Research by PhD student Stefanie Stantcheva touches on taxation, student loans and education incentives.
The following article by Orna Feldman originally appeared in the fall 1998 issue of Soundings, the newsletter of the School of Humanities and Social Science. Ms. Feldman is editor of Soundings.
Paul Krugman, the Ford International Professor of Economics, is the winner of the 1991 John Bates Clark Medal, awarded every two years to an American economist under 40 who has made significant contributions to economic knowledge. Lauded for the originality and elegance of his theoretical thinking--particularly on the "new trade theory" he helped found--he is known equally well for his controversial stances that debunk policymakers' thinking on many hot-button economic issues. Cited by Newsweek as Nobel-bound, Krugman is the author of 16 books--most recently, The Accidental Theorist--and a regular contributor to Fortune magazine and Slate, an on-line magazine.
Soundings: You're known for skewering the cherished economic ideas of powerful policymakers. A while back, for example, you called the notion of international competition a "dangerous obsession." Where, in your opinion, should policymakers be focusing their attention?
Krugman: I think the really big problems here are mostly problems of distribution, of inequality between the well-off and the badly off, and the social problems that go with that.
Let's talk about this disparity of income. Why are the rich getting richer and the poor getting poorer?
The short answer is, we don't know. But there are two popular stories. One is a right-wing popular story which says it's not happening and that it's all politically motivated. Much of what I've written has been an attempt to debunk the well-financed attempts to declare that there is no issue of income inequality.
You mean by laying out the facts?
Yes. But the problem is how you look at the facts. One of the great myths of American life is social mobility. Our belief in Horatio Alger stories is really a lot larger than the reality. The fact is that most people who are in the upper tiers of the income distribution were born there and most people who are in the bottom were born there. But there's almost a disinformation campaign to claim this isn't true.
And what's the other popular story?
Well, the myth on the left is that it's all the fault of imports, that it's the global economy that's done it. And looking at the numbers makes it clear that this is not the main story. It's probably some combination of technological change and more complicated factors that have caused the inequality.
In what way is technological change the culprit?
The kinds of technological change we've had in the last 20-25 years have been very strongly biased toward highly skilled people. Loosely speaking, you take something that used to require two engineers and 48 blue-collar workers to produce, and now you can produce it with four engineers and 10 blue-collar workers. So it's not just that you can produce something with fewer workers--which is a good thing because you get to produce more stuff--but that the workers needed are much more highly educated and skilled. There has been a devaluing of ordinary labor.
The other thing, which is a little more subtle, is that technologies put a huge premium on a small number of people perceived as being the best at something. This is the "winner take all" or "superstar" aspect of technology. You have a handful of people making enormous sums of money on the one hand, and on the other, a decline in the demand for people who are only good, as opposed to famous. You see this in the superstar lawyer who can handle many cases simultaneously, with a staff of supporting people, and in the academic world with the increased ability to disseminate information over the Internet.
While it's true that anybody can post a paper on the Internet, what actually happens is that the half dozen or so established names get read and responded to. And there is no way for someone who isn't already in the magic circle to really get into that discussion. It has the effect of creating a handful of academic superstars who reap a disproportionate share of the glory. It's happening throughout our society--a relatively small number of people become enormously wealthy and a relatively large number of people are left behind.
Are they left behind in the middle class, or are they slipping further down?
The changes in income in the US are what I call fractal--that is, there's increased inequality among astonishingly narrow groups of people. So engineers are doing better than janitors, but there's increased inequality among engineers. And the bottom tenth of our population is clearly slipping backwards. The main point for me is a question of social cohesion--a sense that the bulk of Americans are living in the same universe. Social cohesion has been steadily eroding for 20 years now.
Why does that concern you?
I think it affects the way our society functions. It's hard for people to feel part of a community when there are vast inequalities within that community. It's something that makes a lot of people feel that they've been left behind, even if in absolute terms their living standard has risen over their lifetime, and I also think it has political consequences. When I was growing up, the idea that the way you became a senator or even a president was to be a very rich man who spent a lot of money on your own campaign just didn't have currency. Now it does. Compared with the kinds of economic crises that are happening elsewhere in the world, the US is doing pretty well. But I still find what's happening to our society pretty disturbing, though I think you can do some things carefully to redress the balance.
What economic policies would flow from that?
I'm a big believer in taxes and transfers. In the US, we like to complain about how over-taxed we are, but we actually have the lowest tax burden, as a share of income, in the advanced world. And you can make a lot of difference at the bottom with a relatively small amount of money. We have a program, the Earned Income Tax Credit, which, like any program, has its problems, but it makes a huge difference to millions of hard-working but low-paid people. Basically, it tops up the wages of people with low earnings. I'd like to see a lot more along those lines.
And conversely, would you tax the rich at higher levels?
Yes. We really need ameliorative social policies.
Much has been written about the impact on the US of the fall of the Asian economies and the economic debacle in Russia. What concerns you most about this?
The thing that most bothers me about Asia is, if this can happen to them, who's to say it can't happen to us? In the case of Japan, you have an advanced, modern economy with no foreign debt and a stable government and all that, which can still get caught in a slump that it doesn't seem to know how to get out of. In the case of the rest of Asia, you have economies that are a little more backward and a little more primitive that do have foreign debts. But still, the way they went almost instantly from an economic boom to the worst slump since the 1930s has got to be a cautionary tale. It suggests there's a lot more risks out there in the world economy than anyone suspected.
So what should we be doing?
First of all, we should be working extremely hard to understand what's happening. And I've actually been a bit dismayed that a lot of the economic commentary in the United States about Asia, and about Japan in particular, has had this kind of moralistic, triumphalist tone: "Well, we do it right and they did it wrong, and that's why this can't happen to us." It was just a few years ago that everyone talked about how superior the Asian economic systems were.
But I'm obsessed with Japan right now. And the reason is--to see something that really looks like a Depression-style economic crisis developing in Japan is a little bit like seeing the Black Death return. This is not supposed to happen in modern times. So I think it's terribly urgent to understand their problem, and well enough so that we understand how to avoid getting into it ourselves. But I find strikingly few serious attempts to analyze the situation.
I want to segue to your work in the media. You've been lauded for the simplicity of your prose that nevertheless manages to explain complex phenomena. But many professionals say that the simplicity doesn't do justice to the complexity. How would you respond?
Well, for one thing, I decided a few years back that if people who knew the complexities didn't write for the broader audience, then the broader audience was going to be the captive of people who didn't understand the complexities. And you know, there's a lot of bad economics out there. A lot of things that are wrong--either on the facts or on the logic or both--can sound very good to someone who isn't used to thinking about it systematically. You need to have somebody explaining that these things are wrong. Otherwise, they get into the public perception.
I mean, suppose you were a serious research psychologist and you saw Deepak Chopra made head of the National Institute of Mental Health. You'd feel pretty bad about that, right? That's been taking place in economics. And beyond that, why not? I enjoy writing. I like to think I'm a pretty good writer. Maybe a John Updike I'm not, but I think I can write as well as most of the people who do write on economics. And I happen to know my stuff, too. So why shouldn't I be trying to communicate it?
What is your opinion of economic journalism in general?
What's amazing is how thin it is. If you look at the people who actually know enough to make knowledgeable commentary on economics in the US press, it's probably a dozen or so, total. Several people at the [New York] Times, Peter Passell and Sylvia Nasar, are pretty good, and Lou Uchitelle works hard on it. Generally speaking, the writers for the Economist know what they're doing. But the stuff that they put out on economics in general-interest, intellectual magazines, say the New Yorker or the Atlantic Monthly, has been just awful.
What's wrong with it?
Both magazines have consistently favored people who don't know what they're talking about. The Atlantic at one point was very dedicated to the view that Japan was succeeding and the US was failing because the US was free-trade and Japan was not. The evidence that was being offered and the logic were just wrong. Or take Business Week; I subscribe to Business Week largely because in every issue I can count on there being something that I can make fun of.
If you had a chance to be a policymaker--to be in a position of power--would you take it?
That's a tough question. I would worry about whether or not I have the personality for it. There are two things that are difficult about it. One of them is you have to have the ability to organize other people to do work, and I'm just not a manager. The other is that you do have to suffer fools gladly and be able to negotiate your way through things.
In some ways, the task of being a policymaker, at least in your public role, is almost the opposite of your task as an outsider making commentary, which is to get people's attention and to force them to think differently. Most of the time, the objective of someone who's inside is to avoid saying anything that catches people's interest, to say something more or less true and relevant, but which doesn't set off alarm bells.
You said you spent an eye-opening year at the White House [in the Council of Economic Affairs in 1982-83]. What were your eyes opened to?
If you spend all of your life in academics, you tend to imagine both that academic research has more influence than it does and that the level of discussion in the real world is higher than it is. And if you spend some time in Washington, you realize that it's really a very primitive level of discussion most of the time. The difference between a real and a nominal interest rate--that was one that I saw in some Cabinet-level meetings. You could see that the then-Secretary of the Treasury just didn't understand that difference. So it changes your view about what kinds of economic analysis are actually useful.
You were a graduate student at MIT, and after a stint teaching at Yale, you returned to MIT. Then you left in 1994 for a professorship at Stanford University, but returned again two years later. What do you like about MIT?
Well, I've spent more of my life at MIT than anywhere else, so this is home. But there are a couple of things that are really special about the MIT economics department. One is the environment--it's the best place to be in touch with cutting-edge ideas in economics. This is a place where stuff is happening. And also, at many universities, the senior faculty are no-shows--they don't do a lot of teaching. Even though people here are frantically busy, everyone does their share of teaching. It keeps people around and interacting.
How would you describe the ambience of the department?
The faculty in this department are as good as any in the world, and they're all around. There are unplanned conversations in the hallways and open doors, and people poke their heads in other people's offices. The collegiality here--it's the best. And also, there's an MIT style of economics, which is relatively more issue-oriented and less formalistic. It's building models of issues suggested by real-world experience, as opposed to proving theorems about fundamental stuff. And I very much operate in this MIT tradition.
A version of this article appeared in MIT Tech Talk on February 3, 1999.