Professor Martin S. Feldstein
George F. Baker Professor of Economics
National Bureau of Economic Research, Inc.
1050 Massachusetts Avenue
Cambridge, MA 02138
The Rich, the Poor, and the Economists
by Michael D. Yates
In the New York Times of December 15, 2001, there is an article titled, “Grounded by an Income Gap.” The subject of the article is the growing income gap between the richest and the poorest people in the United States, a disparity greater here than in any other industrialized nation. Apparently the reasons for this inequality have been vexing the brains of our best economists. Martin Feldstein, Harvard professor and, under Reagan, the chairman of the Council of Economic Advisors, is quoted as follows: “Why there has been increasing inequality in this country is one of the big puzzles in our field and has absorbed a lot of intellectual effort.” But, this effort has apparently been wasted, since he goes on to say, “But if you ask me whether we should worry about the fact that some people on Wall Street and basketball players are making a lot of money, I say no.”
Before I comment on Professor Feldstein’s rather remarkable statements, let me say something about Feldstein’s own work. Before he became Reagan’s chief economist, he was an expert on the economics of social security. In published papers, he claimed to have empirically demonstrated that the social security system in the United States inhibited savings. Since savings are the source of capital investment, the implication of his research was that the social security system also reduced investment and thereby reduced the growth rate of the economy, since investment is the engine of economic growth.
Feldstein’s work fit nicely into the growing conservative movement which arose after the post World War Two boom came to an end in the early 1970s. The Keynesian economics that was gospel during my college years was giving way to a return to the pre-Keynesian theory that “freely” operating markets (free from the poison of government control and regulation) were the only solution to all economic problems. Led by the famous “Chicago Boys,” especially Milton Friedman, the anti-Keynesians carried the day in the economics profession and still do. No wonder, then, that when Ronald Reagan became president, he tapped Feldstein to chair the Council. For years, Reagan had been railing against social security from his General Electric radio pulpit. Now here was an economist who could lend professional credence to Reagan’s reactionary views. Social Security would be a tough nut to crack. It was an extremely popular program, run with great efficiency and effective in sharply reducing poverty among the elderly.
There was just one problem. Feldstein’s research was fatally flawed. Two staff economists at the Social Security Administration asked Feldstein for his supporting data. After three years of repeated requests, he sent the data to them. When they tried to use Feldstein’s numbers to replicate his results, however, they could not. They uncovered an error in the computer program Feldstein had used, and when they corrected the error, the results were exactly the opposite of Feldstein’s. That is to say, the social security system actually encouraged savings and, according to Feldstein’s cherished “free market” theory, facilitated capital formation and economic growth. (For more on this, see “‘Superstar’ Feldstein and His Little Mistake” in Dollars & Sense, Dec. 1980, pp. 1-2 and the citations therein.)
In a field like physics, when the data consistently fail to support a hypothesis, the hypothesis is eventually rejected. A scientist who continues to hold to a rejected hypothesis will eventually lose his scientific reputation. But in economics matters are not so straightforward. To the best of my knowledge, Feldstein never acknowledged that his research was worthless. In fact, a short time after his mistake was exposed, he claimed to have redone his research and found his original result. Nor has he become a champion of the social security system. He is today one the most virulent proponents of privatization, and he continues to cook his numbers. He kept his privileged position at Harvard, from which he has made millions of dollars as a consultant. As the Times article gives proof, he is still being sought after for pithy quotes in his later middle age.
The reason why a person like Feldstein can continue to prosper in the face of what should have been a devastating professional scandal is simple money and power. The social security trust funds contain billions of dollars, and those who own our society’s property want that money. It is not now available to them, but it would be if social security were abolished or to use the euphemism of the day, “privatized.” Today, economists continue to tell lies about social security, a program as sound as it ever was but under growing and relentless attack. Feldstein and others like him provide a veneer of “science” to justify what is nothing more than the theft of the people’s money.
Which gets us back to inequality. Anyone willing to look can see that a society in which wealth ownership is extraordinarily unequal, as it is in every capitalist country, must by its very nature also be one in which incomes are also unequal. And anyone with any connection at all to reality knows that those with the lion’s share of the wealth (and income) call the shots in everything that matters politics and culture to name just two and this power puts still more money into their hands. It also follows, as the night follows the day, that there can be no such thing as equal opportunity in a hopelessly inegalitarian society. Just perform a thought experiment. Imagine two child, one born into the poorest family in the United States and one born into the richest. Imagine further that all necessities, indeed all useful things, must be purchased in the marketplace. The results of such an untrammeled capitalism, just the kind Feldstein prescribes, are easy to predict. If the poor child is lucky enough to survive, he or she will assuredly have close to a zero opportunity to rise to the top. The rich child, on the other hand, can be completely incompetent but will never fall to the bottom or anywhere close to it.
If we add to the inherent law of capitalist inequality policies designed by the wealthy to make them richer, inequality will worsen as it has in the United States. As the Economic Policy Institute and many other scholars have shown with meticulous and uncooked research, the employer-led and government-abetted attack on labor unions, the class nature of the schools, the implementation of job-destroying and income-reducing trade policies, the stagnant minimum wage, all have contributed to growing inequality. Not to mention racism and sexism. Yet Feldstein and his ilk profess incomprehension. Or, worse yet, they blame the victims. They say that teenage pregnancy is a primary cause of poverty. In intellectual desperation, they even say that “low cognitive ability” is the culprit. Not only is this bankrupt, but given the racial composition of those at the bottom of our society, it is racist (as is Feldstein’s equation of Wall Street operators and basketball players).
Yes, the last 25 years have witnesses a marked transfer of money from the poor to the rich. But contrary to the cant of economists like Feldstein, this has everything to do with capitalism and the actions of politicians beholden to and increasingly a part of the wealthy class. No wonder the economists, whose own place high up the income scale is so often tied to their championing of this unfair and repugnant system, would rather ignore this truth (and the voluminous evidence supporting it) or claim not to understand it or say its not a problem but a socially desirable state of affairs. This is what the wealthy demand, and this is what the rest of us must think if the entire ideological edifice buttressing capitalism is not to crumble to the ground.
Let me make two final comments. First, the Times article ends by noting that Adam Smith, himself, was concerned with equity. Smith said, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” That the “far greater part of the members are poor and miserable” cannot be doubted; this is truer today than it was in 1776 if only because then a much higher proportion of the world’s population could grow its own food. But the article fails to note Smith’s remedy for human misery education in homeopathic doses. Second, lest we doubt the class biases of Feldstein and company, let us remember that after the fascist generals murdered Salvador Allende and began to round up, torture (including electric shock), and murder their enemies, the “Chicago Boys” were recommending neoliberal “shock treatment” for the economy.
MICHAEL D. YATES is associate editor of Monthly Review. He is the author of Why Unions Matter and co-editor of Rising from the Ashes?: Labor in the Age of “Global” Capitalism.