over the decade went to the top quintile. If one takes the long view, as in the second column of the table (which measures from the business cycle peak in 1973), one sees an overwhelming picture of radically growing inequality. And one might correctly suspect even from these data that the pattern continued inside the top quintile, i.e., that the top 5 and the top 1 percent did better still.

When Armey (with his Ph.D. in economics) wrote this passage, he must have had the same table in front of him that I am looking at now. He must therefore have known that he was, strictly speaking, lying when he described his data as being what happened during the “eighties,” and could not have failed to notice that, even at the end of his carefully selected period, incomes were fare more unequal than they had been in the seventies. In other words, the passage is a deliberate attempt to mislead the reader.

Percentage Income Change by Income Bracket for the Periods 1979–1983 and 1973–1989.

It gets even better. Armey cites a study that shows that there is huge income mobility in America. The message here is simple: Don’t worry that some people find gold and some don’t—next year you may be the winner. He gives numbers saying that fewer than 15 percent of the “folks” who were in the bottom quintile in 1979 were still there in 1988. He then asserts that it was more likely that someone would move from the bottom quintile to the top than he would stay in place. Again, he doesn’t cite the source, but these are familiar numbers. They come from a botched 1992 Bush administration study, a study that was immediately ridiculed and that its authors would just as soon forget.