Argument Flares Over Rising Gap In US Incomes

ECONOMIST Paul Krugman claims to be suffering from "shock and dismay" at the extensive reaction to his "ballpark" calculation of the growing inequality of income in the United States. After accounting for an increase in the number of families in the US, he reckons that some 60 percent of the growth in after-tax income in the years between 1977 and 1989 went to the richest 1 percent of families.

Now two new studies are adding to a broadening debate on the nation's income patterns:

1. The Census Bureau issued a report Monday finding that nearly 1 out of 5 Americans who worked full time did not make enough money at the end of the 1980s to keep a family of four out of poverty.

2. The Economic Policy Institute released a study yesterday holding that 80 percent of Americans, including those with college education and white-collar workers, saw their wages decline in the final years of the 1980s. (See accompanying column.)

Krugman's calculation was reported on the front page of the New York Times March 5. From there it went to the campaign speeches of Democratic presidential candidate Bill Clinton. Then it was attacked by conservative economists. For instance, a Republican economist on the Joint Economic Committee staff, Christopher Frenze, calls it "the 'Big Lie' about the 1980s - that it was a decade of greed when the rich got richer and the poor, poorer."

The debate, Mr. Frenze notes, has become a partisan issue.

Mr. Krugman's analysis next prompted a staff memorandum from the Congressional Budget Office (CBO), since the Massachusetts Institute of Technology professor had reconfigured some of its statistics. The memo aimed at clarifying "some of the confusion."

The Wall Street Journal on Monday used the memo to attack editorially Krugman and the New York Times article.

Commenting on the criticism of Krugman's work, Harvard University economist Lawrence Katz says: "It all seems like a bunch of fuss over second-order things. It in no way changes the conclusion. Any way you cut it, income distribution shifted against those in the bottom." Krugman says the only similar major shift in the nation's distribution of income occurred in the years after President Franklin D. Roosevelt introduced his New Deal measures and World War II boosted the economy. In those years, he adds, the shift was toward more equity of incomes rather than inequity.

The CBO memo finds that between 1977 and 1989 after-tax income in the US rose by about $830 billion. Growth in the number of families by 102 million accounted for $580 billion of that. Of the remaining $250 billion, 70 percent went to the richest 1 percent of families and 46 percent to the next wealthiest 19 percent. Those two add up to more than 100 because of a decline in the income of families in the bottom 40 percent of incomes.

Those numbers indicate the Krugman calculations were conservative - as far as they went.

Then the CBO strives for "more accurate measures" by adjusting for the shrinkage in family size between 1977 and 1989. This calculation results in the share of the $250 billion in after-tax income going to the top 1 percent of families falling to 44 percent. A third CBO estimate, eliminating capital gains from the calculations, drops the percentage to 33 percent.

Even when capital gains that go in a large proportion to the wealthy are left out, the share of total after-tax income of the wealthiest 1 percent of families grew from 6 percent in 1977 to 10 percent in 1989, the CBO says. To economists, that is a huge change. "There has been nothing like it in any other advanced country," Krugman says.

Frenze says that untaxed capital gains from real estate and retirement funds for low- and middle-income families are mostly ignored in the CBO numbers. He says net capital losses are limited and partnership investment losses are mostly omitted. These factors mean the CBO calculations exaggerate the gains of the rich, he says.

But the academics say they are not impressed by such criticisms. "It is really irresponsible to be arguing against the data," Mr. Katz says.

The controversy over the gains of the top 1 percent has drawn attention from something more important - the decline in incomes of poorer families, he says.

Katz says he hopes the riots in Los Angeles will inspire the nation to do better in providing education and training to the unskilled and less-educated, who tend to have lower incomes.

Here Frenze agrees, saying that the labor force is not prepared sufficiently to take advantage of the expansion of jobs requiring high skills and more education. He talks about the breakdown of families and the rise in the number of single mothers, the high crime rates in inner cities, and welfare dependency.

Republicans, he says, emphasize creating more income, not redistributing it from the rich to the poor. "We don't think the government's job is to redistribute income."

By contrast, Krugman holds that among the reasons why income inequality increased in the US during the 1980s as compared to other industrial nations was that here taxes on the rich were lowered and the safety net weakened. "The government pitched in and helped the process along."