Fuzzy Math by Krugman (2001) - why the Bush tax cut will be bad for the USA

[Oleander Ardens]

I have just limited time so I will just answer CR.

That's a fundamental misstatement of economics; there is not one set 'pie' where if one person gets a larger piece, another person must get a smaller piece.

Let us see the context from which you have taken your Krugman quote:

Still, you can understand why Novak assumed that we were No. 1. After all, we really are the richest major nation, with real G.D.P. per capita about 20 percent higher than Canada's. And it has been an article of faith in this country that a rising tide lifts all boats. Doesn't our high and rising national wealth translate into a high standard of living -- including good medical care -- for all Americans?

Well, no. Although America has higher per capita income than other advanced countries, it turns out that that's mainly because our rich are much richer. And here's a radical thought: if the rich get more, that leaves less for everyone else.

That statement -- which is simply a matter of arithmetic -- is guaranteed to bring accusations of ''class warfare.'' If the accuser gets more specific, he'll probably offer two reasons that it's foolish to make a fuss over the high incomes of a few people at the top of the income distribution. First, he'll tell you that what the elite get may look like a lot of money, but it's still a small share of the total -- that is, when all is said and done the rich aren't getting that big a piece of the pie. Second, he'll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.

These arguments for lack of concern are plausible. And they were entirely correct, once upon a time -- namely, back when we had a middle-class society. But there's a lot less truth to them now.

First, the share of the rich in total income is no longer trivial. These days 1 percent of families receive about 16 percent of total pretax income, and have about 14 percent of after-tax income. That share has roughly doubled over the past 30 years, and is now about as large as the share of the bottom 40 percent of the population. That's a big shift of income to the top; as a matter of pure arithmetic, it must mean that the incomes of less well off families grew considerably more slowly than average income. And they did. Adjusting for inflation, average family income -- total income divided by the number of families -- grew 28 percent from 1979 to 1997. But median family income -- the income of a family in the middle of the distribution, a better indicator of how typical American families are doing -- grew only 10 percent. And the incomes of the bottom fifth of families actually fell slightly.

As you see Krugman precisely answers your question, not surprisingly a bit better than I could have done.

I would like it to shift a possible discussion about Keynes into a new thread and refocus on the little interesting book "Fuzzy Math". It is already interesting enough for this thread.

OA

[Crazed Rabbit]

Nope, Krugman did not preemptively answer my critique. I said:

That's a fundamental misstatement of economics; there is not one set 'pie' where if one person gets a larger piece, another person must get a smaller piece.

Krugman attempts to preempt attacks based on other things:

First, he'll tell you that what the elite get may look like a lot of money, but it's still a small share of the total -- that is, when all is said and done the rich aren't getting that big a piece of the pie. Second, he'll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.

I'm not saying either thing.

CR

[Oleander Ardens]

I confess I'm quite amused. You say something very agreeable in your first quote, which content you share with a part of Krugman's quote. Yet you think you score a point by thinking he is wrong. It would help your understanding if you would care to read again his quote. Or would you care to elaborate your points?