Inequality: Is America Becoming a Two-Tiered Society?


Tonight’s presenters are
Professor Bradford DeLong of UC Berkeley and
Professor Gregory Mankiw of Harvard University. They are both among the
world’s leading experts on macroeconomics, yet they
hold different receptions to Piketty’s work and the
concept of inequality. Very smart people
sometimes do disagree. The format for tonight’s
event is straightforward. Each presenter, beginning
with Professor DeLong, will present their
general remarks regarding our selected topic
for approximately 25 minutes. Following both presentations,
we will have an equal period of time, 25 minutes, for
questions and answers from the audience. Again, I really hope that
you enjoy your dinner and our presentations. With no further ado, I’d like to
introduce Professor J. Bradford DeLong, professor of
economics at UC Berkeley, and was deputy
assistant secretary for economic policy
at the US Treasury during the Clinton
administration. He blogs regularly for the
Washington Center for Equitable Growth and is a research
associate of the National Bureau of Economic Research. He’s a prolific author of dozens
of scholarly papers and book chapters, as well
as an active voice through social media on all
matters of macroeconomics and related contemporary
public policy. Please join me in
welcoming Professor DeLong. [APPLAUSE] Thank you. Whenever I come here,
especially in the fall, I’m reminded of what a
great university Brown is. And whenever I do, I
think that right now it’s probably the best of
the Ivies in terms of retaining its balance. But this is probably
nothing more than the fact that Brown today strikes
me as more like, say, the Harvard of my youth,
than Harvard does today. And probably simply a belief
that when I’m in Brown, I must be young and strong and
healthy and much more energetic now than I am what
I find I really can’t go back to work at 9:00
PM and work for three more hours at full tilt and get a
whole bunch more done. But even if it’s
only a myth and only a consequence of my psychology
and my longing for my youth, being back in Brown,
hanging out at Brown always makes me extremely happy. So I am more than
usually glad to be here, my statement that
I’m glad to be here is more than usually
true in such events. [LAUGHTER] Inequality. Inequality has ruled human
sciences, or human societies, at least since shortly after
the beginning of agriculture. Once you have farms,
you have the possibility of large social groups. And once you have farms, you
really cannot run away when the thugs with spears who have
trained to use the spears come and demand half your crop. And then there are
also the grifters, with knowledge of the
stars, who can tell you when the last winter storm
was probably the last one, because of where the stars are,
and so when it’s safe to plant and when the next storm is
going to bring with it a freeze, and so it’s time to harvest. The grifters with
knowledge of the stars and claimed access to
the will of the gods, are, at least,
significantly useful. But so are the thugs with
spears in protecting you against other thugs
with other spears who don’t want to nurture you
and keep you around, alive, and growing their crops, but
instead would definitely want to smash, grab, and run away. And so human societies
have been characterized by lots of inequality,
starting with what I will call
unproductive inequality, from the very beginning
of agriculture. We see this in the very first
pieces of literature we have. The Epic of Gilgamesh, the story
that the Babylonians actually called, The Man Who
Knew All Things. Gilgamesh is two-thirds
god, one-third man. And so as a result, he makes
the young men stand in rows and follow his orders and
train with their spears and build things for him. He doesn’t leave the
wife to her husband, nor the maiden to the warrior
that she wants to marry, nor a daughter to take
care of the mother, but instead, moves people around
for his comfort and pleasure. And the people are oppressed. The people are
extraordinarily oppressed of by this inequality. And what they do is
they cry out to the god Anu and the other gods. And the gods don’t
smite Gilgamesh down, that after all, he
deserves to be dominant. He deserves to be unequal. He is, after all, a higher
being, two-thirds god and one-third man. But they say, we
have to do something. And so they start figuring out
what adventures Gilgamesh could have, and we are off and
running with world literature. This is a very strong
post-Neolithic revolution, pre-industrial
agricultural pattern. We see it, I think,
most strongly between 5,000 and
2,000 BC, when all of a sudden, the
number of men who have sons who have sons who
have sons who have sons who have sons who have sons, so on
down, descent in the male line, preserving the Y
chromosomal mutations. As compared to female
daughters of daughters who have daughters of
daughters who have daughters, preserving the mitochondria
down the genetic line with small mutations. Some suddenly go steeply awry. From 75,000 BC up
until 5,000 BC or so, there are about equal numbers
of preserved Y chromosome and preserved mitochondrial
linkage of descent in the direct male and
direct female line. Since 2,000 BC, there
are about equal numbers. From 5,000 to 2,000
BC, we seem to have about 15 female mitochondrial
DNA direct descent lineages surviving for
each one male lineage. Polygyny for some men,
non-matrimony for many more, and the persistence of
male descent groups. If your grandfather
had a special position because he was a child, a son
of Heracles, in the direct line, you, if you were in
the direct– currently have a big position
as well in society. And what’s life for women
like during the 3,000 years that this is going on? Now let me back up and
get more to economics, because I’m going to be talking
a lot about these things called Gini coefficients,
which are how our data on equality-wide
society tends to come. The Gini coefficient, the way to
think about a Gini coefficient. If the bottom three
quarters of a society get one quarter of income, and
the top quarter get the rest, and if it’s evenly distributed
over those two groups, then, if I did my arithmetic
right on the plane, the Gini would be 0.5. If the bottom two thirds got
one third and the top one third get the rest,
evenly distributed, the Gini would be 0.33. And if you were to think
like a utilitarian, like Jeremy Bentham,
and imagine there’s some psychological law by which
each doubling of your income, each doubling of the real
resources you can command for your use, kind of
raises your happiness utility by an equal amount, a
move from a Gini of 0.5 to 0.33 would have as much effect on
the social welfare function, would do as much to promote the
greatest good of the greatest number, as a 30% boost
to everyone’s income. Which means that
movements in inequality are a substantial
deal for a society. They’re nothing
like the huge deal that the first and second
industrial revolutions have been, the thing
that has left us today between 10 and 40 times
as well off, depending on how you do the math,
as those who preceded us here at the southern edge
of New England back in 1650, so that compared to what 10-
to 40-fold multiplication of material wealth a 30-fold
difference, it’s there, it’s not huge, but it is
an important part of how a society works, especially
given that we expect somewhat slower
growth in the future than we’ve seen in the past. Now, the pattern established in
the era of Gilgamesh persisted, except for the dominance
of polygyny, or at least of male descent groups
that survived over time because of long
historical persistencee– some survived up until
1800 or perhaps 1850– that agrarian age
economies were. My teacher and Greg’s
former colleague, Jeff Williamson, my
colleague Peter Lindert at the University of California,
the amazingly smart Branko Milanovic at City University
of New York, calculated. Agrarian age economies
look to have been about 80% as unequal as they could
possibly have been, given the requirements that
the poor and the middle class get enough so that
they don’t die quickly. Any more unequal,
women would be too skinny to ovulate
regularly, children would be so malnourished as to have
compromised immune systems and fall victim to the common
cold, in which case they die, and in the words that
Charles Dickens put into the mouth of
Ebenezer Scrooge, a kind of relatively
right-wing utilitarian of the early 19th
century in Britain, “their death would be desirable
because it would decrease the surplus population.” Thus pre-industrial
economies, they were really not that
much more unequal than industrial economies. But the pressure
by the upper class to extract resources
from the rest, either through theft, through
fraud, or through exchange, overdetermined by an
initial distribution of resources established
from society, was much, much stronger. And so presumably,
inequality back then was much, much bigger a deal. It meant, potentially,
survival or non-survival, and it required a lot
more social pressure to extract something that much
closer to the maximum feasible inequality. And then also the
pre-industrial civilization is different from ours, at
least from ours today, at least from ours as we hope
it will be, in terms of status group inequality. The position of women, the
position of subordinate castes, whether divided by
ethnicity or by access to education or by anything
else, the position of slaves. That whenever Jeffrey
Williamson and Peter Lindert try to talk
about how America in 1775 was a relatively equal
society, because the top 1% had only eight to 10
times the average, rather than the 15 to
30 times the average that we saw in Western Europe
at about the same time, I want to say no, no,
no, and I want to ask, would Thomas Jefferson’s
slaves agree with you? Would George Washington’s
slaves agree with you? Would James Madison’s
slaves agree with you? Whatever you think
of the situation at the time of the start of
the industrial revolution, the industrial revolution and
the coming of the first Gilded Age, the period
before World War I, saw a stabilization
of inequality, in, at least, North Atlantic
societies, at about the level we have today. Then, starting with
the Great Depression and continuing on
through the 1980s, we have this era in which
inequality drops substantially. In which we do move from 0.5
to 0.33 in the Gini coefficient in Britain, which
I said, if you’re a naive, stupid,
philosophical utilitarian, although real philosophers
don’t take stupid utilitarianism seriously, is about
the equivalent of a 30% boost to well-being. In the US it’s
considerably less. Now across the North
Atlantic, or at least across the English-speaking
North Atlantic, it’s not so clear. We’re going back to the
old Gilded Age pattern. And we look forward to what’s
going to happen in the future. We’ve seen this
starting in 1980, in which the tenth, which
are not a constant group. Over the course of your
lifetime, a quarter of people will spend at least two years
in the top tenth of the income distribution. So thinking of the
tenth as a static group and the rest of us as the 90%,
as the rest, isn’t quite right. And indeed, most
Brown students will be in the tenth for at least
half of their working years. I’ve been in the top tenth since
the year I actually stopped being a lecturer at
MIT and actually got my first real
assistant professor job, in which I worked less hard
than I had as a lecturer at MIT and had four times the money. But still, what the tenth did
for us, for the rest of us, in 1967, the rest of us
are paying half of output to them to do it today,
rather than 35% or so. That’s a substantial shift. That’s a shift down
from 65% to 50% of the total production
for the other 90%. That bites to some degree. And we can divide the tenth. When we divide the
tenth, we see it’s really the top 1% that has benefited
extravagantly from the changes in inequality we’ve
seen since 1980 or so. That the rest of us, those
who aren’t in the top 1%, or, I should say, the rest of
you– I can’t claim to be out of it– it starts at
about $500,000 a year in household income right now. You used to pay 10% of income
for being bossed around by and benefiting from the skills
and ideas of the top 1%. Now you’re paying twice that. Now you’re paying 20% of output
for the privilege of having us around. Are we really twice as
productive and twice as useful, relative to you? Well, most of you will find
out, because most of you will join the 1% at some
point during your lives. It also isn’t a
completely static thing, but the chances of your rising
from elsewhere in society and being the top 1%
and reaching the top 1% are materially lower
in the United States now than they were in the
United States around 1900, and perhaps than they
were in Europe back then, although that’s not so clear. We don’t really have good
enough data to say a good deal. And then there’s the overclass. The top 0.01%. The 15,000 households at the
very top of the American income distribution, which turns
over, but which turns over once every 15 years or
so, on average. The people who,
together, we used to pay 1% of what we
produced for what they did, now we pay them 5%. We’re paying them, on
average, $60 million a year each for
whatever they do. Is that worth it? Could we have a better
society in which we took more of that money
and distributed it around to the rest to do other things? Certainly, I think so. That give me an extra
$400, and I will probably take my wife to
the French Laundry restaurant up in Napa
Valley, and we will have a wonderful $400 dinner. But if we divided
that $400 into 20 $20 tranches and given those $20
tranches each, to, say, 20 single mothers for them
to take their children out to McDonald’s for a
splurge, wouldn’t that generate more human
happiness than we get by going to the French Laundry? Well, apparently I must
think not, because as a rule, I don’t do it. I’m not Peter Singer. I don’t attempt to
actually implement what I think ought
to be true about the utilitarian distribution
of wealth around the world. Now how much difference
does it make? It seems to make a substantial
political difference. We think we’re seeing
this year, that if you look at American production
and supervisory workers, their incomes stopped growing
around 1973, at least, to any great extent, even though
productivity in the economy continues growing. About half of this
is that productivity has been growing more
slowly in the economy as a whole since 1973
than it was before. A small part of this
is because the terms of trade between what
we produce in general and what the non-rich
consume have changed. That it’s things that the
rich differentially consume. Of which, I suppose, this
is the leading example. Expensive electronic
toys and other luxuries that have fallen
in price the most, along with investment goods. But a good chunk of this is the
fact that inequality has risen, that the top 10%, the
top 1%, and the top 0.1% are taking a larger
share, and, at least, in some interpretations
of what’s going on, this is unraveling the
political-economic fragment of our society to
an alarming degree, along with from a narrow,
utilitarian, Benthamite, greatest good of
the greatest number, giving more income then
we can usefully use, then, to those of us who
happen to be at the top. So what happens next? Well, Brookings
economist Arthur Okun, writing in the early
1970s– and, in fact, I think, in a famous
lecture that he gave at Harvard’s
Kennedy School– talked about the leaky
bucket and how you had to curb your desire
to tweak the tax code and to tweak
policies to transfer too much income from
the rich to the rest, because the bucket leaked. That you tax the
rich too much, you find you’re distorting the
framework of production and effort by too
much, you find you’re losing substantial amounts
of what you could produce. With the polar example being
the communist societies behind the Iron Curtain
of Eastern Europe, that when the Iron
Curtain fell in 1990 and we actually could examine
them in detail, that we found were about only as one fifth
as productive as the societies of Western Europe that they
had been living next to for 43 years. That attempt to ruthlessly
enforce some kind of equality and to eliminate the markets
that Karl Marx thought were a principle
generator of equality, that that was an extraordinarily
destructive thing to undertake. On the other hand,
if you want to say that moves toward
redistribution to the poor reduce the incentives of the
rich and non-rich to work, higher inequality gives
the rich more power and more of a stake in
rent-seeking as well. That, after all, in
the economic process of creative destruction,
who is it that is going to be creatively destroyed? Sam Walton made many fortunes,
made the second biggest fortune ever earned in America,
by figuring out that the coming of
containerization and of modern
information technology would enable big box Walmart
to successfully out-compete the downtown stores
of small-town America, that their added convenience
would not outweigh the fact that he had a
much more efficient value chain and enormous economies
of scale and transportation and distribution. And so that was a substantial
increase in inequality, moving inequality
from the top 5% to the pockets of Sam Walton,
whose fortune is now divided by four, who now have
substantial political voices in that they have enough
money to spend on it, and who are presumably right
to be creatively destroyed by some future economic shift,
but who have every incentive to try to figure out how
to guard against that. And here we get to Thomas
Piketty’s argument. And the way I think that Thomas
Piketty should have written his book is that he
should have started out by saying that there is this
iron law of history since 1500 in the North Atlantic. That the rate of
profit is always 5%. That land and businesses
are always valued at 20 years’ earnings, more or
less, or 20 years’ projected earnings. That that seems to happen when
the wealth to income ratio is high, and when the wealth
to income ratio is low. In something like the age of
social democracy, the period between 1930 and 1980, the
rate of population in the North Atlantic’s growing
at 2% per year, that productivity growth
is growing at 2% per year, that conspicuous consumption,
philanthropy, taxes, take about 3% of the capital
of the rich every year. And that means that
old capital get eroded. That the economy
is growing at 4%, but old wealth is
only growing at 2%. So over time, it becomes less
and less salient as a share of the economy. And so as a result,
the rich are comprised of a mix of inheritors
on the one hand, the lucky on the other, and
the skillful value-adding entrepreneurs who have exploited
enormous potentially new source of value on the third. By contrast, in a Gilded
Age, population growth at 0.5% per year, productivity
growth at 1% per year, maybe conspicuous consumption,
philanthropy, taxes, less than 2% per year,
old capital at 3%, economy growing
at 1.5% per year. Heirs become more
salient over time. Old capital becomes more salient
over time in the economy. And as it becomes more
salient, and has a bigger political voice and
is able to engage in more rent-seeking in
order to give things the way they are, that that
is the force that drives the constancy of
the rate of profit at 5%. And when we think
about inequality, we need to deal with that. Now economists overwhelmingly
do not think that way. We, by contrast, tend to
follow John Maynard Keynes. We think that if there
is more capital, if there is more wealth out
in the economy, well, wealth is absolutely
useless without labor to assist it, put it
to work, to operate it. More capital means there
is fiercer competition for workers. And so you’d think
the rate of profit would fall, that when
the society is totally awash in capital,
that workers would be able to strike better
bargains in the market. And so the rate of profit
would fall substantially, and would fall by more
than the total mass of capital, at least, capital
owned by heirs and heiresses declines. And this is what Keynes
called the euthanization of the rentier. He looked forward to a world in
which there was more and more capital accumulation,
yes, in which the rich and the super-rich
were richer and richer, yes, but in which the rate of profit
had fallen so far that even though the rich
had a lot of wealth and so could direct
a lot of labor into areas they
thought was productive, they would not be taking a
more outsized share of income from the rest of society
than they had in other ages. The thing to say
about Piketty is that his argument is much
more a story about Europe than about America. That Europe is the place
with zero population growth. Although if Donald
Trump has his way, America will suffer
negative population growth to the tune of 12 million
over the next four years. Europe is the place with less
dynamic entrepreneurship, with more limits on, say, the
opening of big box stores, and with less
creative destruction. That America’s rich
are overwhelmingly entrepreneurs and
super-income earners who vary from artists like
Bruce Springsteen, people like Oprah Winfrey, who
used to, in a previous era, would only have been
able to leverage her extraordinary skills at
bringing interesting gossip to your attention over
an audience of four people over her back fence,
rather than 40 million, and yet who has enriched
the lives of millions Who have been watching the Oprah. And other super-income
earners, including financiers, some of whom, for reasons
I can’t understand, persuade people to pay
them 2% of their wealth every year to manage their
money and yet, as a group, do not do any better
than if you’d simply bought to the Vanguard index
fund and then nothing else. That is the story,
it may be apocryphal, is that Fidelity tried
to do a study of what people with Fidelity
accounts did the best, and the answer was
those who had forgotten they had a Fidelity account. [LAUGHTER] [INAUDIBLE] I’ve never
been able to run this down, but it’s too delicious
not to repeat. Big picture evidence
on which dominates. Which way is the bucket leaking? Are a richer rich a sign that
entrepreneurship and enterprise is more strongly rewarded
and so growth is faster, or are they a sign that
there’s more rent-seeking going on and more restrictions
on the creative destruction process, the kind of thing that
makes my house in Berkeley, California now
worth $1.5 million because it is one mile
north of the subway and one mile south
of the university, you can walk to both,
and the city of Berkeley isn’t letting people
build anything else in the neighborhood? Such a house in, say,
Houston would cost $400,000. In Cleveland, it
would cost $150,000. Same 2,800 square foot,
century-old arts and crafts house with its
original woodwork. And yet the rich rent-seeking
homeowners of Berkeley, it’s very difficult when you
stand up at city meetings and say we should encourage
development in Berkeley. Your neighbors look at you as
though you’re a strange person. There’s basically no pattern. Think that redistributing
income either way, at least at the margin at
least where we are, will have a big effect
on economic growth, history isn’t on your side,
no matter which side of that you pick. So what happens next? Well, we really do not know. The bucket is leaky. The rate of capital,
since 1700, does indeed seem to have been stuck at 5%. There are bunches of factors
making for slower growth and there seems to be
less of a taste since 1980 for high progressive tax rates. If those trends
hold, then indeed we do have Piketty world in
which heirs and heiresses grow in their salience in society. If those don’t hold, or if
we collectively make them not hold, or if Piketty is wrong and
capital and the rich who seek to restrict creative destruction
are unable to keep capital from competing against itself, and
so forcing the rate of profit down, then we don’t. We won’t. It’s in our hands. But maybe I should step back
by saying that I have assumed, throughout this, position two. The utilitarian
view that inequality is a bad thing unless
justified by faster growth, because each doubling
of each individual’s income contributes the same amount to
the social welfare function, contributes the same
amount to adding to total societal happiness,
as any other doubling. And because it’s cheaper to
double the income of the poor than the income of
the rich, we should focus on redistributive
policies, at least at the
margin, that do more for the income of the poor. That’s just position two. Position one is that we decide
on what the distribution of income would be
for good reasons, because we are a democracy, and
that economists should focus on figuring out what should
maximize wealth and say that the rest is a
political value choice, and that we have no standing. There is no place
to stand, no lever with which we can quarrel
with the political choice that the members of
a democracy make. They are the sovereign people. They have a sense of their
own collective interests. Or you can go further than
the utilitarian direction. You go to the Rawlsian
and say that if there’s anyone in a society
who was poorer off as a result of inequality,
they have a legitimate beef. That the only society that
is truly acceptable in which therein no one has a legitimate
beef about its organization, is one in which inequality
exists because, and as part of, increasing total
production by so much as to make even the least
advantaged person best off. There are also theories that
inequalities are justified when they reward the worthy,
with the worthy ranging from the descendants
of the Franks who conquered the Gauls in 450. They had a natural right
to tax exemption in France before 1789 because
they were worthy. To those of us who happen
to have born with brains that allow us to gain and
hold tenured Ivy League professorships, in my
case, UVA professorships, in my sister’s
case, and to somehow become portfolio
manager of a hedge fund, in my brother’s case, that those
brains make superior and worthy in some sense. Or any of a whole bunch of other
possible definitions of worthy. And then there are
Plato and Aristotle, who would say that
inequalities are justified when they allow for philosophy. And thus Plato argued strongly
against gender inequality in education, saying, I’ve known
women who can be philosophers. We need to educate women
as much as we educate men, because we need philosophers. And Aristotle, who said that we
need slavery, at least until we have catering carts that
will move themselves. Or like the catering carts
the gods have at Olympus. Or until we have
metal robots that can make plows by themselves
as the servitors of Hephaestus. That when that day comes,
which it never will, we can avoid having
massive inequality, but that’s a utopian pipe dream. Or you can say that
inequalities are justified when they are the result
of a fair system, but then doesn’t that just
push the question back, what is a fair system? And let me stop there. [APPLAUSE] Our next speaker this evening
is Professor Gregory Mankiw, the Robert M. Beren
Professor of Economics at Harvard University. Professor Mankiw is
also a prolific writer, and a regular participant in
academic and policy debates. He’s authored textbooks,
Principles of Microeconomics, and his intermediate level
text, Macroeconomics, are amongst the
industry standards, selling millions
of copies in dozens of languages around the world. Please join me in
welcoming Professor Mankiw. [APPLAUSE] Thanks so much. It’s great to be here. I’m going to go back not
quite as far as Gilgamesh. I’m going to focus on
the last 100 years or so. And what I want to do
today is do three things. I’m going to talk to you
about what the facts are, that I want to try to explain. I want to talk about some
of the economic forces at work to explain these facts. So I’m really going to
go through hypotheses. And then I want to talk about
what policies we might pursue in light of these facts and the
theories to explain the facts. So let’s start off
by looking at facts. This is a graph that
shows you growth in income before and after 1973
at different parts of the income distributions. So you can see the bottom 20%,
the top 20%, and at the corner at the right, the top 5%, which
is a subset of the top 20%. And what you see in blue are
the growth rates before 1973, basically from World
War II to 1973. What we see here is
that there’s growth in all parts of the
income distribution. In fact, growth is a little
higher at the bottom, so we were becoming
more equal as a society because the bottom was growing
a little faster than top. But you saw growth
across the board. And then after 1973,
things are very different. You continue to see fairly
robust growth at the top, you see fairly meager
growth in the middle, and you see, if anything,
slight declines at the bottom. So the bottom 20% is basically
experiencing no growth at all. So this shows you
the overall pattern of changes in inequality
over these two very important sub-periods. I’m also going to give you
a couple graphs to show you what’s happening
at the extremes. This one is famous,
as Brad showed you, this is the Piketty-Saez data. This is based on tax returns. And what we see here is the
share going to the top 1%, and as Brad pointed
out, this is exactly the same data he showed you. It basically doubles from
10% to 20% over this period. So we’re basically back
to the level of inequality we saw in the Great Gatsby era. Now remember that, by the way,
the doubling of this income share. This is important. We talk about solutions
later towards the end. So basically doubled the
share going to the top 1%. This shows you the poverty rate. And basically, because we
saw no growth on the bottom over this period, we’ve
seen basically no advances in poverty. From ’59, when the
poverty data starts, the 1970s, we saw declines
in the poverty rate, that’s when John Kennedy could say a
rising tide raises all ships, and he was right. But then the rising tide started
leaving some of the dinghies behind, and the
poverty rate basically pretty much plateaus It
goes up in recessions, down in expansions. The recessions are
the shaded areas. But basically there’s really no
long-term trend for the past 40 years in the poverty rate. So those are the basic facts
about income inequality that we’d like to explain. I should point out, by the way,
that everything I’m looking at here is before tax incomes. So we can’t say, well, it’s
tax policy is doing it. At least, not the direct effects
of tax policy are doing it. this is all before tax
incomes that I showed you. OK, so those are the facts. And those, I think,
are things economists would like to explain and like
to figure out how to reverse. So what are the
economic forces at work? Before I tell you,
I want to talk about four important forces
that I think actually do help explain what’s going
on, and are all contributing. But before I do that, I want
to take you on a dead end. It’s this book here. [LAUGHTER] I, actually– this book is
a great book, in some ways. I think the data collection
is really quite interesting, but I think the analysis of
the economic forces at work are basically wrong. So the basic Piketty
argument, I actually don’t know if it’s
Pi-KET-ty or PI-ket-ty. I’m not sure how
to pronounce it. But any– what? Pi-ket-TY? OK, Piketty. OK. So Thomas’s argument
is, the way he puts it is that r greater than
g is the central contradiction of capitalism and leads to an
endless inegalitarian spiral. Well, those are
really strong words. [INAUDIBLE] kind
of likes capitalism like I do, saying you found
a fundamental contradiction, central contradiction
of capitalism, that’s kind of like, really? I got to take that seriously. And the basic– what
r represents here is the rate of
return on capital, and g is the growth
rate of the economy. And what Thomas says
is, well, if the growth rate of the economy is
below the return on capital, then the capitalist will
get more and more money relative to what
labor’s earning, and therefore becoming
less and less equal, more and more unequal,
and these big estates are going to keep
growing over time. And he says we do live in a
world where r is bigger than g, and therefore we’re really up
sh– we’re in a bad situation. [LAUGHTER] And what we need, in his
inclusion is, a tax on wealth. Progressive wealth,
global wealth tax. He wants [? this as ?]
the global level. He wants the UN to do it,
because otherwise the rich will just move to
some low-tax country. If the UN [INAUDIBLE] this
progressive global wealth tax, so we don’t end up in an
endless in-egalitarian spiral. Well, I think there’s so many
reasons why that’s wrong. I’m just going to
give you three. And then I’m going to–
in fact, my first attempt at these slides, I didn’t
even mention this book. Then I saw the
announcement that went along, I was suppose to
talk about this book, so I added this slide. OK, so why is that wrong? Well, r is the rate
at which wealth accumulates for the wealthy
under three assumptions. One, they never spend any money. Two, they only have
one child each, so the money gets passed
on that one child. And three, there’s
no taxes on capital. We know all three of
those things are false. First of all, the
wealthy do spend money. There’s conspicuous
consumption, they fly around in their private jets,
they have fancy cars, they give money to
Brown University to build buildings
in their name. There’s all sorts of ways
that you can conspicuously spend your money, and they do. So that all that
spending sort of dissipates their
wealth over time. Secondly, they procreate. They two children on average. That means every generation,
their wealth gets halved. They give one to one
and one to the other, we don’t have primogeniture
in this country. Typically, people split their
assets among their kids. So they all have two
kids, on average, and then it’s going to get
halved every generation. And then we have taxes
on capital income, both the ongoing capital
taxes and also the state tax. So I did some back of
the envelope calculations for a paper, and I
concluded that to get this endless
inegalitarian spiral, you don’t need r bigger than g,
you need r to be bigger than g by about 7 percentage
points per year to offset these three forces. And that’s probably
not plausible. Secondly, it’s probably not true
that r’s really big right now. I think Brad has a pretty
good summary of Thomas’s book. It’s probably not true
that the return on capital is exactly 5% right now. In fact, if you look
anything, now, people are worried about really
low rates of return. Real interest rates
are basically 0%, ratios are very high. So this idea we’re still in
this world of 5% rates of return is fairly unlikely. And finally, even
if this is true, this is really a
story about what might happen in the future. If you want to see what
has happened in the past, it’s really not
anything about this. Because the inequality
we’re observing is not about inequality
between capital and labor, it’s inequality among
different laborers, it’s inequality between
the highly compensated and the low compensated. And I think Thomas admits this. And so even if
you buy his story, it’s really a speculative
story about what might happen, not a story about
what has happened. So I want to talk about
what has happened. So what are the forces at
work driving income inequality over the past four decades? Well, this is actually
the book that everybody should be reading on income
inequality, not the Piketty book. This is the book by two
of my Harvard colleagues, it’s the race between education
and technology, Claudia Goldin and Larry Katz. And they have a fairly
straightforward story about what’s driving inequality. Their story is that technology
tends to favor skilled workers relative to unskilled workers. New technology is used
by skilled workers, and it tends to replace
unskilled workers. I recently went to a restaurant
at Toronto Airport a few weeks ago, and one thing
I thought of is there’s some unskilled jobs
that can’t be replaced, and I thought being a
waiter is one of them. But turned out they had–
this Toronto restaurant had replaced two of the
three jobs waiters do. What do waiters do? They take your order,
they bring you your food, and then you pay. Well, this restaurant
at this airport had an iPad at
every single table, you ordered your
own food, the waiter did come up to
give you the food, and then you paid
with the machine with your own credit card. So the two of the three
things had already been replaced for waiters. And similarly seen
throughout the economy, automation replacing a
variety of unskilled workers. So that tends to
depress the demand for unskilled labor, that
tends to increase inequality. The other side of the
coin, though, is education. Because what education does
is turn unskilled workers into skilled workers. that’s what the purpose of
places like Brown and Harvard are. Turn unskilled workers
into skilled workers. And according to
Goldin and Katz, what inequality has
been driven by is this race between
education and technology, technology making us
less equal, education tending to make us more equal. So here’s a picture from
Goldin and Katz’s work. This shows you years of
schooling by year of birth. And what you see here
is that it’s constantly going up over time. If you were born
in 1870 or so, you probably about seven
years of schooling, on average, as an American. Now it’s closer to 14
years of schooling. But notice it has slowed down. If we had continued
along the previous trend, the typical American would have
a couple years more schooling today than, in fact, they do. And it’s this slowdown that
according to Goldin and Katz is what’s driving
higher inequality. Slowdown in
educational attainment. Here’s another picture that’s
consistent with that story. This is from David Autor. This shows you change
in earnings since 1963 by educational attainment. And it’s men on the
left, women on the right, story’s not that different. What you see, you
see for people that are high school
dropouts, for men, you see wages have
fallen a little bit. And they’ve increased for
women, but only about 20% over this very long
period of time. People with high school
degree have done better, people with a bachelor’s
degree have done better still, and people with
a graduate degree have done the best of all. So for those
undergraduates here, be thankful that
you’re here at Brown, but think about
graduate school, too. Because, as you can
see, you do even better with a graduate degree than you
do with just a college degree. So this is consistent
with the Goldin and Katz story, that inequality has
a lot to do with education. There’s a bit of a
growing gap between what’s happening to earnings of people
with high skills and people with low skills. Globalization is another thing
that’s contributing to this. I don’t think is the
main thing going on, but I think it is one
of the things going on. When we trade with
other countries, we tend to import goods
and services produced with relatively
unskilled labor, and we tend to export things produced
with relatively skilled labor. We import, say,
t-shirts from China, and we export, say,
textbooks from Harvard. And that’s our driving force
increasing income inequality. So I think– and
indeed, there’s a lot of parallels between changes
in technology and changes in trade. Something that I talk about
when I talk about globalization. I think it’s a contributing
factor, much in the same way that [INAUDIBLE] education
and technology is. Superstars. The famous paper by Sherwin
Rosen, about 20, 30 years ago, talks about the
economics of superstars. Here’s an example of a
superstar, Robert Downey Jr. I’m sure many of
you saw The Avengers. It’s a great movie. For that one movie,
that one movie, Robert Downey Jr.
was paid $50 million. To give you a sense of
how much money that is, the typical American would have
to work for more than 1,000 years to make $50 million. And he made that for that one
movie, which presumably filmed over a few months, and people
talk about the next Avengers, he’s likely to get
more than that. So why is it that he got
$50 million for that movie? What are the economics of that? Well, it’s not that he
ripped off the producers. I think the producers and
investors of the movie were very happy with that movie. They made a lot of money. Roughly speaking, 200 million–
these are round numbers, so look these up–
roughly 200 million people saw this movie worldwide. So of those 200 million people
saw the movie, each of them bought a ticket, and
$0.25 of their ticket went to Robert Downey Jr. And my guess is if
you saw the movie, you said, yeah, that’s
a good performance. I’m happy to pay him
a quarter for it. Or you don’t feel ripped off. But the amazing
thing about it is that he could have
200 million customers. And that’s the
nature of superstars that Sherwin Rosen talked about. In certain industries,
something about the nature of the good that allows
you to, if you’re at the top of your game,
reach literally everybody on the planet. If you’re Taylor Swift,
people like your singing, everybody gets to
listen to your singing. If you’re a great actor
like Robert Downey Jr., everybody gets to
see your acting. If you’re the
world’s best plumber, not everybody gets to
enjoy your services. You can’t have 200 million
customers if you’re a plumber. And so the certain
industries in which the people at the
top of their game can reach a very wide market. Notice, by the way,
the average singer sings in the shower
for nothing at all. The average actor
may do it for fun, community theater on the
weekends, for no money at all. Only if you’re the best,
the top of your game, can you be Taylor Swift or
Robert Downey Robert Downey Jr. And there has been, I think,
because of, again, changes in technology, a growth in the
number of superstars out there. The women’s movement
and assorted mating. Women have a very
different role in society than they did 50 years ago. Women are much more
likely in the labor force. But what people don’t
appreciate is to what extent this has contributed
to rising inequality. Now, I know you’ve come to
Brown to get a great education. But let me say also,
by the way, this is a very selective
matching service, so this is a good place to
meet your future spouse. Because you’ve been
selected to get here. You probably have a lot of
earnings potential, [INAUDIBLE] with a lot of
earnings potential. They’ve gone through the
same selection process. Just keep that in mind. Nick, my son’s here. [LAUGHTER] OK. This gives you some
evidence of the changing role of assorted mating. This is a very simple graph. Let me just explain it to you. This is a sociology journal. What the sociologist
did is she correlated husbands’ incomes and wives’
incomes in different years. And the line at the
bottom’s for all couples. That’s what I want
to focus in on. And we see in the
1960s, the correlation between husbands’ incomes and
wives’ incomes was negative. Today it’s positive. Well, it’s kind of
easy to understand why it’s positive today. It doesn’t seem surprising. Because we know
what today’s like. A successful doctor,
lawyer, banker marries another successful
doctor, lawyer, banker. And they have two really high
incomes in the same household. That’s the positive
correlation that contributes to income quality. But back in the 1960s,
it was negative. Why was that? Well, a lot of you
students weren’t born then, but I was around. And what happened back then was
when the man did really well– and it was the man
at that point– the man did really well,
he came home and said, great news, dear, you
don’t need to work anymore. And so the woman would drop
out of the labor force. And so you see so the
negative correlation between husbands’ incomes
and wives’ incomes. And so that negative correlation
was a stabilizing force in household incomes. Because men did better,
and the wife dropped out. That’s what stabilized
family incomes, so you had less inequality. So if you’re really worried
about income inequality and you’re planning to be
that successful doctor, lawyer, banker, marry
yourself a poet, because that will help
stabilize your family incomes. OK. OK so those are the hypotheses. I mentioned four
different explanations. I don’t think these are
alternative explanations. I think there are a
variety of forces at work that are all contributing
at the same time to the trends we’re seeing. Income inequality is a important
phenomena that– really, an outcome, that has lots
of forces affecting it. The question is what do we
do now, in light of– you’ve seen the facts,
you’ve seen what I think are the most plausible
hypothesis for explaining these facts. In light of that,
what do you do? Well, the first thing
you might want to do is address the root causes. But once you start
realizing them, and I’ve identify some
of the root causes, you realize how
many of those root causes are really
hard to change. We’re not going to change
the nature of technology. It would be nice to
tell entrepreneurs, stop inventing stuff that
skilled people can use, and invent stuff that unskilled
people can use that can replace the skilled people. But once you [INAUDIBLE] that’s
kind of a hard thing to do, Technology– it’s
easier to figure out to get a machine to
replace an unskilled person than to get a machine to
replace a skilled person. Now there’s other
examples of that. Maybe we can get
machines reading x-rays to replace the radiologist. So yeah, we can
think of examples, but that tends not to be
the way inventions happen. And we can’t really direct the
nature of innovation in a way that we might like,
if we wanted to. We’re not going to
reverse globalization, Donald Trump notwithstanding,
and we shouldn’t. Because we do
believe, economists do believe that
globalization, trade expands the size of the
economic pie overall, even if it, perhaps, leaves some
people with a smaller slice. Just like technology. Technology expands the overall
size of the economic pie, but sometimes leaves some
people with a smaller slice. Globalization does
much the same thing. And really, we’re
not going to get those bankers to marry poets. So assorted mating is
something that’s here to stay. Women are going to stay
in the labor force . Successful men are going to
marry successful women and vice versa. And that’s just the forces
increasing inequality that we’re going to
have to put up with. So once you recognize
the root causes, you realize a lot of
these are things we really can’t influence very much. But one thing we can
do is we can increase the supply of skilled workers. Inequality, as I
said, was driven by the mix of skilled and
unskilled workers, Goldin and Katz, that we
need to increase educational attainment. And that’s one of the
things we can work on. We can increase the
supply of skilled workers by trying to increase
educational attainment. And I’m not an expert in
the economics of education, but you realize it’s all
sorts of things you might do. And it involves things
like maybe better pre-K, maybe better financing of
higher education, maybe better organization of
our high schools. So we could fire
ineffective teachers, all sorts of things that
educational reformers debate, which of these
are most important. But let me do point out that
even if we succeed in that, this is going to be a
very long term project. It’s not going to
happen overnight. So for example, let’s imagine,
as Jim Heckman argues, that better pre-K,
pre-kindergarten, is really important for
underprivileged kids. Let’s say he’s right. Let’s suppose we pass the
perfect pre-K program. What that’s going to do? Well, that means that in 20
years, when those students are in the labor force, we’ll
have a better mix of workers. That could be great. They’re not not going to show
up in economic outcomes for 20 years, because
those aren’t going to be workers for 20 years. So we have to be very
patient if this is the route we’re going to take. And maybe we need to be patient. After all, this increasing
inequality, as we saw, unfolded over several decades. So maybe it will take us
several decades to unfold it. but education attainment
may be the way to go, but it really does require
a large degree of patience. There is an easy way to increase
the supply of skilled workers, and that’s just let them in. Let in as many skilled
workers as want to come. And to be honest,
I’ve never understood why it is that we
don’t have an open door policy for skilled workers. If a foreign
student, for example, goes to a place like Brown,
gets an advanced degree, and wants to stay in
the United States, we should say thank you. We should give
them the green card as Chris Paxson is
handing out the diploma. Immigration say, here’s the
green card, please stay. And I think unskilled
immigration raises a whole host of more complicated
issues, which I’m not going to get into here, but
skilled immigration, I think, should be a no-brainer
for us as policy makers. Now the alternative to
treating if the root causes is to treat the symptoms. That’s what I want
to talk about now. Everything I talked about was
inequality before tax incomes, and there is a gap
between before tax incomes and after tax incomes,
and that’s the tax system. And so therefore,
a lot of the debate over income inequality,
the policy debate, is over tax policy. So let me just talk
about that a little bit. This shows you tax rates by
different parts of the income distribution. This is all federal taxes as
estimated by the Congressional Budget Office. On the right you
see the tax rates under the current tax law,
which was passed in 2013. So the top 1% pays 33% of their
income in taxes, on average. The middle class, the middle
three quartiles pays 13%, and the lowest quintile pays 3%. You can see that we have
a progressive tax system. Higher income people
pay higher taxes. You can see that the
degree of progressivity changes over time. So you can see that in
the early ’80s, when Ronald Reagan was president,
taxes on the top 1% fell. You can see that under Barack
Obama, taxes on the top 1% rose. And now we have a
tax system that’s pretty much been as progressive
as we had during this period since 1979, which is
when the CBO data starts. But I’m not going to
sit here and argue whether Barack Obama’s tax
policy or Ronald Reagan’s tax policy is better. But I do want to
point out something that I think is
pretty important. Notice the difference between
Barack Obama’s and Ronald Reagan’s tax policy. It’s basically about
six percentage points for the top 1%. So there’s a a 6
percentage point difference in this very progressive
tax system we have now, versus the less
progressive tax system we had at the end
of Reagan’s term. Six percentage points. Remember earlier, I said that
the income share of the top 1% has doubled. Doubled. That doubling is huge, compared
to the 6 percentage points. So we can debate Obama tax
policy versus Reagan tax policy till we’re blue in the face. But it’s only going to
make a very small dent in the basic issue of rising
inequality over the past 40 years. Having done that,
I’ll talk a little bit about how we might
think about tax policy. Brad did a great job of
talking utilitarianism. Actually, this is the famous
book that he mentioned, Inequality and
Inefficiency, you can even see the picture of the
leaky bucket there. The first thing to say about
the thing with the awful tax system, it’s not just
an issue of economics. It’s largely an issue
of political philosophy. You can’t really say what the
optimal tax system is just from economics alone. You have to take a stand
in political philosophy. Economists normally, when they
do this, the whole literature in optimal tax policy,
economists normally just adopt utilitarianism. And it’s not because
economists have thought hard about all the philosophical
objections to utilitarianism and found them wanting. It’s that it’s really convenient
to adopt utilitarianism. Because utilitarianism
actually says setting optimal social
policy is maximizing subject to a constraint. That’s what economists do. We maximize subject
to constraints. that’s what our
tools are useful for. So political philosophies
just maximizes subject to a constraint, great, we can
be political philosophers, too. So I think there is a
attraction to utilitarianism among economists that’s often
hasn’t been really thought through. I’ve written some
research papers trying to get economists
to think a little harder about utilitarianism. Let me just mention one
briefly since I have a minute. I wrote a paper called “The
Optimal Taxation of Height.” It turns out the wonderful paper
by George Akerlof years ago that said, if you’re trying
to do an optimal tax, then anything
correlated with income should be taxed too, because,
essentially, it’s exogenous, because if you can tax
that exogenous thing, you can tax income
less and the taxes will be less extortionary. He called this the
economics of tagging. So Matt Weinzierl
and I came along and wrote a paper called
“The Taxation of Height”, because we observed–
there’s literature that says that height and
income are correlated. And we actually documented
that, we wrote down a utilitarian
calculus and said, OK, if you believe– if
you’re utilitarian and you take this
fact that height is correlated with income, then
you should want to tax height. And we calculated what
the optimal height tax is. And it’s several
thousand dollars. A short person should pay
several thousand dollars less in taxes from a tall
person for the same income. So being tall, you have to
pay extra a few thousand dollars a year. Now I have a colleague
in the Harvard Law School who read this and said, I
love, how utilitarian, that’s a great idea. But our point wasn’t
that it was a great idea. Our point was– [LAUGHTER] Our point was that
this is a stupid idea, but if you are utilitarian,
you have to believe it. So therefore, you
don’t believe it, you’re not really utilitarian. And so it was
really a challenge. It was an intellectual
challenge to utilitarians, say you probably really,
in your heart of hearts, are not utilitarian. So you got to figure
out what you are. But anyway, there’s
no question that this is a political– utilitarianism
is a political philosophy, and Brad was pretty
good at laying out a variety of other possible
political philosophies. Let me lay out just one. Robert Nozick, famous book,
Anarchy, State, and Utopia, he wrote the following. He said, “we are not in
the position of children who have been given
positions of pie by someone who now makes last
minute adjustments to rectify careless cutting.” That is, utilitarianism
wants to go in there and say, oh, there’s
this unequal pie, let me go fix that. Because it’s really
too bad that when markets cut up the pie and
people ended up unequal slices. Go back to Nozick. “What each person gets,
he gets from others who give to him in exchange
for something, or as a gift. In a free society,
diverse persons control different
resources, and new holdings arise out of the
voluntary exchanges and actions of persons.” So what Nozick is saying
is, there’s inequality, but people voluntarily
got there that way. Don’t worry about it. Or, if I had to summarize
Nozick, here’s my summary. There’s good rich people
and there’s bad rich people. If you’re Robert Downey Jr. and
you created something of value that a lot of people were
willing to pay you $0.25, 200 million people
willing to pay you $0.25 to see your performance
in The Avengers, no problem, says Nozick. Government doesn’t
need to get in there. Sure, it’s unequal,
but we liked seeing The Avengers and the
fact that Robert Downey Jr. got fabulously wealthy
for it, no problem. On the other hand,
if the rich got wealthy by simply diverting
money from other people, they simply stole
from other people, like Bernie Madoff
here, that’s a problem. So I don’t think
Robert Nozick would say Bernie Madoff’s a fine guy. [INAUDIBLE] Nozick
would say, no, he stole. We need to protect people
from more stealing. Now, I actually think this
Nozickian view is actually much more similar to a lot
of the popular consciousness about inequality
than utilitarianism that people– economists–
often gravitate towards. Remember back when there
was Occupy Wall Street? We had Occupy Wall Street. We did not have Occupy
Hollywood, Occupy Silicon Valley, Occupy Major League
Baseball, Occupy Taylor Swift. Nobody complained about
those people getting rich. They complained about
Wall Street getting rich. Why was that? Because they thought that
those people on Wall Street were getting rich kind
of like Bernie Madoff. Maybe they didn’t actually
get to go to jail, but a lot of the Occupy
Wall Street people thought they should. And in the aftermath of
the financial crisis, I can kind of understand
where they’re coming from. Now, I don’t agree with them. I think a lot of
people on Wall Street do do useful things for society. But this sense that
something was wrong, that people were getting
fabulously wealthy in a way that wasn’t
creating value, was, I think, the sense that a lot of
Occupy Wall Street people had. And I think to the extent
that I or Robert Nozick share that perspective
on Wall Street, I think they would have come
to a similar conclusion. So here’s the question I
want to leave you with, which is, is the typical rich
person more like Robert Downey Jr. where they create
value, or are they more like Bernie Madoff
with his diverting value to other people? That is not a question
of political philosophy. That is a question of
positive economics, but not an easy one to answer. Let me leave you, finally, with
one last thought in concluding. People worry about inequality. People worry about too
many people in poverty. I understand that and I think
those are valid concerns. But suppose you’re a person
living at the poverty line in the United States. If you’re living at the poverty
line in the United States, you are poorer than
85% of other Americans, but you are richer than
85% of people in the world. So even a person at the poverty
line is, by global standards, doing well just by virtue of
living in the United States. So if I had to put this
conclusion on a hat, it would say “Make
America Grateful Again”. Thank you very much. [APPLAUSE] We now have approximately
25 minutes for question and answers from the audience. There are microphones on
both sides of the room, and our event this evening is
being videotaped and recorded for posterity, so please
speak into the mics. Go for it. All right, so just– hi. Really quickly, so
you pointed out, Greg, that in the last 30
years, really, the taxes don’t look very much
more progressive. But as you know, when
Eisenhower was president, our marginal tax rate
on the top was 93%. So would you like to say
something about that? Yeah, sure. I started the CBO data
in ’79 because that’s when the CBO data starts. I would have loved to
have gone back further. You’re right. [INAUDIBLE] marginal taxes
rates were very, very high under Eisenhower. I think, actually, very,
very few people paid it. I tried to do some back of
the envelope calculations. Paul Samuelson did. Paul Samuelson and Bill Bradley. Did what? Paid them. Well, I think very
few people did, so I haven’t seen that
number going back. I mean, it’s a little bit
like, suppose I said right now, we’re going to set the
top marginal tax rate 99% for anybody making more
than $200 million a year. Fine. Robert Downey Jr. may do
it for his next movie, but it’s so few
people, it really wouldn’t show up in the
1% data or anything else, so I think it’s
relatively few people. I’d love to see the
CBO data gone back. Greg Mankiw would
immediately transfer ownership of his
textbooks to a corporation that would pay him $1 a year. I’ll hire Brad as
my tax advisor. [LAUGHTER] And then wait for
tax rates to go down. Hi. Thank you buys both very
much for being here. It’s a great talk. I’m curious to know what you
both think of Larry Summers’ secular stagnation hypothesis. It seems pretty relevant,
especially given that both of you talked about
the political and structural causes that might be
driving inequality. Can you start by offering
a brief summary of what he means by– You want to– sure. You want to go– [INAUDIBLE] Larry Summers’ secular
stagnation hypothesis is that over the past 15
years, the supply of savings in the world has grown because
of the industrialization of the global south and desire
of people there to save more, because of increasing inequality
in the global north, which produces an upper class that
has a desire to save more, because of a variety
of other factors. At the same time as a
reduction in expectations, either of the ability to invent
new technologies, or, perhaps, of the profitability,
the ability to extract money from those
new technologies, has fallen. And so as a result,
the interest rate that balances aggregate
supply and aggregate demand at full employment has
fallen, and fallen by a lot. So that the economy
is constantly in the position of bumping up
against a situation in which people no longer want to
spend their cash as using it as a means of liquidity,
but instead want to hold on to their cash, to hoard it,
as a store of future value, because the interest rate
that could get other things is so small. And this poses enormous
problems for an economy and for policymakers who
want to produce something like full employment. That can be fixed
or it can be treated by a variety of some
simple, some complicated, some subtle, some easy,
some difficult, means. There are some
people, like me, who think it’s largely misdirected. The problem is not a global
savings glut or secular stagnation. But rather, that when
2007, 2008 came along, people lost confidence
in the ability of Wall Street and its
partners around the world to adequately distinguish
good risks from bad risks, or if they could still
distinguish good risks from bad risks, on
their willingness to tell their clients
which were good risks and which were bad risks. And so as a result,
what we have is not a imbalance in savings
and investment, but rather a shortage
of risk-bearing capacity and a shortage of safe
assets that people can hold, confident that the people on
Wall Street who issued them will fulfill their promises. So I would be much
more focused on trying to fix it by clever and subtle
investments or interventions in capital markets to
try to raise confidence in the amount of assets
perceived as safe in the world economy, rather than
thinking that there’s a much deeper problem that
has to be attacked somehow. But I could well be wrong. It could well be that we
face a crisis, at least of our ability in
the North Atlantic, to get something close
to full employment on a reliable basis over
the next generation. I’ll just add a couple things. I share a lot of Brad’s
skepticism about it. I don’t think it’s fundamentally
a driver of inequality. But I think it is a very
important hypothesis, if true, about to the [INAUDIBLE]
business cycle. But if it is true,
that only way it fits into some of
this discussion is if you believe
Larry’s right, it does make the Piketty argument
about r bigger than g even more suspect. Because part of
secular stagnation is not a lot of great
investment projects around, which tend
to drive r down. Well, I did turn to try to
flag– that is, economists use r for two things. They use it for
the rate of profit and the rate of interest. And they usually think the
two are the same because there are lots of interest rates. There are lots of profit rates. We usually think they are in
a fairly regular relationship with each other. Since 2007, we’ve had
a very steep divergence between the safe rate of
interest on things like German or US long term government
bonds on the one hand, and the hurdle rate
at which companies need to see before they invest,
or the rate at which stocks are valued on the
other, which appear to have stayed much the same. That right now, interest
rates on safe assets are extraordinarily
low, which is why the prices of treasury
bonds are so extremely high. And yet there was an article
by Justin Lahart in the Wall Street Journal
last week, I think, saying that the actual rate
of profit in the stock market looks to be not the 4%
that Robert Shiller says it is, but more like 5.5%,
when you measure it normally. And that 5.5% is
more or less normal. That’s what Piketty says has
been the rate of profit since the beginning of time, in which
case viewing it as– is I think Piketty has
substantial problems, but I think his a failure
to distinguish between the– [INTERPOSING VOICES] Piketty [INAUDIBLE]
not the rate in stock. It’s a combination of stocks
and bonds, the whole portfolio. So that would be a little lower. Let’s move on to a
clearly planted question. Nicholas? No, I did not. I did not plant this question. In fact, it scares
me a little bit. I actually have a
question for you, which is, you said
education promotes equality over inequality, but how do you
reconcile that with the fact that the wealthier have
better access to better education, which would,
therefore, in many ways, promote inequality? I think the idea is
that the relative wages of skilled and unskilled
depends on the relative supply of skilled and
unskilled, and therefore, when you create more skilled
people from unskilled people, it’s going to tend to reduce the
wages of the skilled relative to the unskilled
and make more equal. You’re absolutely right that
one of the challenges we face in terms of increasing
educational attainment is to try to allow people who
come from poor backgrounds to get access to
educational attainment. How to do that is not easy. It’s one of the reasons we
have a public education system, for example. It’s not a perfect system. It’s one reason that places
like Brown raise money for financial aid, although I’m
guessing if we ask President Paxson, she’s going
to say we don’t have enough money for financial aid. So if any donors are out here
want to give her a check, I’m sure she’ll cash it. So I think we have mechanisms
to try to deal with that. But it’s not a perfect system. I’m actually on a
panel right now, funded by the Gates
Foundation right now for the Urban Institute. And the Gates
Foundation basically is asking the
question, OK, we have a bunch of money we want to
spend, tens, $20, $30 billion they want to spend. And one of their goal is to
increase mobility from poverty. What’s the best way, if you’re
going to spend $20 billion to increase mobility
from poverty, what’s the best way to spend it? Education, everything from
pre-K up through college, is one of the
things on the table, but there’s also a lot of
other things on the table. And the question, what’s the
best way to spend the money, if you have a finite set of
resources, is a very hard one. But it’s something
that this partnership is trying to figure out. Yes, hi, thanks. I appreciated the nod
to political philosophy, so I’m trying to jump into
that window a little bit. Because in an
economist mode, when you think about inequality,
it’s so easy to think, what is the effect of inequality
on the total amount of utility? Or what’s the
effect of inequality on the average
amount of utility? Or what’s the
effect of inequality on those with the least? And it’s all, what’s the
effect of economic inequality on the economics of the matter? But when political
philosophers, as you both know, think about this, it’s
not all about that. And even economists
typically believe in things like
the Bill of Rights or some basic
liberties, which are supposed to be
equally guaranteed, relatively non-negotiable. And they just assume those
are in place, more or less. [INAUDIBLE] So one way just to
add this ingredient in– this is no criticism of
anything you said, but another way to think
about how should we think about inequality, why does
it matter, when does it matter, is there may be ways in which
economic inequality undermine the equality of the
basic liberties. So for example, in
a Rawlsian setting, for example, if economic
inequality gets too great, there’s at least a hypothesis
that certain sectors of society could steer the
political system. And then we all
think that’s unfair, or maybe is going to have
disastrous consequences, not just for the
economics of other people, but for the basic fairness
or relations of domination between classes of people. So as I say, it’s not a critique
of anything but I just– Well, first, it is a
critique of economists who tend to say that, look,
during the growing together time, the economy was working,
at least in a growth sense. And now it isn’t. Because African-Americans
who knew there were towns in
the Midwest where they had to be out by sundown. A woman like Sandra Day O’Connor
who cannot get an offer from a single private law firm when
she graduates from Stanford, number three in her class. They would have a
different view on how equal the growing together
society of ’48 to 1973 was than do us white males
who kind of look back with nostalgia at that period
and are more than half of us going to vote for an obvious
grifter come November. It’s humiliating to belong to
this demographic, I tell you. [LAUGHTER] I think everybody’s going to
vote for obvious grifters, depends on what you want. [LAUGHTER] One of the arguments
people often make is that economic
inequality leads to inequality of political power,
because the rich can spend their money in order to
influence the political system. If that were true, Jeb Bush
would be the nominee right now, because– It would be a better world. But I’m personally
a skeptic that money translates into political power
as much as other people are. But to the extent that it was
a concern, I can understand. I think it’s a
legitimate concern. I just see the
political system as much more complicated than that. Or fragile. But Thomas Piketty does not. One way to think about
Thomas Piketty’s book is that for him, the typical
country is always France. [LAUGHTER] Which to us is absurd,
but to him is normal. And he’s looking at the
French third republic. Radically egalitarian
in democracy, radically opposed to any
kind of redistribution, no cultural [INAUDIBLE]
intellectual hegemony of the kind of
non-redistributionist right in terms of the
distribution of income. He thinks that’s the
pattern for the North Atlantic for the
next century based on the fact that was
the pattern for France between 1848 and 1930. [INAUDIBLE] I had a few questions, comments. First of all, I think
I might be being a bit unfair to the growth
society of the post-war era. It was not a happy place to be
a woman or a racial minority, but that was a unique
period in American history when there was a consensus
and a real solidarity about fixing those problems. That was there when
women were liberated, when civil rights were passed. And I think that kind of
growth and social solidarity of that era was crucial to that. My other observation
had to do with the chart of the federal
income tax burden. I think talking about
federal income tax as a headline number
is really getting us only part of the picture,
only focusing on the part that we argue about. If we have– Can we go back for a second? To clarify. This is all federal taxes,
not just income taxes. It includes payroll. It doesn’t include state, local. It includes all federal taxes. And is it counting
payroll taxes– Yes. –both is it counting
payroll deduction as part of the gross
income in that [INAUDIBLE] CBO is trying to
distribute everything that the federal government
creates to the person who pays it in some kind of
notional counterfactual sense, any set of regiments about
which are hard to defend if you look at them closely. OK. So– This includes payroll taxes. I was unclear on that. I’ll tell you why I was a
bit– why at least to me, even now, it doesn’t
appear to be the case. Because in 1983 we see this
massive Social Security reform that increases everybody’s
payroll taxes and payroll deductions. It’s not included in the
headline federal income tax. And it’s a massively
regressive form of federal taxation
that’s not part of the debate on
federal income tax. And it’s also capped. And the numbers there
look suspiciously like the numbers for
the income tax rate. I just, again, I don’t know– I promise you, this
includes the payroll taxes. [INTERPOSING VOICES] I think this is the uptick
for from ’83 to ’85. OK In the lowest quintile number. I think that’s
where that shows up. That’s right. I think Brad’s right about that. OK. Then the rest of my comment is
not going to be as relevant. [LAUGHTER] Thanks. A friend of mine, Bob Ellickson,
who teaches property law at Yale Law School, has
often begun his classes by asking students
whether they think land should be held socially
or whether it should be held in private parcels. And everyone today
agrees it should be held in private parcels and
that social ownership of land is not desirable. But if he asks his students
whether assets should be devoted to
for-profit corporations or nonprofit corporations, the
class splits 50/50 on that. And a lot of people think
nonprofit corporation should play a really big role
in distributing resources. You talked in your
slide about how education through nonprofit
organizations bumps up income. So that if you
attend college, you make more than if you’ve just
graduated from high school, and if you go to graduate
school you make even more still. But nonprofit corporations,
which universities are, provide very, very
different kinds of products. We don’t scrutinize the
products very carefully. It’s not clear to
me how comparable a college education
or a business school education at one school
is as compared to another. So I was wondering if there’s
anything more that you could say about using education
as a way to bump up income. Is there any way we could make
nonprofits more productive? Should we be concerned
about relying so heavily on nonprofits, given that there
are not many consumer inputs or democratic electoral inputs
into the running of nonprofits? And in general, how could we
reframe our education system so as to do a better job
with the people we’re trying to educate? Those are really
interesting questions. On the land issue, I’m
guessing the students who like private land
probably wouldn’t want to privatize Central Park. No, So I think there are some
public ownership of land that a lot of people agree. And streets and airports. I think universities are
interesting institutions. I don’t fully
understand– for example, there’s been attempts to
doing for-profit education institutions. My sense is it’s not been
a very pretty picture, and for reasons I
don’t fully understand. So I think the
nonprofit model seems to work really a lot better,
and again, I don’t fully understand that. It’s also, we’re
also in an industry that has fairly little
technological progress. Yeah, we have Khan Academy, we
can do MOOCs and everything. But the best
educational experience, from my perspective,
is a professor and a small group of students
around the table talking about something. And if you think
about that, that’s not really all that
different from the technology that Socrates used. So we’re in a
industry that hasn’t seen much technological
progress in 2,000 years. So maybe that’ll change. Maybe I’ll be replaced
by a robot in the future. But I’m guessing,
actually, that education is going to be a growth industry. We’re not going to be replaced. And as people
leave manufacturing and other declining employment
parts of the economy, going into education is
probably– and health care, are probably the two
sectors that are probably going to grow over time. Will education specialize
with a focus on engineering and computer science– That’s a good question. The kind of education
is a tricky one. And one of the big
questions is, OK, we need to educate more people. Do we need more people with
college degrees of the sort you give at Brown, or
do you need more people to train to be welders
and electricians? Maybe some of both, but I
actually am a big believer, for reasons I’m not
sure I can really articulate all that well,
in general purpose education of places like Brown, where
you learn how to think. Because that will serve you. You can take a
Shakespeare course, it doesn’t mean you’re going
to become a Shakespeare scholar when you leave
Brown, but it provides you a way to think about the
world in a way that gives you flexibility, whatever
job you pursue. And I’m a big believer
in more of that, but I’m not sure I can
defend that very well. I agree with you on both counts. I would simply like to point
out that one of the, say, person who had a successful
career on Wall Street once told me that the
single most valuable thing for his education was the
seminar on medieval witchcraft he took as a junior at
Harvard from Steven Osmond. Because every week the
class would be about, here we have this
document about witches written in the 14th century. And to us, what it
says are completely absurd and ludicrous. So the question is, how is this
author lying to us, and why, and for what purpose,
and what can we tell about the real situation
that underlies that? And scrutinizing
every document that comes before it, learning to
do it with that orientation, he said, has proven
immensely valuable. That’s a great story, Hello, my name is Joseph. I study economics. So my question is about,
so we saw this chart that the top 0.01% has a much
larger share of the pie now. So my question is, do
you think the four bullet points of Professor Mankiw
that explain inequality can explain this development? The development by which CEOs of
major corporations seem to have somehow acquired a
right to a quarter of the profits of the
corporation, at least during the time
that they’re CEO. Which is something that had
not existed before, say, 1986, but seems to be a fairly
static part of America since. This is the extraordinary
puzzle of American finance. That back in the 1950s,
we had financial assets equal to maybe two and a
half times a year’s GDP, and the rest of us
paid finance about 1% of asset value each
year for transactions and money management services. Now we have financial assets
about four years’ worth worth, about four years of GDP. And we pay fees
and trading costs and price pressure
against ourselves because we all sell
at the same time and buy at the same time,
which amount to 2% of asset value in an average year. And so finance collects a total
of 8% of national product. And yet it doesn’t
really seem to me that the allocation of
capital is much better or that better companies
grow faster or that any of the things, any of the
intermediate services that should produce faster economic
growth overall, that we ought to be getting from finance. Which is, after all,
an intermediate good. It’s something to help
us in our transactions, and our choice of investments,
some that we should. The problem is that we’re
doing this voluntarily. It’s not as though
it’s a monopoly. If anything, the coming
of Citigroup and Bank of America and
Travelers Insurance into the financial
market has greatly increased the amount of
competition, especially in high finance, over
the past 20 years. And yet, somehow, we’ve
decided we voluntarily want to pay these people more
for the services they provide. And yet, as every finance
economist will say, the best thing to do if
you’re a Fidelity customer is to forget you
have an account. The best thing to
do in general is to buy a Vanguard index fund
that has your risk preferences. There’s about 15,000
people in that 0.01%. So there’s some CEOs there,
but it’s not primarily CEOs. 3,000 financiers and CEOs. Yes, a lot of finance people. Yes Who are in the hedge fund
industry making money at 2 and 20. I have not looked at
the Brown endowment, but I’ll bet you the
Brown endowment has a bunch of money sitting in
hedge funds paying 2 and 20. And you have as smart
an economist running your institution as they come,
and if you have money sitting there, it’s because,
presumably, she thinks or her investment committee
thinks, this is adding value. And I don’t know if that’s true. I sit on an investment committee
in a much smaller nonprofit and I’ve been trying to get
them to put more money in index funds, like Brad says. And I’ve been very
unsuccessful, because the rest of the investment
committee thinks that they are to beat the market. They haven’t while I’ve been
on the investment committee. I have most of my
money in index funds, so I’m not enriching those guys. But I can’t tell you that Brown
and Harvard are making mistakes by putting the money there,
as all these big institutions like Brown and Harvard do. That concludes the
time that we’ve dedicated to question
and answer portions. Join me in thanking
both of our presenters. [APPLAUSE]

4 thoughts on “Inequality: Is America Becoming a Two-Tiered Society?

  1. Professor Beren describes the effect of a combination of advantage associated with talent and abilities as well as educational attainment. The result is that some individuals will obtain incomes far greater than the average income even for those whose capabilities are very close to one another. What is certainly true is that the incomes received at the very high levels have virtually no influence on the standard of well-being of the recipients. What is also true is much of the income received at the very high levels is unearned, is rent-derived — from passive investment or from speculation. Our tax system would be much fairer if we combined tax simplification with progressivity that captures rent (even at the risk that some earned income is also captured. What might this look like?

    The starting point would be to exempt all individual incomes up to some level (e.g., the national median). All other deductions and exemptions would be eliminated. Then, above this level, higher rates of taxation would be imposed on higher rates of income. The rates and ranges could be determined during the budget process in order to raise sufficient revenue to balance the budget (recognizing there are other sources of public revenue to be drawn on). Thus, the end result at the very top might be a 90% tax rate on incomes above $100 million.

  2. the second speaker is wrong about the import export swap based on the level of product sophistication…he is living in the past.

  3. When times are good like now in the US inequality may not that crucial/important and not that many people care, there will be a period sometimes in the future when the US will experience a DEEP and LONG recession then the have nots will become restless when their financial sufferings are deep and if the government like Roosevelt do not redistribute wealth then the will be a strong likelihood of a revolt and even more seriously a revolution.

  4. 1:17:00 the guy's question was the same that i had during the presentation – are they even including capital gains taxes?!? i don't think so, those figures don't add up, not even close. (Also sales tax is probably left out too)

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