Plutocracy and Politics

SYNOPSIS: Krugman discusses issues of income inequality

Kevin Phillips's new book, "Wealth and Democracy," is a 422-page doorstopper, but much of the book's message is contained in one stunning table. That table, in the middle of a chapter titled "Millennial Plutographics," reports the compensation of America's 10 most highly paid C.E.O.'s in 1981, 1988 and 2000.

In 1981 those captains of industry were paid an average of $3.5 million, which seemed like a lot at the time. By 1988 the average had soared to $19.3 million, which seemed outrageous. But by 2000 the average annual pay of the top 10 was $154 million. It's true that wages of ordinary workers roughly doubled over the same period, though the bulk of that gain was eaten up by inflation. But earnings of top executives rose 4,300 percent.

What are we to make of this astonishing development? Stealing (and modifying) a line from Slate's Mickey Kaus, I'd say that an influential body of opinion has reacted to global warming and the emergence of an American plutocracy the same way: "It's not true, it's not true, it's not true, nothing can be done about it."

For many years there was a concerted effort by think tanks, politicians and intellectuals to deny that inequality was increasing in this country. Glenn Hubbard, now chairman of the Council of Economic Advisers, is a highly competent economist; but he demonstrated his fealty during the first Bush administration with a ludicrously rigged study purporting to show that income distribution doesn't matter because there is huge "income mobility" that is, that this decade's poor are likely to be next decade's rich and vice versa.

They aren't, of course. Even across generations there is a lot less income mobility than the folk wisdom about "shirt sleeves to shirt sleeves in three generations" would have it. Mr. Phillips shows that tales of downward mobility in once-wealthy families are greatly exaggerated; the descendants of 19th-century robber barons are still quite different from you and me.

But the Gilded Age looked positively egalitarian compared with the concentration of wealth now emerging in America. Pretty soon denial will no longer be possible. What will the apologists say next?

First we will hear that vast fortunes are justified because they are the reward for vast achievement. Here's where that table comes in handy, because it tells you what achievements actually get rewarded. Only one of the 10, Tyco's Dennis Kozlowski, has actually been indicted. But of the rest, three four, if you count John Chambers of Cisco were Andy Warhol C.E.O.'s: their companies were famous for 15 minutes, just long enough for the executives to cash in their stock options. The list also includes Gerald Levin, who engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage.

We'll also hear that in any case nothing can be done to limit the accumulation and inheritance of vast wealth. We'll be told, for example, that reinstating the estate tax would have devastating economic effects even though the great boom of the 1990's took place with a 55-percent tax on the largest inheritances. I've even been assured by some correspondents that inheritance taxes on the very rich are impractical, that they will always be evaded this in spite of the fact that in 1999 the estate tax raised about $15 billion from estates worth more than $5 million.

But it's not just a matter of collecting taxes. Mr. Phillips, a lifelong Republican, is most concerned not by economics per se but by the political consequences of wealth concentration. He warns that "the imbalance of wealth and democracy is unsustainable, at least by traditional yardsticks."

How will this imbalance be resolved? The economists Claudia Goldin and Robert Margo have dubbed the narrowing of income gaps that took place under F.D.R. the "Great Compression"; if I read Mr. Phillips right, he thinks something like that will happen again. But he also offers a bleak alternative: "Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime plutocracy by some other name."

Apocalyptic stuff. But Mr. Phillips has an impressive track record as a political visionary. What if he's right?

Originally published in The New York Times, 6.14.02