May 19, 2009

Learning and Education With The 'Socratic Method'

In the dialogue ‘Meno’ Socrates shows that even an uneducated peasant can understand advanced geometry(extract below). Simply by asking questions that allowed the person to deduce what the answers were from their own understanding and experience. This method has become known as the ‘Socratic Method’ and I think Plato's dialogue 'Meno' is our first written demonstration of this method.

Contrasting this method to the one used in modern schools you might notice that a student is told what is right and what isn’t. He/she is taught a formula and then told to solve equation. This approach assumes that the student doesn’t know, cannot infer and must be stuffed with knowledge/information.

This process of ‘stuffing’ a student makes a student believe that they have learn’t something(random facts) and creates an illusion that they know.

Education comes from the word educare which means to “draw forth”

'Education' is known to have several root words. It is popularly known to be derived from the Latin root 'educo' meaning to 'educe'- to draw out. It also has root words, 'educare' and 'educere'. "educare' means to 'rear or to bring up' and it refers to child rearing, whereas, 'educere' which is derived from two roots 'e' and 'ducere' means to 'draw out from within' or to 'lead forth'.

Abraham Lincoln, Galileo, Leanardo da Vinci were all self taught and became some of the greatest men of our history. There are only two possibilities for this. Either genius cannot be encouraged in the masses of kids but just pops up out of the blue in a few rare individuals OR the school system doesn’t work as an ‘educational’ medium.

The most effective model of learning we know of comes from the word –educare – or education which is applied and developed through the Socratic Method used by the ancient Greeks. This method was used in the streets of ancient Greece and produced some of the biggest innovations known to man. They transformed our perception of the world around us with breakthroughs of knowledge in philosophy, math, science and politics.

The renaissance of Europe also had individuals who applied the Socratic method to their studies(through curiosity) and once more our knowledge was transformed with breakthroughs in logic, astronomy and technology, which led to the Industrial Revolution changing the world forever.

Why do we have so few 'geniuses'? The answer to this conundrum is simple. Schools have a system of teaching that assumes that a child is like an empty vase that has to filled. This is the opposite of the Socratic method of teaching. This argument is not a new on.

You have already seen how history is reduced to facts to memorize. This format is exactly of the attitude that the students lacks information and must be filled (kind robotic don’t you think?). If you take this method of filling students and apply it to a large scale population, we are teaching whole generations of students not to rely on themselves but on what they are told because their only experience of learning is through prescribed textbooks.

The following is a picture I took of a table that compares the Socratic Method with the Scientific Method from here.



Notice how similar they are. We have major breakthroughs with the scientific method and have technology that we couldn't even have dreamed of 400 years ago. In the same way that the scientific method helps with discovery, the socratic method helps with learning.


The following is a transcript of a teaching experiment, using the Socratic method, with a regular third grade class in a suburban elementary school. I present my perspective and views on the session, and on the Socratic method as a teaching tool, following the transcript. The class was conducted on a Friday afternoon beginning at 1:30, late in May, with about two weeks left in the school year. This time was purposely chosen as one of the most difficult times to entice and hold these children's concentration about a somewhat complex intellectual matter. The point was to demonstrate the power of the Socratic method for both teaching and also for getting students involved and excited about the material being taught. There were 22 students in the class. I was told ahead of time by two different teachers (not the classroom teacher) that only a couple of students would be able to understand and follow what I would be presenting. When the class period ended, I and the classroom teacher believed that at least 19 of the 22 students had fully and excitedly participated and absorbed the entire material. (read more)



Extract from 'Meno' by Plato:

Soc. Attend now to the questions which I ask him, and observe whether he learns of me or only remembers.

Men. I will.

Soc. Tell me, boy, do you know that a figure like this is a square?

Boy. I do.

Soc. And you know that a square figure has these four lines equal?

Boy. Certainly.

Soc. And these lines which I have drawn through the middle of the square are also equal?

Boy. Yes.

Soc. A square may be of any size?

Boy. Certainly.

Soc. And if one side of the figure be of two feet, and the other side be of two feet, how much will the whole be? Let me explain: if in one direction the space was of two feet, and in other direction of one foot, the whole would be of two feet taken once?

Boy. Yes.

Soc. But since this side is also of two feet, there are twice two feet?

Boy. There are.

Soc. Then the square is of twice two feet?

Boy. Yes.

Soc. And how many are twice two feet? count and tell me.

Boy. Four, Socrates.

Soc. And might there not be another square twice as large as this, and having like this the lines equal?

Boy. Yes.

Soc. And of how many feet will that be?

Boy. Of eight feet.

Soc. And now try and tell me the length of the line which forms the side of that double square: this is two feet-what will that be?

Boy. Clearly, Socrates, it will be double.

Soc. Do you observe, Meno, that I am not teaching the boy anything, but only asking him questions; and now he fancies that he knows how long a line is necessary in order to produce a figure of eight square feet; does he not?

Men. Yes.

Soc. And does he really know?

Men. Certainly not.

Soc. He only guesses that because the square is double, the line is double.

Men. True.

Soc. Observe him while he recalls the steps in regular order. (To the Boy.) Tell me, boy, do you assert that a double space comes from a double line? Remember that I am not speaking of an oblong, but of a figure equal every way, and twice the size of this-that is to say of eight feet; and I want to know whether you still say that a double square comes from double line?

Boy. Yes.

Soc. But does not this line become doubled if we add another such line here?

Boy. Certainly.

Soc. And four such lines will make a space containing eight feet?

Boy. Yes.

Soc. Let us describe such a figure: Would you not say that this is the figure of eight feet?

Boy. Yes.

Soc. And are there not these four divisions in the figure, each of which is equal to the figure of four feet?

Boy. True.

Soc. And is not that four times four?

Boy. Certainly.

Soc. And four times is not double?

Boy. No, indeed.

Soc. But how much?

Boy. Four times as much.

Soc. Therefore the double line, boy, has given a space, not twice, but four times as much.

Boy. True.

Soc. Four times four are sixteen-are they not?

Boy. Yes.

Soc. What line would give you a space of right feet, as this gives one of sixteen feet;-do you see?

Boy. Yes.

Soc. And the space of four feet is made from this half line?

Boy. Yes.

Soc. Good; and is not a space of eight feet twice the size of this, and half the size of the other?

Boy. Certainly.

Soc. Such a space, then, will be made out of a line greater than this one, and less than that one?

Boy. Yes; I think so.

Soc. Very good; I like to hear you say what you think. And now tell me, is not this a line of two feet and that of four?

Boy. Yes.

Soc. Then the line which forms the side of eight feet ought to be more than this line of two feet, and less than the other of four feet?

Boy. It ought.

Soc. Try and see if you can tell me how much it will be.

Boy. Three feet.

Soc. Then if we add a half to this line of two, that will be the line of three. Here are two and there is one; and on the other side, here are two also and there is one: and that makes the figure of which you speak?

Boy. Yes.

Soc. But if there are three feet this way and three feet that way, the whole space will be three times three feet?

Boy. That is evident.

Soc. And how much are three times three feet?

Boy. Nine.

Soc. And how much is the double of four?

Boy. Eight.

Soc. Then the figure of eight is not made out of a of three?

Boy. No.

Soc. But from what line?-tell me exactly; and if you would rather not reckon, try and show me the line.

Boy. Indeed, Socrates, I do not know.

Soc. Do you see, Meno, what advances he has made in his power of recollection? He did not know at first, and he does not know now, what is the side of a figure of eight feet: but then he thought that he knew, and answered confidently as if he knew, and had no difficulty; now he has a difficulty, and neither knows nor fancies that he knows.

Men. True.

Soc. Is he not better off in knowing his ignorance?

Men. I think that he is.

Soc. If we have made him doubt, and given him the "torpedo's shock," have we done him any harm?

Men. I think not.

Soc. We have certainly, as would seem, assisted him in some degree to the discovery of the truth; and now he will wish to remedy his ignorance, but then he would have been ready to tell all the world again and again that the double space should have a double side.

Men. True.

Soc. But do you suppose that he would ever have enquired into or learned what he fancied that he knew, though he was really ignorant of it, until he had fallen into perplexity under the idea that he did not know, and had desired to know?

Men. I think not, Socrates.

Soc. Then he was the better for the torpedo's touch?

Men. I think so.

Soc. Mark now the farther development. I shall only ask him, and not teach him, and he shall share the enquiry with me: and do you watch and see if you find me telling or explaining anything to him, instead of eliciting his opinion. Tell me, boy, is not this a square of four feet which I have drawn?

Boy. Yes.

Soc. And now I add another square equal to the former one?

Boy. Yes.

Soc. And a third, which is equal to either of them?

Boy. Yes.

Soc. Suppose that we fill up the vacant corner?

Boy. Very good.

Soc. Here, then, there are four equal spaces?

Boy. Yes.

Soc. And how many times larger is this space than this other?

Boy. Four times.

Soc. But it ought to have been twice only, as you will remember.

Boy. True.

Soc. And does not this line, reaching from corner to corner, bisect each of these spaces?

Boy. Yes.

Soc. And are there not here four equal lines which contain this space?

Boy. There are.

Soc. Look and see how much this space is.

Boy. I do not understand.

Soc. Has not each interior line cut off half of the four spaces?

Boy. Yes.

Soc. And how many spaces are there in this section?

Boy. Four.

Soc. And how many in this?

Boy. Two.

Soc. And four is how many times two?

Boy. Twice.

Soc. And this space is of how many feet?

Boy. Of eight feet.

Soc. And from what line do you get this figure?

Boy. From this.

Soc. That is, from the line which extends from corner to corner of the figure of four feet?

Boy. Yes.

Soc. And that is the line which the learned call the diagonal. And if this is the proper name, then you, Meno's slave, are prepared to affirm that the double space is the square of the diagonal?

Boy. Certainly, Socrates.

Soc. What do you say of him, Meno? Were not all these answers given out of his own head?

Men. Yes, they were all his own.

Soc. And yet, as we were just now saying, he did not know?

Men. True.

Soc. But still he had in him those notions of his-had he not?

Men. Yes.

Soc. Then he who does not know may still have true notions of that which he does not know?

Men. He has.

Soc. And at present these notions have just been stirred up in him, as in a dream; but if he were frequently asked the same questions, in different forms, he would know as well as any one at last?

Men. I dare say.

Soc. Without any one teaching him he will recover his knowledge for himself, if he is only asked questions?

Men. Yes.

Soc. And this spontaneous recovery of knowledge in him is recollection?

Men. True.

Soc. And this knowledge which he now has must he not either have acquired or always possessed?

Men. Yes.

Soc. But if he always possessed this knowledge he would always have known; or if he has acquired the knowledge he could not have acquired it in this life, unless he has been taught geometry; for he may be made to do the same with all geometry and every other branch of knowledge. Now, has any one ever taught him all this? You must know about him, if, as you say, he was born and bred in your house.

Men. And I am certain that no one ever did teach him.

Soc. And yet he has the knowledge?

Men. The fact, Socrates, is undeniable.



More about this sort of learning and teaching with Win Wenger;

o   Preface:  Einstein and Socrates
Two historically powerful systems of thought combined
 How to Teach Smarter, Not Harder!
One of the outstanding features of the Project Renaissance forms of modern Socratic Method is their simplicity and ease...
 Feeding the Loop
A new theory of human development, learning, creativity and genius.
 Freenoting
A writing brainstorm in some context can bring up a wealth of insights you didn't think you knew.


 Borrowed Genius
How to build skills by borrowing from a true genius.

 Mutual Listening
For miracles in the classroom.

 Socratic Method
More than just a great technique for learning and understanding, here's the core of Win's new book in the making.

A Few Informational Links On Clean Energy


General Links:


CARSON CITY, Nev.—As lawmakers rush through the final weeks of their 2009 session, they're working out details on several bills to help Nevada overcome obstacles to realizing its full potential as a renewable energy leader.
Nevada's ample wind, sun and hot springs have put the state in a favorable position to develop renewable energy resources, earning it the nickname the "Saudi Arabia of alternative energy."

While Congress continues to debate renewable energy portfolios and infrastructure development, individual states and companies continue to move forward.

On Wednesday, Pacific Gas and Electric announced a deal with solar company, BrightSource Energy for the production of 1,310 megawatts of solar thermal power. There are seven projects in the deal, with the first expected to begin operations in 2012, and all being operational by 2017.


With politicians pushing adoption of renewable energy in the United States and Europe, the last few years have seen a surge in plans for wind farms--both on land and sea. But wind power isn't viable everywhere--and prime coastal spots are often already developed.
So some wind-turbine makers are shifting their focus toward building bigger wind turbines that can harvest the lower-speed winds that are more readily available. This next generation of wind turbines is no small matter: their rotors have a diameter the size of a football field.


Australia to build largest solar energy plant
Published: Sunday 17 May 2009 16:02 UTC
Last updated: Sunday 17 May 2009 16:02 UTC
The Australian Prime Minister Kevin Rudd has announced plans to build the world's largest solar energy plant. The plant will generate three times as much energy as the current largest solar plant in California in the United States. The prime minister called sunshine "Australia's biggest natural resource".



Introduction to Geothermal Power

Heat from the earth can be used as an energy source in many ways, from large and complex power stations to small and relatively simple pumping systems. This heat energy, known as geothermal energy, can be found almost anywhere—as far away as remote deep wells in Indonesia and as close as the dirt in our backyards. Tapping geothermal energy is an affordable and sustainable solution to reducing our dependence on fossil fuels, and the global warming and public health risks that result from their use.

In the Western United States and in other places around the world, geothermal energy produces electricity in large power plants. Today, geothermal energy provides about five percent of California's electricity, and 25 percent of El Salvador's.[1] In Idaho and Iceland, geothermal heat is used to warm buildings and for other applications. In thousands of homes and buildings across the United States, geothermal heat pumps use the steady temperatures just underground to heat and cool buildings, cleanly and inexpensively.


Links From Bill Moyers


Here is a collection of links that stress how you can practically help to preserve our biodiversity.

Moyers of Energy and Environment

Links from PBS NOW



Can something as common as building materials
represent an opportunity to create jobs, help the needy, and save the planet? This week, NOW looks at two "green" projects keeping furniture, paint, cabinets, and other building supplies out of landfills and getting them into the hands of those who need them most. Will they be devastated by the economic meltdown, or do they signal a possible way out?


A California Assemblywoman's personal environmental mission to reduce auto emissions inspired her colleagues to act and other states to follow suit. Supported by favorable federal court decisions, encouraged by Governor Arnold Schwarzenegger, and armed with new laws, her state is now on the cutting edge of efforts to reduce the carbon footprint of everything from American power plants to automobiles.


Will the green energy dream come to fruition? This week NOW explores obstacles to the promise of renewables—energy generated from natural resources such as sunlight, wind, and rain.

As America looks to dramatically increase its use of renewable energy, an inconvenient reality stands in the way: the need to upgrade the country's antiquated electricity grid. Part of that overhaul involves the construction of gigantic and expensive long-distance transmission lines to carry clean energy from remote sites to population centers.

NOW travels to California, which has the most ambitious clean energy plan in the nation. But the state's efforts face stiff opposition from property owners and conservationists who prefer renewable energy from "local sources," such as photovoltaic rooftop solar panels.

Complicating the matter are claims that the transmission lines are not actually carrying renewable energy at all, but represent a thinly-disguised strategy to stick to old energy practices.

The green energy dream: Why it may not happen.

Can Coal be Earth-Friendly?
Can America's cheapest and most plentiful energy resource be produced without burning the environment?

A rise in sea levels isn't the only impact global warming is having on the world's oceans. A growing body of evidence suggests that climate change is also affecting ocean currents and the chemistry of the seas, with potentially catastrophic results.

May 17, 2009

BOOK - Unequal Democracy: The Political Economy of the New Gilded Age By Larry M. Bartels

Book is published by Princeton University Press

Description

Unequal Democracy debunks many myths about politics in contemporary America, using the widening gap between the rich and the poor to shed disturbing light on the workings of American democracy. Larry Bartels shows that increasing inequality is not simply the result of economic forces, but the product of broad-reaching policy choices in a political system dominated by partisan ideologies and the interests of the wealthy.

Bartels demonstrates that elected officials respond to the views of affluent constituents but ignore the views of poor people. He shows that Republican presidents in particular have consistently produced much less income growth for middle-class and working-poor families than for affluent families, greatly increasing inequality. He provides revealing case studies of key policy shifts contributing to inequality, including the massive Bush tax cuts of 2001 and 2003 and the erosion of the minimum wage. Finally, he challenges conventional explanations for why many voters seem to vote against their own economic interests, contending that working-class voters have not been lured into the Republican camp by "values issues" like abortion and gay marriage, as commonly believed, but that Republican presidents have been remarkably successful in timing income growth to cater to short-sighted voters.

Unequal Democracy is social science at its very best. It provides a deep and searching analysis of the political causes and consequences of America's growing income gap, and a sobering assessment of the capacity of the American political system to live up to its democratic ideals.

Larry M. Bartels is the Donald E. Stokes Professor of Public and International Affairs and director of the Center for the Study of Democratic Politics at Princeton University.


The following is a sample chapter located here.

CHAPTER 1

The New Gilded Age

In the first sentence of one of the greatest works of modern po liti cal science, Robert Dahl posed a question of profound importance for democratic theory and practice: “In a po liti cal system where nearly every adult may vote but where knowledge, wealth, social position, access to officials, and other resources are unequally distributed, who actually governs?”1

Dahl’s answer to this question, for one American city in the late 1950s, was that po liti cal power was surprisingly widely dispersed. Examining politics and policy making in New Haven, Connecticut, he concluded that shifting, largely distinct co ali tions of elected and unelected leaders influenced key decisions in different issue areas. This pluralistic pattern was facilitated by the fact that many individuals and groups with substantial resources at their disposal chose not to devote those resources to political activity. Even “economic notables”—the wealthy property own ers, businessmen, and bank directors constituting the top tier of New Haven’s economic elite—were “simply one of the many groups out of which individuals sporadically emerge to influence the policies and acts of city officials.”2

The significance of Dahl’s question has been magnified, and the pertinence of his answer has been cast in doubt, by dramatic economic and po liti cal changes in the United States over the past half- century. Economically, America has become vastly richer and vastly more unequal. Perhaps most strikingly, the share of total income going to people at the level of Dahl’s “economic notables”—the top 0.1% of income- earners—has more than tripled, from 3.2% in the late 1950s to 10.9% in 2005. The share going to the top 1% of income- earners—a much broader but still very affluent group—more than doubled over the same period, from 10.2% to 21.8%.3 It seems natural to wonder whether the pluralistic democracy Dahl found in the 1950s has survived this rapid concentration of vast additional resources in the hands of America’s wealthiest citizens.4

Meanwhile, the political process has evolved in ways that seem likely to reinforce the advantages of wealth. Politi cal campaigns have become dramatically more expensive since the 1950s, increasing the reliance of elected officials on people who can afford to help finance their bids for reelection. Lobbying activities by corporations and business and professional organizations have accelerated greatly, outpacing the growth of public interest groups. Membership in labor unions has declined substantially, eroding the primary mechanism for or ga nized repre sen ta tion of working people in the governmental process.

How have these economic and po liti cal developments affected “who actually governs?” In 2004, the Task Force on In equality and American Democracy, convened by the American Politi cal Science Association, concluded that po liti cal scientists know “astonishingly little” about the “cumulative effects on American democracy” of these economic and po liti cal changes. However, based on what we do know, the task force members worried “that rising economic in equality will solidify longstanding disparities in po liti cal voice and influence, and perhaps exacerbate such disparities.”5

This book provides a multifaceted examination of the po liti cal causes and consequences of economic in equality in contemporary America. Politi cal scientists since Aristotle have wrestled with the question of whether substantial economic in equality is compatible with democracy. My evidence on that score is not encouraging. I find that elected officials are utterly unresponsive to the policy preferences of millions of low- income citizens, leaving their po liti cal interests to be served or ignored as the ideological whims of incumbent elites may dictate. Dahl suggested that democracy entails “continued responsiveness of the government to the preferences of its citizens, considered as po liti cal equals.”6 The contemporary United States is a very long way from meeting that standard.

Economic in equality clearly has profound ramifications for democratic politics. However, that is only half the story of this book. The other half of the story is that politics also profoundly shapes economics. While technological change, globalization, demographic shifts, and other economic and social forces have produced powerful pressures toward greater in equality in recent decades, politics and public policy can and do significantly reinforce or mitigate those pressures, depending on the po liti cal aims and priorities of elected officials. I trace the impact of public policies on changes in the U.S. income distribution over the past half- century, from the tripled income share of Dahl’s “economic notables” at the top to the plight of minimum wage workers at the bottom. I find that partisan politics and the ideological convictions of po liti cal elites have had a substantial impact on the American economy, especially on the economic fortunes of middle- class and poor people. Economic in equality is, in substantial part, a political phenomenon.

In theory, public opinion constrains the ideological convictions of po liti cal elites in democratic po liti cal systems. In practice, however, elected officials have a great deal of political leeway. This fact is strikingly illustrated by the behavior of Democratic and Republican senators from the same state, who routinely pursue vastly different policies while “representing” precisely the same constituents. On a broader historical scale, political latitude is also demonstrated by consistent, marked shifts in economic priorities and perfor mance when Democrats replace Republicans, or when Republicans replace Democrats, in the White House. In these respects, among others, conventional democratic theory misses much of what is most interesting and important about the actual workings of the American po liti cal system.

My examination of the partisan politics of economic in equality, in chapter 2, reveals that Democratic and Republican presidents over the past half-century have presided over dramatically different patterns of income growth. On average, the real incomes of middle- class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working poor families have grown six times as fast under Democrats as they have under Republicans. These substantial partisan differences persist even after allowing for differences in economic circumstances and historical trends beyond the control of individual presidents. They suggest that escalating in equality is not simply an inevitable economic trend— and that a great deal of economic in equality in the contemporary United States is specifically attributable to the policies and priorities of Republican presidents.

Any satisfactory account of the American political economy must therefore explain how and why Republicans have had so much success in the American electoral arena despite their startling negative impact on the economic fortunes of middle- class and poor people. Thus, in chapter 3, I examine contemporary class politics and partisan change, testing the popu lar belief that the white working class has been lured into the Republican ranks by hot-button social issues such as abortion and gay marriage. Contrary to this familiar story, I find that low- income whites have actually become more Democratic in their presidential voting behavior over the past half-century, partially counterbalancing Republican gains among more affluent white voters. Moreover, low- income white voters continue to attach less weight to social issues than to economic issues—and they attach less weight to social issues than more affluent white voters do. The familiar image of a party system transformed by Republican gains among working- class cultural conservatives turns out to be largely mythical.

Then why have Republican presidential candidates fared so well over the past half- century? My analysis in chapter 4 identifies three distinct biases in politi cal accountability that explain much of their success. One is a myopic focus of voters on very recent economic perfor mance, which rewards Republicans’ surprising success in concentrating income growth in election years. Another is the peculiar sensitivity of voters at all income levels to high- income growth rates, which rewards Republicans’ success in generating election- year income growth among affluent families specifically. Finally, the responsiveness of voters to campaign spending rewards Republicans’ consistent advantage in fundraising. Together, these biases account three times over for the Republican Party’s net advantage in presidential elections in the post- war era. Voters’ seemingly straightforward tendency to reward or punish the incumbent government at the polls for good or bad economic perfor mance turns out to be warped in ways that are both fascinating and politically crucial.

In chapter 5, I turn to citizens’ views about equality; their attitudes toward salient economic groups such as rich people, poor people, big business, and labor unions; and their perceptions of the extent, causes, and consequences of economic in equality in contemporary America. My analysis reveals considerable concern about in equality among ordinary Americans and considerable sympathy for working- class and poor people. However, it also reveals a good deal of ignorance and misconnection between values, beliefs, and policy preferences among people who pay relatively little attention to politics and public affairs, and a good deal of politically motivated misperception among better-informed people. As a result, political elites retain considerable latitude to pursue their own policy ends.

Chapters 6, 7, and 8 provide a series of case studies of politics and policy making in issue areas with important ramifications for economic in equality. Chapter 6 focuses on the Bush tax cuts of 2001 and 2003, which dramatically reduced the federal tax burdens of wealthy Americans. I find that public opinion regarding the Bush tax cuts was remarkably shallow and confused, considering the multitrillion- dollar stakes. More than three years after the 2001 tax cut took effect, 40% of the public said they had not thought about whether they favored or opposed it, and those who did take a position did so largely on the basis of how they felt about their own tax burden. Views about the tax burden of the rich had no apparent impact on public opinion, despite the fact that most of the benefits went to the top 5% of taxpayers; egalitarian values reduced support for the tax cut, but only among strong egalitarians who were also politically well informed.

Chapter 7 focuses on the campaign to repeal the federal estate tax. As with the Bush tax cuts more generally, I find that repeal of the estate tax is remarkably popu lar among ordinary Americans, regardless of their political views and economic circumstances, and despite the fact that the vast majority of them never have been or would be subject to estate taxation. Moreover, the strange appeal of estate tax repeal long predates the efforts of conservative interest groups in the 1990s to manufacture public opposition to the estate tax. Thus, the real political mystery is not why the estate tax was phased out in 2001, but why it survived for more than 80 years—and will likely return when the phaseout expires in 2011. The simple answer is that the views of liberal elites determined to prevent repeal have been more consequential than the views of ordinary citizens.

In chapter 8, I turn from wealthy heirs to working poor people and the eroding minimum wage. Here, too, the views of ordinary citizens seem to have had very little impact on public policy. The real value of the minimum wage has declined by more than 40% since the late 1960s, despite remarkably strong and consistent public support for minimum wage increases. My analysis attributes this erosion to the declining political clout of labor unions and to shifts in partisan control of Congress and the White House. As with the estate tax, the politics of the minimum wage underscores the ability of determined elites in the American political system to postpone or prevent policy shifts. However, in this case the determined elites have not been liberal Democrats intent on taxing the bequests of millionaires, but conservative Republicans intent on protecting the free market (and low- wage employers) from the predations of people earning $5.15 per hour.

My case studies of the Bush tax cuts, estate tax repeal, and the eroding minimum wage shed light on both the political causes and the political consequences of escalating economic in equality in contemporary America. In chapter 9, I attempt to provide a more general answer to Dahl’s fundamental question: Who governs? I examine broad patterns of policy making across a wide range of issues, focusing on disparities in the responsiveness of elected officials to the views of their constituents. I find that the roll call votes cast by U.S. senators are much better accounted for by their own partisanship than by the preferences of their constituents. Moreover, insofar as constituents’ views do matter, political influence seems to be limited entirely to affluent and middle- class people. The opinions of millions of ordinary citizens in the bottom third of the income distribution have no discernible impact on the behavior of their elected representatives. These disparities in repre sen ta tion persist even after allowing for differences between high- and low- income citizens in turnout, political knowledge, and contact with public officials.

Writing in the 1980s, at an early stage in the most recent wave of escalating in equality, political scientists Sidney Verba and Gary Orren depicted an ongoing back- and- forth between the powerful forces of economic in equality and political equality: “political equality . . . poses a constant challenge to economic in equality as disadvantaged groups petition the state for redress. Egalitarian demands lead to equalizing legislation, such as the progressive income tax. But the continuing disparities in the economic sphere work to limit the effectiveness of such laws, as the eco nom ical ly advantaged groups unleash their greater resources in the political sphere. These groups lobby for tax loopholes, hire lawyers and accountants to maximize their benefit from tax laws, and then deduct the costs.”7

In the long run of American political history, Verba and Orren’s depiction seems apt. However, in the current economic and political environment it is easy to wonder whether the “constant challenge to economic in equality” posed by the ideal of political equality is really so constant or, in the end, so effective. This book provides strong evidence that economic in equality impinges powerfully on the political process, frustrating the egalitarian ideals of American democracy. The countervailing impact of egalitarian ideals in constraining disparities in the economic sphere seems considerably more tenuous.

ESCALATING ECONOMIC IN EQUALITY

Most Americans have only a vague sense of the contours of the nation’s income distribution—especially for parts of the income distribution that extend beyond their personal experience. Annual tabulations published by the U.S. Census Bureau provide a useful summary of the incomes of families at different points in the distribution. For example, in 2005 (the most recent year for which such tabulations are available), the typical American family had a total pre- tax income of $56,200. More than 15 million families—one out of every five—earned less than $25,600. A similar number earned more than $103,100. Even higher in the distribution, the richest 5% of American families had incomes of more than $184,500.8

The Census Bureau provides parallel annual family income tabulations going back to 1947 for families at the 20th, 40th, 60th, 80th, and 95th percentiles of the income distribution. These tabulations constitute the longest consistent data series included in the Census Bureau’s Historical Income Tables.9 Although they do not reflect the economic fortunes of very poor families at one extreme or very wealthy families at the other extreme, they do represent a broad range of economic circumstances, encompassing working poor families at the 20th percentile, middle- class families at the 40th and 60th percentiles, affluent families at the 80th percentile, and even more affluent families at the 95th percentile. Thus, they provide an invaluable record of the changing economic fortunes of American families over a period of almost six de cades.10

The distribution of income in American society has shifted markedly in that time. The broad outlines of this transformation are evident in figure 1.1, which shows how the real pre- tax incomes (in thousands of 2006 dollars) of families at various points in the income distribution have changed since 1947. It is clear from figure 1.1 that the period since World War II has seen substantial gains in real income for families throughout the income distribution, but especially for those who were already well off. The average rate of real income growth over the entire period covered by the figure increased uniformly with each step up the income distribution, from about 1.4% per year for families at the 20th percentile to 2% per year for families at the 95th percentile.

The difference between 1.4% and 2% may sound small, but it has compounded into a dramatic difference in cumulative real income growth over the past half- century: 118% for families at the 20th percentile versus 199% for families at the 95th percentile. Of course, the contrast in economic gains between poor families and rich families is much starker in absolute terms than it is in percentage terms. Mea sured in 2006 dollars, the real incomes of families at the 20th percentile increased by less than $15,000 over this period, while the real incomes of families at the 95th percentile increased by almost $130,000.

These figures convey a striking disparity in the economic fortunes of rich and poor American families over the past half- century. However, they fail to capture another important difference in the experience of families near the bottom of the income distribution and those near the top: poor families have been subject to considerably larger fluctuations in income growth rates. For example, families at the 20th percentile experienced declining real incomes in 20 of the 58 years represented in figure 1.1, including seven declines of 3% or more; by comparison, families at the 95th percentile have experienced only one decline of 3% or more in their real incomes since 1951.

Although it may not be immediately apparent in figure 1.1, the pattern of income growth in the past three de cades has differed sharply from the pattern in the first half of the post- war era. In the 1950s and 1960s families in every part of the income distribution experienced robust income growth. Since the mid- 1970s income growth has been a good deal slower and a good deal less evenly distributed. These differences are evident in figure 1.2, which compares cumulative rates of real income growth for families in various parts of the income distribution from 1947 to 1974 and from 1974 to 2005.11

From the late 1940s through the early 1970s American income growth was rapid and remarkably egalitarian, at least in percentage terms. Indeed, the real incomes of working poor families (at the 20th percentile of the income distribution) and affluent families (at the 80th percentile) both grew by the same 98% over this period. Income growth was slightly higher for middle- class families and slightly lower for families at the 95th percentile, but every income group experienced real income growth between 2.4% and 2.7% per year.

Over the past three de cades, income growth has been much slower and much less evenly distributed. Even for families near the top of the income distribution, the average rate of real income growth slowed substantially (from 2.4% per year to 1.6% per year for families at the 95th percentile). For less affluent families, real income growth slowed to a crawl. Families at the 60th percentile experienced real income growth of less than 1% per year—down from 2.7% in the earlier period. The real incomes of families at the 20th percentile grew by only 0.4% per year—down from 2.6% in the earlier period. Much of the income growth that did occur was attributable to increases in working hours, especially from the increasing participation of women in the workforce.

Even the disparities in income growth for affluent, middle- class, and poor American families charted in figures 1.1 and 1.2 understate the extent of escalating in equality over the past 30 years, since much of the real action has been concentrated at the very top of the income distribution. While the Census Bureau figures document the experience of families affluent enough to have reached the 95th percentile of the national income distribution, they shed no light on what has happened to people with much higher incomes. As it turns out, income gains among the ultra- rich have vastly outpaced those among the merely affluent.

Economists Thomas Piketty and Emmanuel Saez have used information collected by the Internal Revenue Ser vice to track the economic fortunes of people much higher up the economic ladder than the Census Bureau tabulations reach. Figure 1.3 presents their tabulations of the real incomes (in millions of 2006 dollars) of taxpayers at the 95th, 99th, 99.5th, 99.9th, and 99.99th percentiles of the income distribution since 1947.12

What is most striking in figure 1.3 is that, even at this elevated income level, income growth over the past 25 years has accelerated with every additional step up the economic ladder. For example, while the real income of taxpayers at the 99th percentile doubled between 1981 and 2005, the real income of taxpayers at the 99.9th percentile nearly tripled, and the real income of taxpayers at the 99.99th percentile—a hyper-rich stratum comprising about 13,000 taxpayers—increased fivefold. The real income cutoff for this hyper-rich stratum (not the average income but the lowest income of taxpayers in this group) was virtually constant for three de cades following the end of World War II; but around 1980 it began to escalate rapidly, from about $1.2 million to $6.2 million by 2000. Although the real incomes of people in this group declined significantly in the stock market slump of 2000–2002, by 2005 they were once again in excess of $6 million.

In 2005, the New York Times published a 20- year retrospective on the list of the 400 wealthiest Americans produced annually by Forbes magazine. The Times noted that the average net worth of these 400 economic luminaries increased more than fourfold over that period (from $600 million in 1985 to $2.81 billion in 2005) and that their combined net wealth in 2005 exceeded the gross domestic product of Canada. “The median house hold income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer.”13

Another illuminating way to look at Piketty and Saez’s tabulations is in terms of the shares of total income going to people in different economic strata. Figure 1.4 shows these income shares for the top 5% of taxpayers (the solid line) and the top 1% (the dotted line) over a period of almost 90 years. For the period since World War II the picture here is quite consistent with the picture presented in figures 1.1 and 1.3. The share of income going to the rich remained remarkably constant from the mid- 1940s through the 1970s and then began to escalate rapidly. For example, the top 5% of taxpayers accounted for 23.0% of total income in 1981 but 37.2% in 2005. The top 1% accounted for 10.0% of total income in 1981 but 21.8% in 2005; after declining gradually over most of the twentieth century, their share of the pie more than doubled in the course of a single generation.14

Two other features of the historical trends in income shares stand out in figure 1.4. One is that the increasing share of income going to people in the top 5% of the distribution is entirely accounted for by the increasing share going to the top 1%; the distance between the solid and dotted lines, which represents the share going to people between the 95th and 99th percentiles, remained virtually constant. As in figure 1.3, it is clear here that the really dramatic economic gains over the past 30 years have been concentrated among the extremely rich, largely bypassing even the vast majority of ordinary rich people in the top 5% of the income distribution. Indeed, economists Frank Levy and Peter Temin have used Piketty and Saez’s data to show that more than four- fifths of the total increase in Americans’ real pre- tax income between 1980 and 2005 went to the top 1% of taxpayers. As a front-page story in the New York Times put it, “The hyper-rich have emerged in the last three de cades as the biggest winners in a remarkable transformation of the American economy.”15

Because Piketty and Saez’s tabulations go back to the advent of the federal income tax system, they also provide important historical perspective on the absolute magnitude of in equality in the contemporary American income distribution. Although it is impossible to compare current levels of in equality with those prevailing in the original Gilded Age in the late nineteenth century, it is possible to compare the position of today’s economic elite with their counterparts in what most economic historians consider the other notable highpoint of economic in equality in American history, the 1920s. Whether we focus on the share of income going to the top 5% of taxpayers or the share going to the even richer top 1%, figure 1.4 suggests that current levels of in-equality rival those of the Roaring Twenties, before the Great Depression wiped out much of the financial wealth of the nation’s reigning upper class. By this metric, America’s New Gilded Age is a retrogression of historic scope.16

INTERPRETING IN EQUALITY

What are we to make of these economic trends? For some people,they reflect an era of economic dynamism and expanding opportunity. Others are made uneasy by the sheer magnitude of the gulf between the rich and the poor in contemporary America, even if they cannot quite pinpoint why. Still others are less concerned about in equality per se than about the absolute living standards of the poor or about the extent of their opportunity to work their way up the economic ladder.

For the most part, discussions of escalating in equality have focused on four related issues: economic growth, economic mobility, fairness, and inevitability. One crucial—and highly contentious—question is whether dramatic income gains among the hyper-rich “trickle down” to middle- class and poor people, increasing the size of everyone’s piece of the pie. After all, even the influential liberal political theorist John Rawls argued that in equality is just insofar as it contributes to the well- being of the least well- off members of society.17

Many ordinary Americans believe that “large differences in income are necessary for America’s prosperity,” as one standard survey question puts it.18 However, economists who have studied the relationship between in equality and economic growth have found little evidence that large disparities in income and wealth promote growth.19 There is not even much hard evidence in support of the commonsense notion that progressive tax rates retard growth by discouraging economic effort. Indeed, one liberal economist, Robert Frank, has written that “the lessons of experience are downright brutal” to the notion that higher taxes would stifle economic growth by causing wealthy people to work less or take fewer risks.20

Much of the economic argument for in equality hinges on the assumption that large fortunes will be invested in productive economic activities. In fact, however, there is some reason to worry that the new hyper-rich are less likely to invest their wealth than to fritter it away on jewelry, yachts, and caviar. According to one press report, the after-tax savings rate of house holds in the top 5% of the income distribution fell by more than half from 1990 through 2006 (from 13.6% to 6.2%), while real sales growth in the luxury retail industry averaged more than 10% per year.21

Even if in equality does promote overall economic growth, that does not necessarily imply that it contributes to the well- being of the least well- off members of society. The benefits of economic growth may or may not “trickle down” to the poor. Although it is common for Americans to suppose that the nation’s collective wealth makes even poor people better off than they otherwise would be, the reality is that poor people in America seem to be distinctly less well off than poor people in countries that are less wealthy but less unequal. A careful comparison of the living standards of poor children in 13 rich democracies in the 1990s found the United States ranking next to last, 20% below Canada and France and 35% below Norway, despite its greater overall wealth.22 Moreover, even holding constant the absolute economic status of the least well- off, there is some reason to worry that in equality itself may have deleterious social implications in the realms of family and community life, health, and education.23

Another important strand of debate focuses on the extent of economic mobility and the relationship between in equality and mobility. As one journalistic account put it, “Mobility is the promise that lies at the heart of the American dream. It is supposed to take the sting out of the widening gulf between the have- mores and the have- nots. There are poor and rich in the United States, of course, the argument goes; but as long as one can become the other, as long as there is something close to equality of opportunity, the differences between them do not add up to class barriers.”24

The dynamism of the modern economy is certainly reflected in the extent of turnover at the pinnacle of the income distribution. For example, the New York Times’ 20- year retrospective on the Forbes list of the 400 richest Americans counted 255 “self- made fortunes” in 2005, up from 165 in 1985. The number of people on the list with undergraduate degrees from Harvard or Yale declined (from 37 to 25), while the number from California nearly doubled (from 49 to 96).25

Of course, the composition of the Forbes 400 may or may not reflect patterns of economic mobility in American society as a whole. Leaving aside this handful of billionaires, to what extent are the economic fortunes of ordinary Americans determined by their starting points in the economic hierarchy? One commentator, Michael Kinsley, warned that “immobility over generations is what congeals financial differences into old- fashioned, Eu ro pe an- style social class.”26 However, recent evidence suggests that the United States already has “significantly less economic mobility than Canada, Finland, Sweden, Norway, and possibly Germany; and the United States may be a less eco nom ical ly mobile society than Britain.”27 These comparisons suggest—contrary to the fervent beliefs of many Americans— that the contemporary United States outclasses Eu rope in the rigidity of its hidebound Eu ro pe an- style class structure.

Comparisons of intergenerational mobility over time within the United States also provide some evidence that mobility has declined over the past three de cades, at least for men. One study mea suring the impact of a wide range of family background factors (including family structure, race and ethnicity, parental education and income, and region) found that “the economic gap between advantaged and disadvantaged men increased because economic in equality increased” during the 1970s, 1980s, and 1990s, while “the gaps in women’s outcomes remained constant.” Another study found that the effect of parental income on men’s economic fortunes “declined between 1940 and 1980 but increased during the 1980s and 1990s.”28

A detailed analysis of income mobility across de cades rather than generations also suggests that there has been at least a modest decline in mobility since the 1970s. The probability of any given family rising from the bottom quintile of the income distribution into the top quintile over the course of a de cade increased slightly (from 3.3% in the 1970s to 4.3% in the 1990s). However, the proportion of families in the top quintile of the income distribution who remained there a de cade later also increased, while the proportion of families falling from the top quintile into the bottom quintile, or from the top two quintiles into the bottom two quintiles, declined.29

Another key point of contention is the extent to which escalating in equality reflects the just rewards accruing to education and skills in the modern economy. According to one conservative observer, New York Times columnist David Brooks,

the market isn’t broken; the meritocracy is working almost too well. It’s rewarding people based on individual talents. Higher education pays off because it provides technical knowledge and because it screens out people who are not or ga nized, self- motivated and socially adept. But even among people with identical education levels, in equality is widening as the economy favors certain abilities. . . . What’s needed is not a populist revolt, which would make everything worse, but a second generation of human capital policies, designed for people as they actually are, to help them get the intangible skills the economy rewards.30

On the other hand, Brooks’s liberal counterpart on the Times op- ed page, Paul Krugman, attacked “the notion that the winners in our increasingly unequal society are a fairly large group—that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don’t have these skills.” Noting that the real incomes of college graduates have risen by less than 1% per year over the past three de cades, Krugman argued that “the big gains have gone to a much smaller, much richer group than that.” Nevertheless, the “8020 fallacy,” as he called it, “tends to dominate polite discussion about income trends, not because it’s true, but because it’s comforting. The notion that it’s all about returns to education suggests that nobody is to blame for rising in equality, that it’s just a case of supply and demand at work. . . . The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of in equality may have as much to do with power relations as it does with market forces.”31

Krugman cited economists Ian Dew- Becker and Robert J. Gordon’s detailed analysis of productivity and income growth over the past four de cades. According to Dew- Becker and Gordon, “most of the shift in the income distribution has been from the bottom 90 percent to the top 5 percent. This is much too narrow a group to be consistent with a widespread benefit from SBTC [skill- biased technical change].” They found that some of the occupations that should have flourished if the dynamic economy of the 1990s was simply rewarding technical skills actually saw very modest income growth. For example, the earnings of mathematicians and computer scientists increased by only 4.8% between 1989 and 1997, while the earnings of engineers actually declined by 1.4%. In contrast, the earnings of CEOs increased by 100%.32

Evidence of a serious mismatch between skills and economic rewards seems likely to fan concerns about the “fairness” of recent changes in the U.S. income distribution. So, too, does the juxtaposition of rapid productivity growth with stagnant middle- class wages. Dew- Becker and Gordon found that economic productivity had increased substantially over the period covered by their analysis, but that “the broad middle of working America has reaped little of the gains in productivity over the past 35 years. . . . The micro data tell a shocking story of gains accruing disproportionately to the top one percent and 0.1 percent of the income distribution.” They characterized the first five years of the twenty- first century as “an unpre ce dented dichotomy of macroeconomic glow and gloom.” On one hand, labor productivity and output growth exploded; on the other hand, median family income fell by 3.8 percent from 1999 to 2004.33

The “unpre ce dented dichotomy” noted by Dew- Becker and Gordon between booming output and stagnant or declining incomes for ordinary workers has been a recurrent political problem for the Bush administration. On the eve of the 2004 presidential campaign, the New York Times announced “A Recovery for Profits, But Not for Workers.” A similar headline in the midst of the 2006 midterm campaign asked, “After Years of Growth, What about Workers’ Share?” Press reports noted that the president was making little headway in convincing the American public that the economy was prospering, despite robust output growth and increasing average wages. The “strange and unlikely combination” of “strong and healthy aggregate macroeconomic indicators and a grumpy populace,” one report said, was “a source of befuddlement to the administration and its allies.”34

Faced with this “grumpy populace” and an imminent election, Trea sury Secretary Henry Paulson acknowledged that “amid this country’s strong economic expansion, many Americans simply aren’t feeling the benefits.” Paul-son blamed that fact on “market forces” that “work to provide the greatest rewards to those with the needed skills in the growth areas.” Paulson’s pre de ces sor as trea sury secretary, John Snow, spoke in similar terms about the “long- term trend to differentiate compensation.”

According to one observer, “ ‘Long- term,’ when used this way by this sort of official, tends to mean ‘fundamentally unstoppable.’ And, in this case, inexplicable, like a sort of financial global- warming process that may be man-made or (who knows?) a natural cycle that we would welcome if only we knew its function. Snow, a trained economist and former corporate C.E.O., doesn’t pretend to be able to explain what’s causing this whole compensation differential. Nor does he seem tortured by his ignorance. ‘We’ve moved into a star system for some reason,’ he said, ‘which is not fully understood.’ ”35

The notion that economic in equality is an inevitable, purely natural phenomenon has been given a pseudo- scientific patina by a self- proclaimed “econophysicist” at the University of Maryland, Victor Yakovenko. Yakovenko noted that, aside from a long upper tail, the dispersion of U.S. incomes closely approximates an exponential distribution—the same kind of distribution characteristic of many natural phenomena. According to an account of Yakovenko’s work published in the New York Times Magazine’s 2005 survey of “The Year in Ideas,” “To an econophysicist, the exponential distribution of incomes is no coincidence: it suggests that the wealth of most Americans is itself in a kind of thermal equilibrium. . . . Yakovenko told New Scientist that ‘short of getting Stalin,’ efforts to make more than superficial dents in in equality would fail.”36

ECONOMIC IN EQUALITY AS A political ISSUE

Interpretations of economic in equality are politically consequential because they shape responses to in equality. If the differences between rich and poor in contemporary America “do not add up to class barriers,” if “the market isn’t broken” and “meritocracy is working,” or if “efforts to make more than superficial dents in in equality” are doomed to failure, then in equality is unlikely to rise to the top of the political agenda. Many observers have been perplexed by the modest salience of in equality as a political issue in America. For example, Dahl wrote that, “For all the emphasis on equality in the American public ideology, the United States lags well behind a number of other Democratic countries in reducing economic in equality. It is a striking fact that the presence of vast disparities in wealth and income, and so in political resources, has never become a highly salient issue in American politics or, certainly, a per sis tent one.”37 Is that because Americans assume that “efforts to make more than superficial dents in in equality” would fail?

The fact that most other rich democracies are considerably less unequal than the United States provides some reason to think that political arrangements short of Stalinism might not be entirely futile in mitigating economic in equality. For that matter, even the limited range of policies implemented in the United States over the past half- century has had substantial effects on prevailing levels of economic in equality. In short, politics matters.

If this claim seems controversial, that is probably because so much public discussion of economic in equality in the New Gilded Age ignores its political dimension. Journalists and commentators may not dwell on the “econophysics” of thermal equilibrium as reflected in the exponential distribution, but they often frame discussions of in equality in a curiously passive, technical, and distinctly apolitical way. The standard perspective is typified by a 2006 cover story in The Economist on “In equality in America.” The report summarized trends in the American economy over the preceding de cade:

Thanks to a jump in productivity growth after 1995, America’s economy has out paced other rich countries’ for a de cade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers’ wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. . . . The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.38

The report provided no hint of what “something” might have changed after 2000. Nor did it offer any explanation for why “America’s income disparities suddenly widened after 1980,” nor why “during the 1990s, particularly towards the end of the de cade, that gap stabilized and, by some mea sures, even narrowed.”

Hello? George W. Bush? Ronald Reagan? Bill Clinton? In 3,000 words, the report offered no suggestion that any policy choice by these or other elected officials might have contributed to the economic trends it summarized. Rather, “the main cause was technology, which increased the demand for skilled workers relative to their supply, with freer trade reinforcing the effect.” The report also suggested that “institutional changes, particularly the weakening of unions,” might have “made the going harder for people at the bottom” and that “greedy businessmen” might be “sanction[ing] huge salaries for each other at the expense of shareholders.”

Reports of this sort obviously do little to make “the presence of vast disparities in wealth and income” noted by Dahl “a highly salient issue in American politics.” Indeed, the authors of the Economist’s cover story began by assuring their readers that “Americans do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Eu ro pe ans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start out poor, if you work hard, you can make pots of money. It is a central part of the American Dream.”39

The political economy of in equality might be very different if, contrary to Dahl’s observation, the presence of vast disparities in wealth and income was a highly salient issue in American politics. How likely is that, and how might it happen?

One admittedly unsystematic barometer of the popu lar zeitgeist is the annual “What People Earn” issue of Parade Magazine, a popu lar Sunday newspaper supplement claiming 71 million readers. For several years, Parade has published annual “Special Reports” including dozens of Americans’ names, photos, occupations, and salaries. Most are ordinary people with five- figure incomes; some are im mensely wealthy celebrities like Michael Jordan, Donald Trump, and SpongeBob Squarepants. (Interestingly, more conventional affluent professionals and businesspeople seem to be distinctly underrepresented.40) The stories accompanying these “salary surveys” have attempted to summarize the current economic climate and job prospects. In doing so, they have also provided some insight into the shifting resonance of economic in equality in contemporary American culture.

In early 2002, Parade depicted “the mood of the nation” as “resolutely confident despite wage freezes, benefit reductions and shrinking job security.” An accompanying essay by financial writer Andrew Tobias put the gulf between the incomes of the rich and famous on one hand and ordinary people on the other in reassuring perspective, noting that in “Uganda or Peru . . . plumbers and librarians earn a whole lot less” than in the United States. “Yes. Life is unfair,” Tobias wrote. “But for most of us, it could be a lot worse. And in America there’s at least a fighting chance that, if you work at it, you—or your kids anyway—can close the gap.”41

The following year, Tobias’s essay “How Much Is Fair?” revisited the issue of economic in equality, but in a rather different tone. Tobias remained sanguine about the millions earned by Ben Affleck, Madonna, and Stephen King. (“I don’t mind a bit. This is America! More power to them.”) However, he was more skeptical about the earnings of CEOs, acknowledging that “most would agree it is best left to the free market to decide” how much they should be paid, but adding that in some cases “the market isn’t really free and the CEO largely sets his own pay.” Noting that one modestly paid CEO earned more than “the Joint Chiefs of Staff and the presidents of Harvard, Yale and Princeton—combined!” Tobias concluded, somewhat defensively, that “it is not class warfare to face these facts, observe these trends and raise these questions. Many will conclude that all is as it should be. Others will say things have gotten out of whack. The ability to confront, debate and occasionally course- correct is one of our nation’s greatest strengths.”42

By 2004, Parade headlined that “The economy’s growing again, and we’re spending more—but jobs and wages aren’t keeping pace.” Some 30 paragraphs later, the report mentioned that “The gap between America’s highest-and lowest- paid workers . . . got wider last year” and that the latter “lost ground to inflation.” In 2005, the Parade report noted that productivity “has risen steadily; but economists say that, so far, the resulting benefits have gone into corporate profits.”43

By 2007, the disparity between “government statistics” and the “daily experience” of workers had become a major theme of Parade’s annual report on the state of the U.S. economy. One prominent subhead announced that “most Americans didn’t see the long economic boom reflected in their paychecks”; another reported that “the salary gains of the last five years have gone to the highest- paid workers.” The body of the story reported that “many Americans are troubled by the income gap between the nation’s highest earners and everyone else—a gap that has grown dramatically in recent de cades.”44

Meanwhile, in a very different segment of the Sunday magazine market, the New York Times Magazine in 2007 published a special “Money Issue” titled “Inside the Income Gap.” Lengthy articles focused on class disparities in schooling, John Edwards’s “poverty platform” in the 2008 presidential race, and the implications of an increasingly global labor market. However, the impact of these weighty examinations of the sociology and politics of economic in equality was diminished by the distracting interspersion of colorful advertisements for investment companies, exotic consumer goods, and high- end real estate. One three- page article on “The In equality Conundrum” (“How can you promote equality without killing off the genie of American prosperity?”) was woven around advertisements for a private bank and financial planning company (“an entire team of wealth experts”), high definition flat- screen tele visions (“the ultimate TV experience”), the national airline of the Cayman Islands (“Endless beauty. Non- stop flights”), and luxury apartments on New York’s Fifth Avenue (“From $10.25 million”).45

The lifestyles of New York Times Magazine readers are emblematic of a striking social gulf between the people who are most likely to read lengthy articles (or books!) on the subject of in equality and the people who have themselves been on the losing end of escalating in equality in the past 30 years. That social gulf has been exacerbated by the economic trends of the New Gilded Age; and it constitutes a significant obstacle to political progress in responding to those trends. One can only wonder how many affluent readers will get around to pondering “The In equality Conundrum” as soon as they return from the Cayman Islands.

If the juxtaposition of social concern and conspicuous consumption in the New York Times Magazine symbolizes the ambivalent resonance of the New Gilded Age among its winners, the various conflicting themes in the Parade reports on “What People Earn” underscore the complexity of cultural norms and values shaping thinking about economic in equality among the people whose economic fortunes have stagnated. American workers are suffering from wage freezes, benefit reductions, and shrinking job security; but they are better off than their counterparts in Uganda or Peru. Celebrities are entitled to their millions; but perhaps there is something troubling about CEOs earning more than the combined salaries of the Joint Chiefs of Staff and the presidents of Harvard, Yale, and Princeton. The income gap between the rich and the rest has grown dramatically; but in America, you—or your kids anyway—can close the gap. Or maybe not.

IN EQUALITY AND AMERICAN DEMOCRACY

To a famously perceptive foreign observer of nineteenth- century America, Alexis de Tocqueville, the spirit of equality was the hallmark of American culture: “Any man and any power which would contest the irresistible force of equality will be overturned and destroyed by it.” However, Tocqueville recognized that equality in the social and political realms could coexist with a great deal of economic in equality. “There are just as many wealthy people in the United States as elsewhere,” he observed. “I am not even aware of a country where the love of money has a larger place in men’s hearts or where they express a deeper scorn for the theory of a permanent equality of possessions.”46

Tocqueville’s juxtaposition of social equality and economic in equality has been a recurrent theme in commentary on the place of equality in American political culture. According to Verba and Orren, for example, ordinary Americans have complex views about the value of equality:

Their sentiments are far more egalitarian in some areas than in others. They assign different goods to different spheres of justice. There are spheres for money, political power, welfare, leisure time, and love. . . . The aim of egalitarianism is not the elimination of all differences, which would be impossible, nor even the elimination of differences within any one of these spheres, which might also be impossible unless the state continually intervened. Rather, the goal is to keep the spheres autonomous and their boundaries intact. Success in one sphere should not be convertible into success in another sphere. Politi cal power, which is the most dangerous social good because it is the easiest to convert, must be constrained against transmutation into economic power, and vice versa.47

One of the most important questions explored in this book is whether politi cal equality can be achieved, or even approximated, in a society marked by glaring economic inequalities. When push comes to shove, how impermeable are the boundaries separating the economic and political spheres of American life?

At some points in American history, at least, those boundaries have been remarkably permeable. The original Gilded Age in the late nineteenth century is a dramatic case in point. Rapid economic expansion and transformation coexisted with intense partisan conflict and political corruption. Social Darwinism provided a powerful ideological rationale for letting the devil take the hindmost. The mordant novel by Mark Twain and Charles Warner that gave the era its name portrayed a political process in which the greedy and cynical preyed on the greedy and gullible.48

In Wealth and Democracy: A Politi cal History of the American Rich, political analyst Kevin Phillips called attention to a variety of striking economic and politi cal parallels between the “capitalist heydays” of the Gilded Age, the Roaring Twenties, and the contemporary era. Eco nom ical ly, he argued, all three periods were marked by “major economic and corporate restructuring,” “bull markets and rising, increasingly precarious levels of speculation, leverage, and debt,” “exaltation of business, entrepreneurialism, and the achievements of free enterprise,” and “concentration of wealth, economic polarization, and rising levels of in equality.” Politi cally, all three periods featured “conservative politics and ideology,” “skepticism of government,” “reduction or elimination of taxes, especially on corporations, personal income, or inheritance,” and “high levels of corruption,” among other factors.49

Having surveyed the rise and fall of great economic fortunes through more than two centuries of American history, Phillips emphasized the regularity with which concentrations of wealth in new industries, regions, and families have been spurred, subsidized, and supported by government policies: “From the nursery years of the Republic, U.S. government economic decisions in matters of taxation, central bank operations, debt management, banking, trade and tariffs, and financial rescues or bailouts have been keys to expanding, shrinking, or realigning the nation’s privately held assets. . . . Occasionally public policy tilted toward the lower and middle classes, as under Jefferson, Jackson, and Franklin D. Roo se velt. Most often, in the United States and elsewhere, these avenues and alleyways have been explored, every nook and cranny, for the benefit of the financial and business classes.”50

In the same vein, Paul Krugman has emphasized the importance of social and political forces in shaping the economic trends of the past 75 years:

Middle- class America didn’t emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation. Since the 1970’s, all of those sustaining forces have lost their power.
Since 1980 in partic u lar, U.S. government policies have consistently favored the wealthy at the expense of working families—and under the current [George W. Bush] administration, that favoritism has become extreme and relentless. From tax cuts that favor the rich to bankruptcy “reform” that punishes the unlucky, almost every domestic policy seems intended to accelerate our march back to the robber baron era.51

While economists have spent a good deal of scholarly energy describing and attempting to explain the striking escalation of economic in equality in the United States over the past 30 years, they have paid remarkably little attention to social and political factors of the sort cited by Krugman. For example, one comprehensive summary of the complex literature on earnings in equality attempted to ascertain “What shifts in demand, shifts in supply, and/or changes in wage setting institutions are responsible for the observed trend?” The authors pointed to “the entry into the labor market of the well educated baby boom generation” and “a long- term trend toward increasing relative demand for highly skilled workers” as important causal factors. Their closest approach to a political explanation was a passing reference to a finding that “the 25 percent decline in the value of the minimum wage between 1980 and 1988 accounts for a small part of the drop in the relative wages of dropouts during the 1980s.”52

It probably should not be surprising, in light of their scholarly expertise and interests, that economists have tended to focus much less attention on potential political explanations for escalating economic in equality than on potential economic explanations. In a presidential address to the Royal Economic Society, British economist A. B. Atkinson criticized his colleagues’ tendency to ignore or downplay the impact on the income distribution of social and political factors, arguing that “we need to go beyond purely economic explanations and to look for an explanation in the theory of public choice, or ‘political economy’. We have to study the behaviour of the government, or its agencies, in determining the level and coverage of state benefits.”

Atkinson went on to criticize economists who have considered political factors for their uncritical reliance on the rather mechanical assumption that government policy responds directly to the economic interests of the so-called median voter—the ideological centrist whose vote should be pivotal in any collective decision arrived at, directly or indirectly, by majority rule. He urged them to go beyond this simple framework, to gauge the extent to which redistributive policies are shaped “by the ideology or preferences of political parties, or by political pressure from different interest groups, or by bureaucratic control of civil servants or agencies.”53

Atkinson’s criticism seems apt, since political economists wedded to the familiar majoritarian model have remarkable difficulty even in explaining why the numerous poor in Democratic political systems do not expropriate the unnumerous wealthy. If taxes are proportional to income and government benefits are distributed equally, for example, everyone with below- average income—a clear majority of the electorate in any Democratic political system with enough capitalism to generate a wealthy class—has an economic incentive to favor a tax rate of 100%.54 Even if redistribution entails some waste, most people should favor some redistribution, and poorer people should prefer more. Furthermore, increases in economic in equality should result in higher taxes and more redistribution.55

Of course, the reality is that very few people—even very few poor people— favor aggressive redistribution of the sort implied by these simple economic models. Nor is aggressive redistribution anywhere in sight. Writing 25 years ago, before most of the substantial increase in economic in equality documented in figures 1.1 and 1.3, Dahl noted that, “After half a century of the American welfare state . . . the after-tax distribution of wealth and income remains highly unequal.”56 Now, after three- quarters of a century of the American welfare state, the distributions of wealth and income are even more unequal than they were when Dahl wrote. Moreover, systematic analyses suggest that the extent of economic in equality has little impact on the extent of redistribution, either across nations or within the United States.57 Certainly, recent American experience amply demonstrates that escalating economic in equality need not prevent the adoption of major policy initiatives further advantaging the wealthy over the middle class and poor. The massive tax cuts of the Bush era, whose gains went mostly to people near the top of the income distribution, are a dramatic case in point.58

In the following pages, I explore these glaring disjunctions between the predictions of simple majoritarian models and actual patterns of policy making in the United States over the past half- century. As Atkinson surmised, the disjunctions turn out to have a great deal to do with “the ideology or preferences of political parties” and with “political pressure from different interest groups.” For example, I find in chapter 8 that although Americans have strongly and consistently favored raising the federal minimum wage, their elected representatives have allowed the real value of the minimum wage to decline by more than 40% since the late 1960s. Moreover, my analysis in chapter 9 shows that elected officials voting on a minimum wage increase paid no attention at all to the views of people poor enough to be directly affected by that policy change. My broader analysis indicates that this sort of unresponsiveness is no anomaly, but a very common pattern in American policy making.

The gap between the predictions of conventional political- economic models and the actual workings of American democracy also reflects the profound difficulties faced by ordinary citizens in connecting specific policy proposals to their own values and interests. Economic analyses often take such connections for granted; but for many people on many issues they are misconstrued or simply missing. Egalitarian impulses often fail to get translated into policy because ordinary citizens do not grasp the policy implications of their egalitarian values. For example, in chapter 7, I show that almost two-thirds of the people who say the rich pay less than they should in taxes nevertheless favor repealing the federal estate tax—a tax that only affects the richest 1–2% of taxpayers. Any serious attempt to understand the political economy of the New Gilded Age requires grappling with the political psychology of American voters and with the real limitations of public opinion as a basis for Democratic policy making.

Escalating economic in equality poses a crucial challenge to America’s democratic ideals. The nature of that challenge has been nicely captured by Michael Kinsley: “According to our founding document and our national myth, we are all created equal and then it’s up to us. In equality in material things is mitigated in two ways: first, by equal opportunity at the start, and, second, by full civic equality despite material differences. We don’t claim to have achieved all this, but these are our national goals and we are always moving toward them.”59

It is a nice sentiment—but is it true? For partisans of American democracy the evidence is far from reassuring.

Supply Side Economics: Do Tax Rate Cuts Increase Growth and Revenues and Reduce Budget Deficits ? Or Is It Voodoo Economics All Over Again?

Article by Nouriel Roubini, Stern School of Business, New York University, 1997.

Act I: Supply Side Economics in the 1980s

It is well known that are among the variables that influence the decisions made by consumers/workers and firms. In the late seventies, the label "Supply Side Economics" was applied to the argument that lower tax rates would improve private sector incentives, leading to higher employment, productivity, and output in the US economy. George Bush, in the days when he was an opponent of Ronald Reagan in the 1980 primaries, referred to an extreme version of this theory espoused by Reagan as "voodoo economics." In this version a cut in tax rates was predicted to result in an increase in tax revenue, and thus not increase the government deficit (the famous Laffer Curve effect). We're going to run through the arguments for such incentive effects, and try to evaluate the policy.

Taxes enter many decisions, but the two most important are probably that they discourage work, since they lower the aftertax return from work, and they discourage saving and investment, since they lower aftertax returns. (A third, which we will not explore here, is that taxes distort investment decisions by taxing different types of capital unequally. Housing, for example, gets a free ride.) We know that the countries that invest the most (measured as the ratio I/Y) also grow the fastest, on average, so maybe this is important (or maybe the causality goes the other way, with the US investing less because it has fewer good opportunities). Whatever the case, let's examine the effect of taxes on wage and capital income.

A lower tax rate on wage income should increase the labor supply. Given the labor demand function, this increase in labor supply will increase employment, reduce the pre-tax real wage and increase the post-tax real wage.

Now turn to saving. We would expect lower taxes on interest and capital gains, as well as tax-sheltered saving plans like IRAs and 401(k) plans, to make saving more attractive and lead to an increase in savings. In equilibrium, this will lower real rates of interest as more saving flows into capital markets, and raise investment. Over time this investment leads to higher capital, more productive labor, and higher output and wages. (This is the long-run dynamics effects of this policy change).

That was the argument. While most economists would agree with the theoretical idea that lower taxes increase labor supply and savings, the crucial empirical question is whether the effects of cuts in tax rates on labor supply and savings are mall or larger. Most empirical evidence from a very large set of studies suggests that that the effect on labor supply is probably small, except on relatively poor workers whose marginal tax rate can be quite high (when they work, they may lose welfare and medical benefits, so the "opportunity cost" of working can be high). This may be an important aspect of social policy, but it probably does not have a large effect in the aggregate. In the graph, this would show up as a fairly steep labor supply curve, so that a shift up has little effect on employment.

The effect on saving, though, is thought by some to be substantial but there is wide disagreement on this issue as well. There is some question how responsive saving is to tax incentives, but a number of economists, including Martin Feldstein of Harvard, think the effect is important. Some argue that the saving rate in the US is smaller than in most other major economies, perhaps because US tax law is less friendly to saving than other countries'. One of the important policy questions is whether we should amend the tax system to make saving more attractive.

So why "voodoo" economics? There is some question about the magnitude of these effects, and the theory was way oversold at the time. Many "supply siders" argued that the incentive effects were so large that a reduction in tax rates would actually raise tax revenue, since the tax base would grow so much. There's no sign that this happened, and indeed most economists were pretty skeptical of this prediction at the time. Quite to the contrary, the budget deficits exploded in the 1980s after tax rates were cut by Reagan in 1981. The response of private savings and labor supply to the Reagan tax cuts was minimal: the labor supply did not increase and the effect on private savings was swamped by the reduction in public savings (the increase in the budget deficit). Since labor supply and savings increased only marginally, government revenues did not increase (relative to GDP) and the budget deficit became very large. The Laffer curve hypothesis was was flatly contradicted. Moreover, the 1980s tax cuts did not increase the rate of growth of GDP and productivity, nor the investment and savings rates. Note the following facts:

1. It is true that the economy grew quite fast from 1983 to 1989 but such a pickup in growth was a standard recovery of growth and fall of unemployment from the depths of the severe recession of 1981-1982 (the unemployment rate went above 10% in 1982).

2. The private saving rate continued to decline slowly in the 1980s. In the 1973-1980, private saving averaged 7.8 percent of the economy, and dropped to 6.9% in 1986 and 4.8% in 1989. In other words, the saving rate was significantly lower after the 1981 tax cut than before it.

3. The labor force grew at an average rate of 1.6% over the 1982-89 period, about the same as during the previous four years.

4. Overall labor productivity grew rapidly before 1973 and much less rapidly since then. In the entire period after 1973, the annual growth rate of productivity has been very close to 1.1 percent. It average around 1.1 percent also in the 1980s.

5. Budget deficits that were equal to 40b US$ in 1979 (-1.7% of GDP) and 74b US $ in 1980 (-2.7% of GDP) increased to 221b US $ by 1986 (5.2% of GDP).

6. The public debt to GDP ratio increased from 26.1% in 1979 to 41.2% in 1986.

For a more detailed discussion read an economic analysis of the Reagan years of Supply Side tax cuts and an economic analysis of why tax cuts do not increase economic growth.

Read next Krugman's two articles in Slate on Supply Side Economics and its Its Decline. A more detailed analysis by Krugman of supply-side economics is presented in his book "Peddling Prosperity", Norton, 1995.

For a systematic overview of supply side views look at the CATS (Citizens for an Alternative Tax System) site and Polyconomics, Inc. , the Web site of Jude Wanniski, one of the early gurus of supply-side economics.

Act II: The Return of Voodoo Economics in the 1990s

Scene I: The 1993 Clinton Deficit Reduction Package

By the time Clinton came to power in 1993, the effects of the supply side policies of the 1980s on the fiscal conditions of the U.S. were clear: the budget deficit in 1992 was 290b US $ or 4.9% of GDP and the public debt to GDP ratio equal to 50.6%. The deficit reduction plan that Clinton proposed was based on a limited increase in income tax rates (only for the very rich), an increase in various indirect taxes and a slowdown in the real growth of government spending.

At the time of the passage of the deficit reduction plan, supply-siders critics of the package argued that the increase in tax rates would:

1. Push the economy into a recession and reduce long-term growth.

2. Increase the budget deficits as individuals would reduce their labor supply and savings would be reduced.

3. Increase real interest rates because of the increase in deficits.

The effects of the deficit reduction plan turned out to be very different from the dismal prediction of supply siders:

1. The budget deficit fell from 290b US $ in 1992 (4.9% of GDP) to 104b US $ in 1996 (1.2% of GDP). The debt to GDP has started to fall after having continuosly increased since 1978.

2. The economy boomed in 1993 and 1994 after the 1990-91 recession and the economy grew at solid an average rate of 2.8% in the 1992-96 period.

3. Real interest rates have remained stable (they are at 2% in 1996 at the short-end of the maturity structure) and significantly lower than the high rates of the 1980s (5% in real terms).

While the effects of the 1993 deficit reduction package clearly contraded the gloomy forecasts of the critics, there has been a revisionist attempt to argue that the increase in the income tax rate for the wealthy in 1993 reduced so much their labor supply and income that it led to a reduction in the revenues collected form the top income individuals. On this debate, we follow the account of Peter Passell in the article "Do Tax Cuts Raise Revenue ? The Supply Side War Continues" (NYT 11/16/95).

In a study published in 1995, Dan Feenberg and Prof. Martin Feldstein of Harvard University calculated that raising the taxes of the rich in 1993 collected only one third of the revenues expected if these taxpayers had not changed their economic behavior. Since the levy on individuals with taxable incomes below $150,000 ($135,000 if we include the elimination of the ceiling on the Medicare payroll tax), they argued that this group was a good control for an experiment about the effects of higher tax rates on revenues.

They argued that if the adjusted gross income of the rich (defined as individuals with adjusted gross income above $200,000) had increased at the same rate as that of the upper middle class (incomes in the 50,000 to 200,000 range), it would have grown by 2.9%. Instead, the taxable income of the group with incomes above $200,000 fell by $ 31billion. So, instead of collecting an extra $ 16 billion in taxes from this group, the government ended up collecting only an extra $ 5 billion (a third of the amount it should have if the incomes of this group had grown at the same rate as the control group). This appeared to be the Laffer Curve at work, a basic tenent of supply side economics.

Unfortunately for the hypothesis, the fall in the incomes of the very rich after 1993 was not due to a reduction in their labor supply but rather a simple tax- shifting of incomes from 1993 to 1992 in expectation of the increase in tax rates. In fact:

1. If 1991 (rather than 1992) is compared with 1993, there is no reduction in expected income and no shortfall in revenues.

2. As Clinton was elected in November 1992, high income earners anticipated higher tax rates in 1993 and tried to realize the income in 1992. A New York state survey shows that two-thirds of Wall Street year-end bonuses were paid in December 1992, well above the one-third usually paid before theend of the year.

3. Treasury Department studies suggests that all in told $ 20 billlion of income was shifted back from 1993 to 1992. Therefore most of the income that Feldstein and Feenberg argued that was destroyed by a reduction in labor supply, was instead realized a year earlier.

Scene II: The Forbes Flat-Tax Proposal

In 1996, Steve Forbes run for the nomination to be the Presidential candidate of the Republican Party on the basis of a single policy proposal: changing the current progressive income tax system to a "flat tax" rate on income. While an analysis of the merits of a flat income tax (that is a disguised consumption tax in the Forbes formulation) is complex (see the home page on the flat-tax/consumption tax controversy), the flat-tax proposal was another variant of supply side economics. In the opinion of Forbes, such a flat tax would siginificantly increase the growth rate of the US economy and the rate of productivity growth by stimulating labor suply, savings and investment. In the view of Forbes, the growth of the economy would increase from the average 2.5% of the 1990s to 4% or even 5% per year.

Economists have been always wary of claims that some policy could change the growth rate of GDP as opposed to its level. There is of course a big difference between a policy change that affects the level of GDP from one that affects the growth rate of GDP. For example, most studies of the potential output effects of a complete liberalization of world trade suggest that the level of GDP would increase in the long- run by about 1% relative to its alternative path. So, real GDP 20 years from now would be only 1% higher than it would be 20 years from now if there is no change in trade policies. If, instead, such a policy change had the effect of increasing the growth rate of the economy (rather than its level) by 1% per year, real GDP would be 30% higher 20 years from now relative to its alternative path. Quite simply, if anything can increase the growth rate of GDP , rather than just its level, the welfare benefits of such a policy would be huge.

Now, if we consider, the Forbes tax plan, there is no evidence of any sort that the growth rate of the economy would double from 2.5% to 5% if we adopted a flat tax. The claim is simply preposterous. Most economists would argue that the effects, if any, are likely to be only on the level of GDP: it is hard to proof that any policy could affect the long-run growth rate of an economy and the 1980s experiments with tax rate cuts confirm that there was no permanent growth effects.

Even those serious economists and scholars that do believe that there might be a positive growth effect of such a policy reform, argue that the growth effects of a flat-tax would be much smaller than those claimed by Forbes. Consider for example the view of a leading conservative economist, Rober Barro from Harvard University:

"A movement to a flat rate tax - with no change in government spending - would stimulate economic growth, but is hard to quantify the effect. Empirical evidence across countries indicates that a cut in non productive government spending and taxes by 1% of GDP raises growth by about 0.1% per year. If taxes are made less distorting but are not eliminated , the effect would be smaller, perhaps half as great. Thus, if the 8% of GDP raised by federal income taxes were instead raised by a flat tax, then growth would be increased by roughly 0.4% a year. This effect is much smaller than that claimed by Forbes, but the benefits would still be enourmous" (Wall Street Journal 2/22/1996).

So, in the best scenario, the long-run growth rate of the economy would increase from 2.5% to 2.9% per year (not to 5%). Even that estimate is clearly overstated and the likely growth effect might be close to zero.

In fact, the scenario described by Barro assumes that the flat-tax would be revenue neutral (i.e. it would still collect the 8% of GDP reveneues raised by the current income tax). However, the Forbes flat-tax plan was not revenue neutral. Most independent studies of this proposals reached the conclusion, that similarly to the tax rate cuts of the 1980s, a flat tax would lead to a fall in revenues and an very siginificantly increase in the budget deficit (the revenue shortfall would be over $ 120 billion per year or about 1.7% of GDP). As discussed above, the tax rate cuts of the early 1980s led to a surge of the budget deficit (from $ 40b in 1979 to $ 220 b in 1986) and a significant increase in real interest rates. The crowding-out effect of this budget deficit national savings and investment led to a fall in the private savings rate and a fall in the amount of national savings (relative to GDP). Since one of the main channell through which a flat tax should increase output and growth is the positive effect on national savings and investment, the evidence (from the 1980s tax cuts and the 1993 deficit reduction) suggests that a dlat tax would depress savings and investment through its effect on the budget deficit. Therefore, any potential growth rate effect (even the tiny ones predicted by Barro) would disappear.

In the view of a maintream economist, William Gale, a senior fellow at the Brookings Institution: "It is completely implausible that improving incentives to work, save and invest in a system that has already moved a long way in theright direction would make a significant difference to growth".

Scene III: The Dole Income Tax Cut Plan

The 1996 return of supply side economics started with the Forbes flat tax campaign and picked up momentum with the recommendations of the Kemp Commission, chosen by the Republican party to develop some proposals for tax reform. However, it reached its policy peak with the presidential campaign of Bob Dole. The economic policy centerpiece of the (failed) Bob Dole's presidential campaign was a proposal of a 15% across-the-board reduction in income tax rates. While Dole had made a career out of being a deficit hawk, his 1996 tax plan (and his choice of supply-sider Jack Kemp as VP candidate) represented a strategic adoption of supply side views. The economics of Dole's tax plan was simple: it would have led to a reduction in government revenues of over $ 500 billion over 7 years. Again, the rethorics of the plan was typical voodoo economics: tax rate cuts would stimulate labor supply, savings and investment so much that the budget deficits would be reduced rather than increased.

A more objective study of this tax plan suggested, instead, that even under the very optimistic scenarios about increased growth and reduced interest rates claimed by the plan, the overall effect of the plan would have been a shortfall of revenues, equal to 75% of the impact tax revenue reduction of the plan. In other terms, even a very sympatetic study of the Dole tax plan found that increase in labor supply, savings and investment following thetax cuts, would generate only 25 cents in increased revenues out of each $ in tax cuts, leaving the total net shortfall in revenues to 75 cents out of each dollar.

The reason why supply side effects do not work is very simple: the estimated responses of labor supply and savings to tax rate cuts are too small to generate the extra revenues that would maintain a tax rate cut revenue neutral.

Consider the evidence on each of these two effects.

1. The labor supply effect:

1.1. The maximum income tax bracket was reduced from 91% to 70% during the Kennedy presidency in the 1960s and then down to 50% by Reagan in 1981.3. However, the labor force grew at an average rate of 1.6% over the 1982-89 period, about the same as during the previous four years. So the first Reagan tax cuts of 1981 had no effect on labor supply.

1.2. The maximum tax bracket was reduced from 50% to 28% in 1986 but again this tax cut had no positive effect on labor supply. A study by Randall Mariger, an economist at the Federal Reserve Board, found that tax rates cuts increased the labor supply by less the 1% between 1985 and 1986.

1.3. The 1993 Clinton increase in the top marginal tax bracket to 39.6% had no effect on the labor supply of the rich, (see the discussion above).

2. The Effect on Savings:

2.1. The evidence is that the response of savings to the after-tax real return to savings is quite small. In the 1973-1980, private saving averaged 7.8 percent of GDP, and dropped to 6.9% in 1986 and 4.8% in 1989. In other words, the saving rate was significantly lower after the 1981 and1986 tax cuts than before it.

2.2. Computer simulations suggests that, even in the case of an extreme policy change, the elimination of all income taxes to be replaced by a tax on consumption only, private savings would increase only by 20%. In other terms, since private savings are about 5% of GDP, in the best scenario they would become 6% of GDP.

2.3 About 80% of savings are already sheltered from current taxation in pension plans that are tax-deferred. So, any policy change that increase the return to taxation would have minimal effects on savings.

So, in conclusion the verdict from history and empirical evidence is quite clear. Supply side economics is "voodoo economics". Reductions in tax rates (starting from initial moderate tax rate levels) do not siginificantly increase labor supply and savings, do not increase economic growth, do not raise total tax revenue and do not reduce budget deficits. Their likely effect on the level and growth rate on output is close to zero while they lead to significantly larger budget deficits.