Does Paul Krugman Have a Retirement Account?

Does Princeton University professor Paul Krugman have a bank account, check book, credit card, mortgage, or retirement account? In Monday's New York Times he characterizes those who achieve success in the financial sector as "wheeler- dealers, men who push money around and get rich by skimming some off the top as it sloshes by." But if he is like most Americans, he uses the financial sector every day.

Of the wheeler-dealers, Krugman writes, "They may boast that they are job creators, the people who make the economy work, but are they really adding value? Many of us doubt it..."

Krugman may doubt that the financial sector adds value, but government agencies that track the data conclude otherwise. Financiers help the economy at the same time as they help Krugman. According to the Bureau of Economic Analysis, the Finance and Insurance sector contributed $1.1 trillion in value-added to the economy in 2012, or 7 percent of GDP.

This includes $435 billion from Federal Reserve banks, credit intermediation, and related activities; $185 billion from securities, commodity contracts, and investments; $413 billion from insurance carriers and related activities; and $46 billion from funds, trusts, and other financial vehicles.

Americans had $21.9 trillion in retirement savings at the end of the third quarter of 2013. Of this, $1.9 trillion was in annuity reserves, $5.4 trillion in government plans, $2.9 trillion in private defined benefit plans, $5.6 trillion in defined contribution plans, and $6.2 trillion in individual retirement accounts.

To say, as does Krugman, that those who manage funds are less important than "captains of industry,...men who make stuff" makes little sense. To make stuff, captains of industry need venture capitalists and bankers.

For instance, angel investor Mike Markkula brought $250,000 in loans and equity investment to Steve Jobs and Steve Wozniak at Apple in 1977, and then arranged for further financing as the company grew. Small companies with big ideas need funding.

When US Air wanted to buy American Airlines the company asked investment advisors. When Twitter went public, it went to an investment bank which specialized in initial public offerings.

Investment advisors and financial service organizations such as Fidelity, Vanguard, and TIAA-CREF are all in competitive businesses. None has a monopoly.

Such competition is one reason why Krugman's description of financiers and venture capitalists as Masters of the Universe does not accord with reality. Treasury data show that the Masters do not stay at the top for very long.

A study published last month in the National Tax Journal by Treasury economists Gerald Auten, Geoffrey Gee, and Nicholas Turner found that individuals in the top one percent in one year were not the same as those in the top one percent in successive years.

Using Internal Revenue Service data from 2000 to 2010, the authors found that about 42 percent of the top 1 percent dropped out after one year. After 6 years, only 27 percent of the original group were still in the top 1 percent.

A similar result comes from a separate annual Treasury Department study of the top 400 richest individuals from 1992 to 2009, last updated in 2012. Just as in the Auten study, the list shows substantial turnover.

Data show that 3,869 taxpayers were on the list of the top 400 returns between 1992 and 2009. Only 87 returns, or 2 percent, appeared in 10 or more years. Twenty-seven percent of taxpayers are represented more than once on the list. On average, each year 39 percent of those in the top 400 were not on the list in any other year.

Just as it is a myth that the same top one percent control America's economy, it is a myth that there is little upward mobility. People move around income quintiles when they start working, when they marry, and when they retire. The movement of women into the workforce has widened the income distribution: the majority of households in the top quintile have two earners.

Auten and his coauthors show that 70 percent of dependents of families in the bottom fifth of the income distribution in 1987 were in higher fifths in 2007. Eleven percent jumped to the top fifth, and 20 percent moved to each of the three middle fifths.

Historically, in times of economic difficulty, there is resentment towards people who are successful, especially when they are successful for reasons that people do not understand. If someone is rich because he is good at making automobiles, then people believe that income is deserved because they can see the cars and use them on a day-to-day basis.

But financial instruments are different because it is harder to understand how they work. People may not realize that the creation and marketing of automobiles requires a financial system. Just as does Krugman, they assume that the automobiles and other stuff are made by the captains of industry without any help from banks.

In February Krugman will turn 61, a time when some begin thinking about retirement. As with many other universities, Princeton University offers retirement plans to faculty through Vanguard and TIAA-CREF, as well as a Tax Deferred Annuity Plan and a Life Insurance Plan. Let us hope for Krugman's sake that some "wheeler-dealers" have done a good job managing the funds.