I see from comments here and elsewhere that the usual obfuscators are rolling out the old income mobility defense: sure, a few people get a lot of the income, but it’s different people every year, so no harm. I think it’s coming from the Tax Foundation this time.

But if you actually read the CBO report, it already deals with that issue:

Household income measured over a multiyear period is more equally distributed than income measured over one year, although only modestly so. Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multiyear income measures also show the same pattern of increasing inequality over time as is observed in annual measures.

Translation: sure, many people who have incomes greater than $1 million one year fall out of the category the next year — but that’s typically because their income fell from, say, 1.05 million to 0.95 million, not because they went back to being middle class. And the new millionaires are typically people who were making just shy of a million the year before, not Horatio Alger stories.

And if you’d been following this subject you would know that this fallacy has been well understood for decades.

Look, let me make a public service announcement: if you rely on bought and paid for sources on income inequality, you’re going to embarrass yourself again and again. These people never get it right, because their whole reason for being is to obfuscate. You should never, ever, trust what they say on this issue.

Just an addendum on the role of the top 1 percent versus the college-noncollege differential. Here, from the CBO report, are the changes, in percentage points, of the shares of income going to three groups. The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1).

It’s a tiny minority, not a broad class of well-educated Americans, who have been winning here.

The Federal Open Market Committee has spoken. It expects very high unemployment for at least the next three years, while it expects inflation to be below target. By any interpretation I can think of, the Fed therefore expects to fail to honor its dual mandate of price stability and full employment. To deal with this shortfall, it proposes doing … nothing.

But that’s not what has me upset, since that’s been the way of things all along. What got me was Ben Bernanke’s response to a question about whether the Fed might adopt nominal GDP targeting, or more broadly change its policy framework in some way that might help us escape the Lesser Depression. And his answer was no, because the standard approach has demonstrated “its benefits in terms of macroeconomic stabilization”.

Oh, my. Look, here’s a crude calculation – the variance of the unemployment rate over the previous 10 years:

You can see the Great Moderation, which might have led the Fed to believe, circa 2007, that it had this stabilization thing under control. But now, after four years and counting of slump?

And anyway, we don’t want “stabilization” right now – we want an escape from a slump that is crushing our future. This is no time to be basing policy on hopes that one of these years we’ll find ourselves back in the Great Moderation.

I have always had the working assumption that Bernanke was being as dovish as he could manage given his board, that in private he understood just how much we need radical action. Maybe not – and that’s very bad news.

Just because.

OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. I have to admit that I have a sneaking suspicion that this is in part driven by KDS (DS for derangement syndrome): some people will rush to take a position precisely because I have debunked it. But anyway, it’s really, really wrong.

Here’s the CBO result:

Notice that the 81-99 percentiles have seen only modest gains; it’s really the top 1 percent that drives the story.

For comparison, here’s some data on wages of men by education from EPI:

Not the perfect comparison, but good enough. Notice the difference in scales. College graduates have made only modest gains, and basically nothing after 2000; even advanced degrees weren’t giving anything like the gains we see for the top 1 percent (and the much bigger gains of the top 0.1 percent).

Yes, college grads have done better than non; but inequality in America is mainly a story about a small elite pulling away from everyone else, including ordinary college grads. And we’ve know this for a long time! There is no excuse for getting it wrong.

Atrios complains, rightly, about the description of the policies being followed in Europe as technocratic. His point is that

we’ve conjured up images of very sensible highly educated wonky people doing the right thing, even as they destroy the world.

But it’s more than that: these alleged technocrats have in fact systematically ignored both textbook macroeconomics and the lessons of history in favor of fantasies. The European Central Bank has placed its faith in the confidence fairy, while imagining that it can run policy in a way that has never worked in several centuries of central bank experience. Meanwhile, the European policy elite has simply wished away the clear evidence that the euro zone needs to make an adjustment that is virtually impossible unless inflation targets are raised.

The point is that I know technocrats, and these people aren’t — they’re faith healers who are making stuff up to suit their prejudices.

You can say something similar, although a bit less pointed, about the Obama administration. The line from people there, including the president, has been that it was too technocratic. But the real technocrats — people like Christy Romer and, well, me — were saying right from the beginning that the stimulus was too small, etc.; people like Geithner who opposed stronger action were basing their position on gut feelings about confidence, not number-crunching.

And by and large, people who did the numbers have gotten it mostly right; it’s precisely because we’re ruled by crats who trust their guts rather than the techno that we’re in such trouble.

Very nice event for the Economic Policy Institute last night. They put together a video about, well, me, that will make my parents happy.

Mike Konczal has a post pulling together all the facts showing how totally wrong Bloomberg was in claiming that Fannie/Freddie/the Community Reinvestment Act were responsible for the financial crisis.

One point worth emphasizing is that a very large part of the supposed case against the GSEs rests on what has to be a deliberately misleading rhetorical tactic. The raw fact is that Fannie/Freddie accounted for very little subprime lending. So the usual suspects talk about “subprime and other high-risk”, mumbling the latter part, so that it sounds as if they were doing a lot of it. Except, as Konczal documents (based on David Min), the “other high risk” was nothing at all like subprime, and not especially high-risk.

The point is that this is cheap, politically motivated stuff, motivated by a deliberate desire to mislead. And if Bloomberg actually believes this stuff, he has very bad judgement, not just about the facts, but about who he should trust.

Via David Dayen, the favored candidate of those who believe we need a smart centrist to solve our nation’s problems reveals himself to be completely ignorant about the causes of our economic crisis, someone who just swallows right-wing propaganda whole:

“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

“But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves.

You can read lots about how wrong this is; Mike Konczal has done it at great length, for example here. The fact is that for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his “analysis” from right-wing flacks.

Some centrist hero.

One problem with blogging is that at any given time many of your readers don’t know about ground you’ve already covered. I’ve tried to remedy that in part with my list of macroeconomics posts over to the right — before commenting on my macro analysis, you might want to read them. Still, it sometimes helps to repost an earlier argument.

So, about why the euro needs inflation to work, here’s what I wrote some time ago:

Jean-Claude Trichet is sounding hawkish about inflation again — and this is very bad news for the European periphery. Let me offer a stylized example to explain why.

So, imagine a eurozone that contains only two countries, Germany and Spain. And let’s make two assumptions: first, Germany’s economy is three times the size of Spain’s, so that German inflation is 3/4 of the overall index, Spain’s inflation 1/4; second, past events have left Spanish wages and prices 20 percent logarithmic too high relative to Germany. (Why logarithmic? So I can just add percentage changes, without having to worry about compounding.)

Now suppose that you want to get relative prices and wages back in line over the course of 5 years. How can this happen? Well, one way or another we need to have German inflation 4 points higher than Spanish inflation over that period.

So consider two scenarios: in scenario A, we have 2 percent German inflation and 2 percent Spanish deflation. This implies an overall eurozone inflation rate of 1 percent. In scenario B, we have 4 percent German inflation and zero Spanish inflation, implying eurozone inflation of 3 percent.

In a frictionless world, it wouldn’t matter which scenario gets chosen. But in reality, scenario A, the low-inflation scenario, is vastly worse for Spain — for two reasons. First, it’s much, much harder to get actual deflation than simply to have stable prices, so scenario A means much higher unemployment. Second, because Spanish debt is in euros, scenario A implies a significantly worse debt burden.

So what we’re seeing is an ECB catering to German desires for low inflation, very much at the expense of making the problems of peripheral economies much less tractable.

This is going to be ugly.

I’d add that the ECB and European leaders have been in complete denial on this point, willing neither to acknowledge the deflation their policies require nor to accept the need for higher overall inflation if deflation is to be avoided.

Dean Baker raises an important point here: it’s really awfully late in the game to be saying that the important inequality issue is college graduates versus non-graduates. It’s not clear that this was ever true, and it certainly hasn’t been true for a while.

I wrote about this years ago, using Ben Bernanke’s maiden testimony as Fed chair as an entry point. As I said then, Bernanke — like many others — had made

a fundamental misreading of what’s happening to American society. What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.

I think of Mr. Bernanke’s position, which one hears all the time, as the 80-20 fallacy. It’s 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.

…

Why would someone as smart and well informed as Mr. Bernanke get the nature of growing inequality wrong? Because the fallacy he fell into 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 inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that’s the real story.

Let me illustrate this point with some CBO data. First, from the new report, here are the income shares of the top 1 percent and the rest of the top quintile:

There has been no rise in the share of the 81-99 group! It’s all about the top 1 percent.

Second, even within the top 1 percent the gains are going mainly to a small minority. An earlier CBO report, using slightly different methods, looked inside the top 1 percent up through 2005. Here’s some of that data:

The big gains have gone to the top 0.1 percent.

So income inequality in America really is about oligarchs versus everyone else. When the Occupy Wall Street people talk about the 99 percent, they’re actually aiming too low.

One last point: I see that David Brooks is arguing that the oligarchy issue, if it matters at all, is a coastal phenomenon, not the issue in the heartland. Let me point out, then, that we have one country, with a tightly integrated economy. High finance is concentrated in New York, but it makes money from the United States as a whole. And even when oligarchs clearly get their income from heartland, red-state sources, where do they live? OK, one of the Koch brothers still lives in Wichita; but the other lives in New York.

Put it this way: having much of the wealth your state creates go to people who are in effect absentee landlords, whose income therefore shows up in another state’s statistics, doesn’t mean that you have an equal distribution of income. Out of state shouldn’t mean out of mind.

Look, I understand that some people find the notion that we’ve become an oligarchy — with all that implies about class relations — disturbing. But that’s the way it is.

Things are falling apart in Europe; the center is not holding. Papandreou is going to hold a referendum; the vote will be no. Italian 10-years at 6.29 at pixel time; that’s a level at which the cost of rolling over the existing debt will force a default, even though Italy has a primary surplus. And with everyone simultaneously pushing for fiscal austerity, a recession seems almost certain, aggravating all of the continent’s problems.

I’ve been charting this trainwreck for a couple of years, and am feeling too weary to trace through it again right now. Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack. Yet European elites embraced the notion of economics as morality play, imposing across-the-board austerity, tightening money despite low underlying inflation, and have been too concerned with punishing sinners to notice that everything was going to blow apart without an effective lender of last resort.

The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.

It all sounds apocalyptic and unreal. But how is this situation supposed to resolve itself? The only route I see to avoid something like this involves the ECB totally changing its spots, fast.

Aside from that, Mr. Draghi, are you enjoying your new job?

An earlier version of this post misspelled the surname of the Greek prime minister. It is spelled Papandreou, not Panadreou.

Just read the whole thing — it’s short. Brad gives us an important history lesson, showing that the lender of last resort function has always been an essential part of a central bank’s job, and that the Bank of England played that role when necessary even though it lacked proper legal authority.

So the ECB, by insisting that price stability is its sole responsibility, may sound conservative but is actually taking a radical stance that has never worked in the past. Of course, this is true of a lot of economic policy these days: the dirty hippies want us to take Econ 101 seriously, while the Very Serious People want us to believe in confidence fairies and invisible vigilantes.

Anyway, read Brad — and hope that Mario Draghi is reading him too.

From Business Insider:

Steve Pearlstein has a very nice piece about the Economic Policy Institute, which is indeed the small think tank that could, playing a disproportionate role in policy discussion. I still consider Obama’s failure to appoint someone from EPI to a senior position one of his biggest mistakes; he really needed someone who would speak up for workers and a view of economics not tinged by financial-sector connections.

At this point EPI is the single best source for analysis of labor issues, one of the best sources of macroeconomic analysis, and in general a bastion of humane clarity. The institute’s success demonstrates just how powerful it is when you combine intellectual integrity with commitment, when you make a point of doing the math right, but also never forget that you stand for something.

Oh, by the way: Since Pearlstein makes a point of mentioning some ancient disputes I had with EPI, I guess I should say something about where all that stands. The main thing, I think, is that trade policy — where I still have some differences with EPI — is much more peripheral an issue than it seemed to be in the early 1990s. I once had a conversation with Bob Kuttner in which we agreed that while we were arguing about NAFTA, Sauron was gathering his forces in Mordor. Our common ground — a shared concern with the fate of workers and the dangers of rising inequality, combined with a healthy skepticism of what Very Serious People say — is far more important than any differences, especially given just how excellent EPI’s work has become.

Put it this way: I’ve had a number of meetings with senior officials along with other progressive economists, and I always feel that of the group, Larry Mishel is talking the most sense — and, whaddya know, agreeing with me.

We’re going to have a little celebration tomorrow evening; let’s hope that EPI’s influence will continue to grow.