If you’re not so smart, why are you so rich?

by on August 23, 2006 at 7:14 am in Economics | Permalink

Andrew Samwick asked a very good question last week: if Paul Krugman says that rising wages at the top are due to nasty Republican policies and not due to rising returns to education/skill how does he explain his own high income?  Unfortunately Mark Thoma interpreted Samwick to be saying that Krugman was hypocritical.  That, however, was not the point at all.

The point is that Krugman is a very good example of someone in the top 1% of income – someone whose earnings have increased tremendously in the 1980s and 1990s thus generating much income inequality.  Krugman wants to say that earnings in the top 1% have gone up because of a reduction in the minimum wage or fewer labor unions.  Huh?  Remember, it’s not just inequality that has increased it’s absolute earnings at the top – where are these earnings coming from?

The idea that reductions in the bottom generate big earnings at the top reminds me of the theory, once popular among theorists of development, that the way to get rich is to steal from poor people.  At best what you can get from lower labor earnings at the bottom is a slightly higher return to capital in general – not a big return to a few people at the top.

Krugman says it’s Republican policies that are generating inequality  Or does he?  Let’s go to the tape.  Here’s what Krugman had to say when it was revealed that Enron paid him $50,000 for a speaking engagement.

My critics seem to think that there was something odd about Enron’s
willingness to pay a mere college professor that much money. But such sums
are not unusual for academic economists whose expertise is relevant to
current events…

Remember that this was 1999: Asia was in crisis, the world was a mess.
And justifiably or not, I was regarded as an authority on that mess. I
invented currency crises as an academic field, way back in 1979; anyone
who wants a sense of my academic credentials should look at the Handbook
of International Economics
, vol. 3, and check the index….

And I wasn’t an ivory-tower academic. In 1994 I had published an article… in August 1998 I had advocated temporary
capital controls …in 1998 I had taken on the Japanese
situation, with a series of papers…

I mention all this not as a matter of self-puffery, but to point out
that I was not an unknown college professor. On the contrary, I was a hot
property, very much in demand as a speaker to business audiences: I was
routinely offered as much as $50,000 to speak to investment banks and consulting
firms. They thought I might tell them something useful. For what it’s worth,
Citibank officials said – you can check it out with a Nexis search – that
a heads-up I gave them in 1996 about the risks of an Asian currency crisis
saved them hundreds of millions of dollars.

Now all this is amusing but that’s not my point (really, it’s just a side-benefit.)  My point is that Krugman’s earlier explanation for his high income was all about the rising return to education ("Look at all my papers!")  I would supplement this basic story with a greater winner-take-all market, more economies of scope etc.  (See also Tyler’s comments.)   

I think Krugman’s earlier explanation for his own income is mostly correct.  Where Krugman and I apparently disagree is that I think that the very same explanation Krugman gives for his income also explains why other people in the top 1% are earning more.  Krugman, however, no longer wants to talk about education and skill he wants to talk about nasty Republicans.

So let me rephrase Samwick’s question.  Paul, If you’re not so smart, why are you so rich?

Dr. Dan August 23, 2006 at 8:28 am

Alex,

Its simply because of you “stupids” chosing yet another “stupid” as the president.

I thought this Paul Krugman debate was over and you start here again as if Paul Krugman is the most insane
economist on earth. Guys, give him some levity.

William Goodwin August 23, 2006 at 9:05 am

Alex, I think one part of the answer to the question lies in this sentence: “At best what you can get from lower labor earnings at the bottom is a slightly higher return to capital in general – not a big return to a few people at the top.”

You’re assuming, without argument, that this is true. But it’s not necessarily so, either in a theoretical or empirical sense. If we assume that, as in the U.S., the returns to capita l and labor are relatively fixed (at least they have been relatively stable for eighty yeras or so, with a slight widening of the gap in the last few years), then one important question becomes how does the portion of corporate revenue that goes to labor get divided? It’s clear that in the last two decades a significantly larger sum of corporate revenue has gone to people at the top of the workforce (and especially to people at the very top of the workforce), rather than to peopla t t the bottom, middle, and upper middle part of the workforce. If that shift has been driven, in part, by policy — even if only insofar as policy shapes norms — then there may be something to what Krugman has said.

joan August 23, 2006 at 9:38 am

College professors average pay is around $80,000 but 5% make more than $567,000. Krugman was one of these, but I can’t help but wonder why. I doubt it is because they are better educated or even know more. I am sure the Fed had economists that could have given a heads up about the Asian currency crisis. Krugman’s hypocrisy is not unusual; it is human nature to be self serving. But this does not address the question he raises (publicizes) about the growing income inequality in the US. Given the number of studies on the measurement and causes that have been done, even Forbes Magazine, it clear he did not discover the problem. I do consider it a problem because I don’t see how you can have a stable free society with an income distribution that looks like a banana republic. How much of the anti-immigration anti-trade movement is being fueled by the stagnate wages? Some South American countries had GDP per capita near the US’s in the 1920,s and look where they are now. The idea that it is the product of having a republican president is not supported by the data. To the extent that government policy is responsible the increasing importance of lobbyist in crafting laws seems a more likely culprit.

Mcwop August 23, 2006 at 9:47 am

If I remember correctly, income inequality grew rapidly during Clinton’s term – perhaps more than under Bush’s. So the conclusion I should draw is that both Republican and Democrat policies cause income inequality? Just maybe, some other forces are at play.

don Hosek August 23, 2006 at 10:03 am

Kevin Drum has some charts on income inequality in his post here: http://www.washingtonmonthly.com/archives/individual/2006_08/009382.php

Apparently you recall incorrectly, Mcwop.

Zaoem August 23, 2006 at 10:16 am

I don’t see how Alex’s point deals with the issue at all: Krugman wouldn’t deny that there are high returns to education. His point is simply that income inequalities rise during Republican administrations and fall during Democratic ones (see here Krugman’s colleague Larry Bartels’ paper on this: http://www.princeton.edu/~bartels/income.pdf).

joan August 23, 2006 at 10:20 am

sorry – that link doesn’t work – use this one and click on college professor
http://money.cnn.com/magazines/moneymag/bestjobs/top50/index.html

Barkley Rosser August 23, 2006 at 12:50 pm

joan,

Fair enough that a source says this, but I do not believe it, and it appears to be
weakly supported by other numbers there. Thus, the 75th percentile is only at 106,000.
The highest specialty is dean of medicine (believable, although I think presidents
and maybe football coaches might beat them), whose median was about 350,000 and
their 75th percentile is 448,000. I note that the 567,000 figure was listed as
the “potential,” and it looks about right for maybe the absolutely highest official
salary in all of academia in the US, but then had that “5% make more” after it in
parentheses. Frankly, I think someone just screwed up on that one.

I can tell you at my mid-size, mid-tier university (James Madison, nearly 17,000
students) the highest salary is the president’s, and he only makes 290,000. So,
again, I think somebody screwed up.

Now, it is possible that at Harvard, Princeton (where Krugman is), MIT, and maybe
a couple of other places, there might be 5% making more than that figure out of a
combination of high salaries, book royalties, patents, consulting, and inherited
wealth. But I doubt many places see that, and the number is off by several orders
of magnitude in terms of official salaries. Again, I lay odds the number reported
is the max salary of any academic, but maybe without perks.

Mcwop August 23, 2006 at 1:31 pm
Dave Meleney August 23, 2006 at 2:00 pm

He saved Citibank hundreds of millions…and they paid him bupkis($50,000?)….what a nice guy! He may be trading on celebrity to some extent but I bet Brittany Spears never takes a percentage like that.

GS August 23, 2006 at 4:37 pm

In your post, it looks like you are comparing cross-sectional data with one persons longitudinally-collected data. Isn’t this a no-no in economics?

Oskar Shapley August 24, 2006 at 11:09 am

I’d be glad if Alex could also explain Paris Hilton’s income with returns to education.

Sam Clarke August 16, 2007 at 2:22 am

knowledge is not the most advantageous attribute in getting rich. Tenacity and character surpass smarts.

aion kina March 20, 2009 at 9:59 pm

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