Letter To the Secretary

Letter To the Secretary
By PAUL KRUGMAN
03/24/2006
Dear John Snow, secretary of the Treasury: I'm glad that you've
started talking about income inequality, which in recent years has
reached levels not seen since before World War II. But if you want to
be credible on the subject, you need to make some changes in your
approach.

First, you shouldn't claim, as you seemed to earlier this week, that
there's anything meaningful about the decline in some measures of
inequality between 2000 and 2003. Every economist realizes that, as
The Washington Post put it, ''much of the decline in inequality
during that period reflected the popping of the stock market
bubble,'' which led to a large but temporary fall in the incomes of
the richest Americans.

We don't have detailed data for more recent years yet, but the
available indicators suggest that after 2003, incomes at the top and
the overall level of inequality came roaring back. That surge in
inequality explains why, despite your best efforts to talk up the
economic numbers, most Americans are unhappy with the Bush economy.

I find it helpful to illustrate what's going on with a hypothetical
example: say 10 middle-class guys are sitting in a bar. Then the
richest guy leaves, and Bill Gates walks in.

Because the richest guy in the bar is now much richer than before,
the average income in the bar soars. But the income of the nine men
who aren't Bill Gates hasn't increased, and no amount of repeating
''But average income is up!'' will convince them that they're better
off.

Now think about what happened in 2004 (the figures for 2005 aren't in
yet, but it was almost certainly more of the same). The economy grew
reasonably fast in 2004, but most families saw little if any
improvement in their financial situation.

Instead, a small fraction of the population got much, much richer.
For example, Forbes tells us that the compensation of chief
executives at the 500 largest corporations rose 54 percent in 2004.
In effect, Bill Gates walked into the bar. Average income rose, but
only because of rising incomes at the top.

Speaking of executive compensation, Mr. Snow, it hurts your
credibility when you say, as you did in a recent interview, that
soaring pay for top executives reflects their productivity and that
we should ''trust the marketplace.'' Executive pay isn't set in the
marketplace; it's set by boards that the executives themselves
appoint. And executives' pay often bears little relationship to their
performance.

You yourself, as you must know, are often cited as an example. When
you were appointed to your present job, Forbes pointed out that the
performance of the company you had run, CSX, was ''middling at
best.'' Nonetheless, you were ''by far the highest-paid chief in the
industry.''

And the business careers of other prominent members of the
administration, including the president and vice president, seem to
demonstrate the truth of the adage that it's not what you know, it's
who you know. So my advice on the question of executive pay is: don't
go there.

Finally, you should stop denying that the Bush tax cuts favor the
wealthy. I know that administration number-crunchers have produced
calculations purporting to show that the tax cuts were tilted toward
the middle class. But using the right measure -- the effect of the
tax cuts on after-tax income -- the bias toward the haves and
have-mores is unmistakable.

According to the nonpartisan Tax Policy Center, once the Bush tax
cuts are fully phased in, they will raise the after-tax income of
middle-income families by 2.3 percent. But they will raise the
after-tax income of people like yourself, with incomes of more than
$1 million, by 7.3 percent.

And those calculations don't take into account the indirect effects
of tax cuts. If the tax cuts are made permanent, they'll eventually
have to be offset by large spending cuts. In practical terms, that
means cuts where the money is: in Social Security and Medicare
benefits. Since middle-income Americans will feel the brunt of these
cuts, yet received a relatively small tax break, they'll end up worse
off. But the wealthy will be left considerably wealthier.

Of course, my suggestions about how to improve your credibility would
force you to stop repeating administration talking points. But you're
the secretary of the Treasury. Your job is to make economic policy,
not to spout propaganda. Oh, wait.