The Nation

January 5, 2004

The Death of Horatio Alger

by PAUL KRUGMAN

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.