- Good afternoon, my name's Doug Irwin,
and I'm director of the
Political Economy Project
here at Dartmouth,
and along with Andrew Samwick
of the Rockefeller Center,
I'd like to welcome you to
this afternoon's events.
Before I introduce the moderator,
I just wanted to say a few words
about the Political Economy Project,
which is co-sponsoring this debate.
The PEP is a new venture just started
this academic year, and it's designed
to encourage student interest
at the intersection of economics,
politics, and philosophy.
We have a bunch of new courses
that we're co-sponsoring
this coming academic year,
and for all students, I have a list
in case you're interested in
tapping into some of those.
They start this summer,
but they go through all four quarters.
We also have a Monday night student dinner
where we invite a faculty member to come
and speak in very informal
way over free food,
so we hope that you can tap into that
in the coming academic year,
and also we hope to sponsor more events
such as these debates and
public events and what have you.
So, the way to tap into us
is to check out our website,
Political Economy Project,
come see me after the debate,
and be sure to get onto
our list mail e-serv,
email service, so that
you can get informed
about coming events.
Let me introduce to you
our moderator for today,
Charlie Wheelan, of the great
Dartmouth class of 1988.
Charlie is a well-known
figure around here,
he teaches for the Economics department
and the Rockefeller Center,
and he's author of such books
as Naked Statistics: Stripping
the Dread from the Data,
The Centrist Manifesto,
and 10 1/2 Things No Commencement
Speaker Has Ever Said.
But he's here to moderate the debate,
so the floor is yours, Charlie.
- Thank you, good afternoon,
we are gonna talk about inequality,
and along with healthcare,
it's probably one of the most
politically contentious
and very interesting topics
that the country has to confront.
There are a lot of reasons
that it's so interesting.
The first is that at its
core, income inequality,
or wealth inequality,
has some very interesting
methodological questions,
beginning with how we define
and measure inequality.
From there, there are
related issues about things
like social mobility, which
drive a lot of how we feel
about income inequality.
Part of resolving our disagreement
over this contentious issue,
of course, is going to stem
from how we define the problem itself,
hence, the first part of the debate
that our two guests have
been asked to take on,
what is the problem?
Separately, inequality raises
profound philosophical questions.
Things like, what is fair?
What do we owe the most
disadvantaged members of society?
So as Doug pointed out
in his introduction,
there is in fact a
philosophy component here.
These are questions that
are usually relegated
to other departments on campus,
but the fact is that they
drive a lot of our economics
in terms of what it is
you want to accomplish.
And of course, if we disagree
about what we want to
accomplish philosophically,
then of course, we will disagree
about the best way to get there.
It turns out that
economic analysis matters
an awful lot as well.
At bottom, we are gonna be
discussing market outcomes,
and in particular, how
market rewards return,
offer rewards to capital and to labor,
and in particular how those
have changed over time,
and what if anything we
ought to do to intervene.
Every government in every
developed country plays
some role in shaping the
markets for capital and labor,
particularly through the
creation of human capital,
or education as it's more often known,
and every country, at least
every developed country, has
some mechanism for redistributing wealth
after the market has had its say.
That leaves us with a huge
continuum of possible policy
interventions, ranging from, at one level,
trying to elevate the
productivity of folks
who are not benefiting from
current market outcomes,
but also leaves us various
options for just taking money
from those who are doing quite well
and redistributing it to
those who are not doing well,
or perhaps, we can discuss,
taking it from people who are doing well,
and giving it to other
people who are doing well,
which is what happens with
some entitlement programs.
(laughing)
But that brings us to the
second part of the debate,
which is, what is the solution?
And then of course,
aside from all of that,
we have the politics.
There are clearly defensible
intellectual disagreements
around this topic,
many of which are going
to be elucidated here,
but it's also true that our
system seems less capable
of integrating different views
and ameliorating these kinds
of problems than the past,
or at least, the political
discourse is far shriller
than it has been at
other points in the past,
and our hope here is to
turn up the substance
and to turn down the volume.
Now, here to do that,
stepping into the debate,
we have two, both prominent economists,
but also very thoughtful individuals,
both of these gentlemen on
my left have been involved
in academic issues related to this issue
in many different kinds of ways,
and both have made a commitment to writing
and communicating about this issue
for broader lay audiences.
On my far left, on your
right, N. Gregory Mankiw is
Professor of Economics
at Harvard University.
He's taught macroeconomics,
microeconomics,
statistics, and principles of economics.
He has also taught sailing,
now should we get into
yacht-building, which is,
if it goes in that direction,
you might be able to weigh in on that.
- Top 1%.
- Right, the 1%.
- They love that.
- It's on the CV.
Professor Mankiw is a prolific writer
as many of you probably know
for both lay publications
and academic journals.
His research includes
work on price adjustment,
consumer behavior, financial markets,
monetary and fiscal policy,
and economic growth.
He's written two popular textbooks,
which some of you may have used,
an intermediate level
textbook, Macroeconomics,
and the introductory textbook,
Principles of Economics,
the latter has sold over a million copies
and has been translated into 20 languages.
From 2003 to 2005, Professor Mankiw served
as Chairman of the President's
Council of Economic Advisors
for the George W. Bush administration.
Now to my immediate left, in the center,
Jared Bernstein is a Senior Fellow
at the Center on Budget
Policy and Priorities.
From 2009 to 2011, he
was the Chief Economist
and Economics Advisor for
Vice President Joe Biden
and also Executive Director
of the White House Task
Force on the Middle Class,
and generally, a member of
President Obama's economic team.
Mr. Bernstein's areas of expertise
include federal and state
economic and fiscal policies,
income inequality and mobility,
trends in employment and earnings,
international comparisons,
and the analysis of financial
and housing markets.
Prior to joining the Obama administration,
Mr. Bernstein was a Senior Economist
and the Director of the
Living Standards Program
at the Economic Policy
Institute in Washington, D.C.
He is the author and
co-author of numerous books
for both popular and academic audiences,
including Crunch: Why
Do I Feel So Squeezed?
and nine editions of The
State of Working America.
He has also published extensively
in various lay publications,
The New York Times,
Washington Post, Financial
Times, and others.
I welcome you both.
The terms of the debate are as follows.
Greg Mankiw has agreed to kick off,
both of the folks up here will make
15 minute opening statements,
they will then each have a
five minute rebuttal period.
I may ask some questions,
and we may open it up for
them to clarify and extend.
At that point, we will turn
it over to the audience.
There are assistants
who should have been
passing out note cards.
If you would like to write a question,
please raise your hand, now or later,
and somebody will give you a
card, write down the questions.
Those will be brought up to me,
and I will sort through them
in hopes of kind of sorting it out
so that I can ask the most
commonly asked questions
and keep the things moving along.
But please feel free to
write your questions down,
and we hope to have a robust discussion.
I will be the timekeeper.
With that, I'll turn it over to Greg
for his opening statement.
- Thank you, it is a delight
to be here at Dartmouth.
I haven't been here at Dartmouth
since I was a student in college myself,
and I was visiting a friend who was here
during Winter Carnival.
Things seem a little less
hazy to me than they did then.
(audience laughing)
What I'd like to do is
talk about three things.
First what the facts
are, I'll do that briefly
since I think they're relatively familiar.
I'd like to talk about
some of the explanations
for the facts, why is
what's going on going on.
And then turn to the policy issues,
how we might respond to these.
So what are the facts?
The facts are that inequality
is very high right now
by historical standards.
If you look at measures of inequality
in the United States,
you find that it was high
in the early part of the 20th century,
and it started declining
especially in the post-World War II years,
and it reached a low in
some time in the 1970s,
and then it started coming up again,
and we're back to where we were
in the early part of the 20th century.
So if you look at measures of inequality,
it's like a big U,
where the bottom of the U
is sometime in the 1970s.
That means that it's more difficult
if you're at the bottom of
the income distribution.
While inequality was falling
and the economy was growing,
we saw reductions in poverty,
but basically over the
past 40 years or so,
we've seen poverty relatively flat.
It's fluctuated over time
with the business cycle,
but there has not been
substantial reductions in poverty,
and that goes hand in hand
with increasing inequality.
So that's sort of the bad news.
Before I move on to the
explanations for that bad news,
let me sort of put in one
piece of good news here,
which is that if you take not a US view,
but a more global view,
you actually come with a
somewhat different story.
Inequality has been rising
in other developed countries,
so it's been increasing
in much of developed,
in much of Western Europe, for example.
But of you take a completely global view,
you look at all individuals
around the world,
you actually find a
very different picture.
Global inequality has
actually been falling,
and global poverty has been falling
even while the opposite has
been true in the United States.
Well, why is that?
Well, that's because the
past several decades has seen
very rapid growth in Asia, in
particular in China and India,
and so you start off with
many billions of people
in very poor countries
experiencing very rapid growth,
and what you see is that global
poverty has been falling,
global inequality has been falling,
even as inequality's been
rising in the United States.
Now that global perspective is something
you might wanna take as a global citizen,
but it doesn't bring
much solace to Americans,
that is, if you tell Americans
that inequality is rising,
you're not making any
progress against poverty,
saying "don't worry,
"there's lots of Chinese unskilled workers
"who are doing quite well,"
uh, that doesn't make them feel any better
about the situation,
but as citizens of the world,
we should take some happiness in the fact
that at least from a global perspective,
inequality is falling,
and poverty is falling.
So what are the reasons
for rising inequality
over the past several decades?
Well, I'm gonna talk
about five hypotheses,
and I really think of
these not as alternatives,
but as five forces at work,
happening more or less simultaneously.
So, force number one is what I'll call
the race between education and technology.
That is actually the title of a book
by two of my Harvard
colleagues, Claudia Goldin
and Larry Katz, and what they argue is
that technology and education are
the primary drivers of inequality.
Technology tends to increase inequality.
Technological progress tends to increase
the demand for skilled workers
and reduce the demand
for unskilled workers,
who increasingly find themselves
replaced by technology.
So if you think about, say,
a typical professor today,
I probably use less secretarial time
than I did in the past
because I can do a lot of
things myself with my computer,
so the technology makes me more productive
and makes secretarial
support less important.
And that's throughout the economy
where skilled workers use the technology
and become more productive
and unskilled workers
increasingly replaced
by the technology.
Goldin and Katz argue that's been true
throughout history but that until 1970
we've been increasing the
supply of skilled workers
because educational
advancement was increasing.
So we had things like the G.I. Bill
and increases in educational
attainment associated
with the post World War II generation,
and so while technology was increasing
the demand for skilled workers,
the educational system
was increasing the supply
of them even faster,
as a result, inequality fell.
Educational attainment then plateaued
sometime in the 1970s, and as a result,
technology started winning the race
between education and technology.
So that's hypothesis one, and I think
a really very important one.
Hypothesis two is globalization and trade.
Increasingly, we have been
trading with other countries,
in particular countries with large numbers
of unskilled workers,
so take China, for example.
When we import goods from China,
they're typically produced
by unskilled workers,
say we're buying t-shirts from China,
and we're exporting things like software
that are produced by skilled workers here.
And what that does is that trade reduces
the demand for unskilled
workers domestically
and increases the demand for
skilled workers domestically,
and as a result, once again,
increases the relative wages
of skilled workers relative
to unskilled workers
and increases inequality.
So globalization and trade
are part of the story.
I don't think it's the main
thing driving this, by the way,
because if that were the
main thing driving increases
in inequality in the United States,
we'd be seeing just the opposite in China,
that is they're exporting
unskilled workers' goods
and importing skilled worker goods,
so you should see declining
inequality in China,
and we don't see that.
In fact, inequality has
also been rising in China,
so I don't think trade
and globalization is
the main thing going on here,
but it could be one of
the things contributing
to inequality.
Immigration, similar to trade,
immigration can also affect relative wages
of skilled and unskilled workers.
If you look at the percentage of Americans
that are foreign-born, you
see it very much mirrors
the trends in inequality.
Roughly 15% of the population
was foreign-born in 1930.
That fell to about 5% in 1970,
and then started increasing
to about 13, 14% today.
Well, why does it matter
where people are born?
Well, it turns out that
foreign-born workers tend to be
less educated than
domestically-born workers.
7% of native-born American
adults have not completed
high school.
27% of foreign-born adults
in the United States have
not completed high school.
And this is true today,
we can see a lot of
relatively unskilled
Mexican workers coming in,
and it was true a century ago,
when my four grandparents
immigrated from Ukraine,
none of them had more than
a fourth grade education,
so it's fairly common.
When immigrants come in, they're
relatively less educated,
and that affects the
distribution of income
a couple ways.
One is if you put a lot
of unskilled workers
at the bottom of the distribution,
even if it has no effect on anybody else,
it will mechanically increase inequality
because they are then measured,
but in addition, they compete
with locally unskilled
workers and tend to depress
the wages of the unskilled
relative to the skilled.
Hypothesis three, four,
education and technology,
globalization, immigration,
hypothesis four, superstars.
Several years ago, I guess 1981,
Sherwin Rosen, an
economist, wrote an article
in the American Economic Review talking
about the economics of superstars.
What is a superstar?
A superstar is a person
who can use his skills
and reach a very, very wide market.
You cannot be a superstar
if you are a plumber.
If you are the best plumber in the world,
there's only a certain amount
of people you can service.
On the other hand, if you're
one of the world's best actors,
you can ply your trade and
sell to the entire world.
I'm sure some of you have
seen Robert Downey Jr.
in Iron Man, and The Avengers is
one of the most successful
movies of all time.
He made, just from making that one movie,
$50 million, that one movie.
Roughly speaking, 200
million people saw the movie,
they each paid something like 25 cents
to Robert Downey Jr.'s
part of the ticket price,
and as a result, he
could sell his services
as an actor to the entire world.
That was possible because of technology.
A century ago, he couldn't
have gone into a theater
and acted in front of 200 million people,
but today by virtue of technology,
he can provide his skills
and become a superstar
and make $50 million.
That is increasingly the case I believe
in the economy as people
can expand their scope
to worldwide markets.
I do this in a small way
by selling my textbooks
around the world.
I have the number one
selling economics textbook
in South Korea despite the fact,
until recently, I had
never been to South Korea.
I sit in my office at
home in Massachusetts,
write these books, send them
off, email to my publisher,
and by and large, all these students
in South Korea are reading them.
Unfortunately,
- [Jared] You don't know
that they're reading them.
(audience laughing)
- Well, they're buying
them, that's all I care,
they're buying them.
- [Jared] They're buying them.
- They're buying them, they're buying.
Now sadly, sadly, economics textbooks are
not quite as popular as Iron Man movies,
but we're working on that.
Now to what extent is that pervasive?
It's hard to measure,
it's very hard to measure
the superstar phenomenon,
but I think increasingly things
like CEOs are superstars.
You're running companies
that have worldwide scope,
and as a result, the people
on top of the economic ladder,
what are sometimes called
super-managers, are earning
high rewards.
The median CEO of a
Fortune 500 company makes
$10 million, that's partly
because he's looking
at a company that has global reach,
and his productivity is very high.
Now critics of this phenomenon say
CEOs don't deserve it,
they're just screwing
the shareholders by putting
their cronies on the board
and getting paid excessive wages.
I think that's probably not true
in light of the fact that
private equity companies
that also hire CEOs also
pay them a lot of money,
and there's no
principal-agent problem there.
The private equity firm
owns the entire company.
If they felt the CEO wasn't worth it,
they wouldn't pay him that much.
So those are four explanations.
My fifth explanation
particularly involves Dartmouth.
You think of Dartmouth
as a particularly elite
educational institution,
and of course, that's true,
but it's also a very, very
elite dating society, right?
Here you have very, very
smart people getting together
and meeting other very, very smart people.
Well, why is that important?
Well it turns out, there's
been a very big increase
in assortative mating.
40 years ago, if you looked
at the income of husbands
and the income of wives, they
were negatively correlated.
That means the higher the
income of the husband,
the less the wife earned.
Why is that?
Well, if you're a successful husband,
your wife didn't need to work.
Therefore, she's more
likely to stay at home
and raise the kids.
Today, there's a positive correlation
between husbands' and wives' incomes.
Why is that?
Well, if you're a
Dartmouth grad, male grad,
who's gonna become a successful
doctor, lawyer, banker,
he marries a woman who's a Dartmouth grad,
who's gonna become a successful
doctor, lawyer, banker.
Take two high incomes, put
them in the same household,
and what do you get?
More inequality in households' incomes.
Okay, so those are the five explanations
as to why I think we've
seen increasing inequality.
The race between education and technology,
globalization, immigration, superstars,
and more assortative mating.
What do we do about this?
In the last five minutes,
let me talk about possible
policy solutions.
Well one possibility is
to treat the symptoms
and not the disease.
Say we have increasing inequality,
instead of trying to
treat the ultimate causes,
let's just sort of fix the outcomes
by taxing the rich more and cutting taxes
for people at the bottom
of the income distribution,
and that's in some sense what we've done
in the past few years.
CBO has data back to 1979 looking at
the progressivity of the federal taxes,
all federal taxes put together,
and right now, in 2013, 2014,
the progressivity of the
tax system is about as great
as it's ever been.
The top 1% pays about 35%
of their income in taxes,
which is basically the level it was
back when Jimmy Carter was president.
The middle class and lower
classes have tax rates
that are near historic lows,
the middle class pays about
14% of their total income
in taxes, people at the bottom about 4%,
and so we have a fairly
progressive tax system
by the standards of
recent history, that is,
going back to '79 when
CBO starts their data.
Now, one thing to say about this is
you can agree whether this is good or bad,
but one thing that's absolutely clear is
that changes in progressivity
are small compared
to the changes in before tax incomes,
so you can like the
Ronald Reagan tax policy,
you can like the Barack Obama tax policy,
but either way, the
differences between those two
tax policies is minute
compared to the differences
in the distribution of income
between 1970 and today.
So that's relatively small potatoes.
Now, there's a question of should we go
to French style tax rates,
should we go to 75% as President Hollande
of France suggested,
and there are economists who said yes,
but I think that's one
I wouldn't agree with.
The race between education and technology,
what do we need is better
educational system,
educational reform, and I think that's,
what exactly those are are hard to say,
I can talk about that in a minute,
but since I only have two minutes,
I won't go into that.
Trade restrictions I think
would be the wrong way to go.
That can make us more
equal, probably make us all
equally bad off, so I
don't think equality,
I don't think we wanna be equally poor,
so I don't wanna go that way.
Immigration is a tough one,
as we've seen in the national
debate on immigration,
at the very least, at the very least,
we should allow skilled immigrants in,
every single college degree
from an elite institution
like this one, you should
get a green card stapled
to it, if you're not a US citizen.
We should let as many skilled
immigrants in as we can.
Unskilled immigrants is a harder one,
which we can talk about some more later.
Superstars are very hard.
I actually don't think
Robert Downey Jr. is
a problem, if he wants
to make great movies
that everyone wants to watch,
I don't think that's
a problem for society.
There are some superstars
on the other side of this,
Bernie Madoff was a superstar
of a different sort,
a superstar wealth diverter,
rather than a superstar wealth creator,
we need to worry about those,
but the superstar wealth
creators are not a problem.
And finally, assortative mating.
I don't think the government's
gonna get involved
in telling the rich Dartmouth
grads to stop marrying
rich Dartmouth grads,
then I could say to the banker,
"I'm sorry, you can't
marry another banker,
"you gotta marry a poet"
(audience laughing)
because we're worried about
increasing inequality,
some increases in inequality
have social determinants,
and those are things we just
have to learn to live with,
so I'll stop there, thank you.
- The poets may be more interesting.
I actually like the idea of
making bankers marry poets.
This is just such a pleasure to be here.
I'm really happy to be here with Greg,
whose work I very much admire,
and I was a little worried
because I think he's
such a careful thinker
that I wouldn't find
anything to disagree with,
but don't worry, there's lots.
Though I think on the facts,
I agree with most of
them, not all of them.
I actually think our tax
system is more regressive,
and I think there's a
way in which you were
just conflating effective
rates with marginal rates,
we'll get into that.
But his list of causes I
find all very relevant,
and I'll push back accordingly.
I wanna thank Doug Irwin
for putting this together
and getting us up here.
Charlie for moderating,
Joanne Needham for helping me
with logistics.
I'm gonna talk about problems,
the problems that I view
that are associated with inequality
in ways that Greg alluded to
but didn't get into very deeply,
and then I'm going to raise a
number of challenges, I hope,
to kind of the unspoken
tenor of Greg's talk,
and he'll have an ample
opportunity to disagree with me
if I'm misinterpreting him,
that said this is going
on, and in many ways,
it's not an obvious problem,
at least in the ways that
I'm going to suggest it is,
and in many ways some of the solutions
that have been proffered to
address that problem are worse
than the problem itself,
this is at least my
characterization of his view,
and I will argue differently.
I think I have a few slides,
but I may use them or not.
Four reasons why I think the
very high levels of inequality,
which we both agree are
high in historical terms,
are problematic.
Fairness, absence of opportunity,
threats to representative democracy,
and macroeconomic instability.
Now fairness is not as
squishy as it sounds.
By fairness, what I really mean is that
if you look at the
trajectory of the incomes
of people at different parts
of the income or wage scale,
and productivity, that is,
the economy's output per hour,
you'll find a very big split
over the period where inequality increased
relative to a period
where inequality was flat.
That is the median family
or median compensation,
right in the middle of the
scale, grew in lock-step
with productivity for decades
in the postwar period, say
mid '40s to the mid '70s, in fact,
low incomes, middle incomes, high incomes,
all just about doubled from
the mid '40s to the mid '70s,
so that was a period
where inequality wasn't a problem at all.
Since then, productivity
keeps trucking along,
it's decelerated somewhat,
it wiggles about,
but the income of the
middle has been flat,
the income at the bottom
has generally fallen.
As Greg mentioned, poverty
rates have been quite sticky.
And this is not to say
that everybody should get
the average productivity growth rate,
but it is a significant
problem in an economy
where year after year the economy expands,
but people either fall
behind or just tread water.
That to me is one of the
significant problems of inequality.
There is a basic social
compact or contract
that says if you work
hard and put in the hours
that you oughta be able to get ahead,
and in fact your children
ought to be able to do
at least as well as you if not better,
and there's a sense among people
that that contract's been
broken by inequality,
and I think that sense
has actually some backing
in the data.
Opportunity, this is a very big one.
In America, we are not five year planners,
as P.G. Wodehouse used
to call the Soviets.
We don't believe that everyone
should have equal outcomes,
but we do at least arguably,
and there was a period where this was
a discussion about white
males, that's for sure,
so let's be clear, I don't
want to sugarcoat the past,
but we do generally believe
that while equality of outcomes
is not our desired goal,
equality of opportunity is.
I think there is increasing evidence
that the level of inequality
we have is actually raising
the barriers to opportunity,
such that high levels of inequality block
income mobility and restrict opportunity,
by the way, in much the
way that Greg referenced
when he was talking about
education as a key solution
to the problem.
If the inequality barriers
make it more difficult
for a poor child to get a decent education
or access to the kind
of university experience
that folks here have, not to
mention the rich boyfriends
and girlfriends they're gonna meet,
that's a way in which
inequality interacts negatively
with opportunity.
Threat to representative democracy.
I was actually gonna write, trying to,
I was thinking, what are the problems
that inequality causes?
I was going to write the
destruction of the world
as we know it, but that
felt a little dramatic,
but in a way, I sort of
feel that way a little bit,
in a way I'll tell you in a second.
There are those, there's
sort of a bumper sticker
that complains about money in politics,
and it says one dollar, one vote.
That's a bumper sticker, and
it's not particularly accurate,
however, I will argue,
and quite strenuously,
that the interaction
of concentrated wealth
and money in politics is
hurting representative democracy
in such a way that enforces
inequality of income
and wealth that blocks
a progressive agenda
or even a centrist agenda that
would push back on inequality
and is an existential threat
when you start thinking about climate,
that is, wealth concentration, interacting
with money in politics, to block solutions
to problems that we have, one of which is
inequality of opportunity and mobility
another of which is just our ability to be
effective stewards of our environment.
So I think inequality at this point,
as it interacts with
our political system is
a threat to representative democracy,
and it might even be worse than that
once you start worrying
about the impacts of climate.
Macro instability.
Income inequality is associated
with something I call
the shampoo economy, which
is bubble, bust, repeat.
This is a problem wherein,
again, income inequality
and high levels of wealth
concentration interact
with the regulatory
function of government,
folks that I hope here
at the Rockefeller Institute are studying,
in such a way as to
promote financial bubbles,
which may generate considerable
macroeconomic growth
at some point in the
cycle but then blow up
and leave a huge mess in their wake.
How much time do I have?
- [Charlie] You have seven
minutes and 30 seconds.
- Okay, that's very accurate.
Before I get to a,
I'm gonna be very glib in my solutions
because I'll get back to that,
I just didn't wanna cram everything
into my opening statement,
I'm going to tick through
a list of about 15 things
I just wrote off the top of my head
as I was riding here from
the Manchester airport,
that I think should make you,
and especially make Greg,
think twice and thrice
about this idea that
somehow our super-managers
and our super-actors,
even if they have superpowers,
are being compensated
in ways that have very little to do
with their marginal product,
with their willingness to work for less,
and with anything that you would associate
with the kind of good,
thoughtful economics
that I associate with Greg Mankiw,
and everything to do with
what economists call rents,
which is basically
undeserved big pots of money,
so I'm just gonna tick through these
and by then I'll probably
be just about done.
There was a careful study,
I thought it was a careful study,
if I have a thumb on the scale,
there was a careful study
by a couple of academics that
tried to ask this question,
can we figure out whether
CEOs are being paid
for their actual contribution
to the firm's bottom line
as Greg suggested with his P/E example,
or through luck, this
was Bertrand, et al.,
and here's a quote,
"Oil CEOs are paid for luck that comes
"from oil price movements."
So they were able to link the compensation
of oil CEOs, CEOs in the oil industry,
to movements in prices
that had everything to do
with, they called it
luck, but really had to do
with the global supply of oil,
not to do with the CEOs' skills.
Very high earners, could I
have my first slide, please?
If you look at the top line there,
that shows the earnings
of those in the top 1%,
and I pulled out their earnings
in that little graph to the left
and matched it to the stock market.
The very high earnings of
those at the top 1% move
with the stock market, not with anything
that I would associate
with their contribution
to the firm at the margin or
certainly with their skills.
There's no story that
says the top 1% became
very unskilled for a few minutes,
there in the late 2000s and late '90s
and then somehow skilled up again
as inequality bounced back.
And by the way, I don't believe
that the technology and
education story gets
you very far here in the
context that Greg was raising
because much of the movement
in inequality has been
among the top 1% or even the top tenth
of the top 1%, and
they're all college grads.
In fact if you look at the premium,
the college premium, the
premium that college educated
workers get over high
school educated workers,
or non-college educated workers,
it's been flat for over 10 years.
It's been flat since the late 1990s,
yet inequality's going up,
so it can't be an education story,
these are all college grads,
there's something going on in the top 1%,
the top tenth of 1% that has nothing to do
with certainly the kinds of skills
that are bequeathed at college,
like I said, they're all college grads.
Go to the next slide.
Look at the slide on the left.
If you just look at that
top line on the left,
that's the ratio of pay
at the top 1%, CEO pay,
at the top 1% to everybody else's wages.
And it sort of cooks
along since the late 1940s
at the average level,
and then when inequality
takes off, it takes off.
I can think of no story
about skill returns,
about you're paid your marginal product,
about you're somehow not
getting these bundles of rents
from the system that you've somehow rigged
to your advantage,
you're kind of, in a way
that I thought Greg was
too dismissive of, that
somehow goes up to the,
that doesn't seem to really start
until you get to the 99.9th percentile.
That somehow there's a real discontinuity
in returns to skill starting
that high in the scale.
I think that's suggestive of
what economists call rents
or undeserved large pay packages.
Financial innovation overpaid.
We see the superstars
or at least the actors
and the singers and all those people,
they're a minority share
of the top 1%, maybe 20%.
Most of the people in
the top 1% are executives
and financiers, and I would argue
that their pay has certainly
not reflected risks
that they've engendered
to the whole economy.
There are race and gender differentials,
and I'd very much like, and
Greg knows that they exist,
I'd very much like to hear Greg's thinking
in that regard.
We know that there are differentials,
even when you control for
all the observable skills,
there are gender differentials
and race differentials.
Expensive people get big cash-outs,
even after they screwed up.
Here's a headline I wrote
down from a few months ago,
"Fined Billions, J.P.
Morgan Gives Dimon a Raise."
So again, I think that's
evidence of rent extraction.
There are what I call
Thomas Piketty effects,
so Thomas Piketty wrote this
famous book on inequality,
which shows that as the share
of capital income increases
as a share of national income,
there's more inequality simply
because capital itself is
more unequal and capital itself becomes
a larger part of the economy,
so as the part of the economy,
capital income versus labor income,
as the part of the economy
that's more inherently
unequal grows as a share,
according to Thomas Piketty,
it likely will grow as a share,
and I think there's good arguments
on both sides in that,
that in itself will not
only increase inequality
but increase inherited inequality,
which I think is quite
divorced from any skill story
or deserved kind of
story you want to tell.
Finally, I just wrote down,
big profits in the pharmaceuticals,
so I'm really just kind of
cherry picking examples here
throughout the economy
where I think a benign story
about super people getting what
they ought to be getting is
quite easily disproved,
I was just reflecting
on the extent to which
drugs, certain drugs, are
much more expensive here
than the same drugs are in Europe,
clear example of what we
call rent-seeking behavior,
or somebody with a friend
in a high place getting
more than they should.
The solutions to the problem,
which I'll go into later
because I don't wanna go over
my time, have to do with
increasing the bargaining power
of middle and low wage workers.
Part of that has to do
with the fact that there's
less unions, lower minimum wages,
things that public policy
could actually make
a difference in.
Part of that has to do with
the absence of full employment.
We really need tight labor markets.
The last time we saw
inequality behaving in a way
that I thought looked very
positive from the perspective
of at least middle and
low income people was
in the latter 1990s when we had
a full employment economy.
Progressive taxation.
The reason why you see
the top 1% paying more
of the taxes than they ever had is
not because the tax system
is more progressive now
than it used to be.
By the way, it is more progressive now
than it was a few years ago.
It's less progressive than
it was in the late 1970s,
for example.
The reason they've been
paying most of the taxes is
because they've been
getting most of the income.
Their effective tax rates,
their tax liability of their
share of their income, has
actually gone down.
Mobility, very much related to education,
and I'll say more about that later.
I very much agree on that point.
- [Charlie] Okay, we now
have five minute rebuttals,
so, Greg.
- On the last point, taxes
as a percentage of income,
the numbers I was citing were
taxes as a percentage of income,
they weren't the share
of the tax liability.
It was their effective tax rate,
and according to CBO,
the effective tax rate of
the top 1% is basically
back to where it was in '79.
Let me sort of go back.
Jared raised four issues,
macro stability, threat to democracy,
absence of opportunity, and fairness.
Let me just do those in reverse order.
First, in macro instability,
macro instability is a big issue,
in fact as a macroeconomist,
I spend a lot of time thinking about that.
I'm not sure it's connected
to inequality particularly,
I mean, we had this
big recession recently,
and inequality's been high,
but before that we had a period
of what's called the Great Moderation,
a period of very stable
macroeconomic performance
with high inequality,
so I think those are two
very important phenomenon,
I don't see them as
connected as Jared does.
As a threat to democracy,
we can talk about campaign finance reform,
I don't pretend to be an expert on this,
but I haven't, let me
start a couple of things,
one is we're in a period
now of high inequality,
and we have the most progressive president
we've had maybe in my lifetime elected,
Barack Obama, so this idea
that the rich are gonna get
their way, how did that work
for Mitt Romney last time?
If the rich got their way,
I wouldn't be working
at Harvard right now.
(laughing)
So I'm less convinced that
money has as big an influence
on politics as Jared is.
I should note that there
are rich people giving
lots of money to politics,
but there's people on the
right like the Koch brothers,
people on the left like Soros,
and there's this guy whose
name I've forgotten right now
who's given lots of money for the support
of global warming,
so I think the billionaires
have a variety of concerns,
and they give money for a
variety of different things,
and I don't see them as
being nearly as influential
as he does.
Absence of opportunity,
I think this may be one place we agree.
The way I would do is focus on the,
I would spend a lot more time focused
on the educational system,
so I had mixed feelings about
No Child Left Behind, pursued
by George Bush, who I worked for,
but I had no doubt that
thinking about trying to reform
our educational system
and make it better was
the right thing to do,
whether he had the
particularly right reforms,
I don't know, and a lot
of people debate that,
but I think focusing on that
is tremendously important.
I think also focusing on
access to higher education is
tremendously important.
One of my favorite
ideas floating around is
from Luigi Zingales at
the University of Chicago,
who says that college students
should be able to sell
equity in themselves,
and by that he means,
instead of taking a college
loan, go to an entrepreneur
who says look, you have
to pay for my college,
and I'll pay you some two, 3% of my income
for the next 30 years.
And the IRS could actually
get involved in helping
to enforce such a contract
because the IRS observes your income,
and that seems like a great
creative way of helping
to spread the risk of
getting a college degree
much better than our current
system of student loans.
And the question on fairness,
to what extent is unfair,
and I think it's great,
I'm gonna end on this
because fairness is not a word
that economists particularly
know how to define,
so when you talk about fairness,
you have to realize that
you're going beyond economics,
you're going into political philosophy.
Is it unfair that Robert
Downey Jr. Made $50 million?
Is it unfair that George Clooney looks
like he looks like, and
I look like I look like?
(laughing)
No, in some ways, it's not fair.
- [Jared] It's not fair!
- But is that the sort of thing you want
the government to be regulating
and saying oh, this is unfair,
and I wanna move resources around.
I'm basically a skeptic
of the powers of government interfering
in our lives,
and that's a statement
of political philosophy,
not a statement of economics,
and as a result, I don't want
the government to be going around saying
this is fair, that's not fair.
Bernie Madoff, I'm perfectly
happy to have them say
that's not fair because that's
clearly wealth diversion,
and I think there's other
examples of wealth diversion,
which we can argue about
that and try to fix it,
but I think if somebody has super talents,
as Robert Downey Jr. does,
and as some super-managers do,
I don't think that's the government's role
to try to remedy that.
But as I said, that's not a
statement of pure economics.
- Alright, so just because
Mitt Romney lost doesn't mean
the rich don't have disproportionate
influence in politics.
I mean, I feel very strongly about that,
and it's certainly the case
that the very rich are
not able to buy elections,
I grant you that.
That's not dispositive, in my view,
of where I was coming from,
and in fact, I looked this up today,
and I'm not sure this
number is still correct,
it's a 2010 number from a source
that looked pretty journalistic to me,
but there's something like five lobbyists
per member of Congress right now,
and so, unless that's the
biggest market failure
I have ever heard of, it
doesn't surprise me at all
that wealth is playing
a disproportionate role
in our politics
and doing things that I
think an objective person,
economist or not, would
recognize as unfair,
and I'll get into some
of them in a second.
Look, on the Robert Downey Jr. problem,
I actually think that
there's probably rent-seeking
or some kind of an inequality
problem there as well,
although I think in many ways,
it's your best argument
because as you say,
the superstars do have great access.
I will remind you that they're
a relatively small share
of the top 1%.
In many ways, it's the
folks in the boardroom
I worry more about, but I guess,
this is me just completely
hypothesizing off the top
of my head, I'll bet you
that Robert Downey Jr. would've done
the Iron Man movie for $40 million
and been happy to do so.
Why didn't he?
I think there's a positioning going on
between those at the very
top of the scale there
and that the only way
Robert would do it for 40 is
if Leonardo DiCaprio would do it for 38
or something like that.
That is, there's a kind of
positional inequality problem
that has little to do
with actual contributions
to the economy's health
and more to do with where you are
relative to somebody else.
Embedded in that is the fact
that at the very bottom
end of the pay scale,
and here you could
probably talk about folks
who are working on the movie set,
who used to make a lot more 30 years ago
than they do now.
Embedded in that are the
kind of power relations,
bargaining power, eroded labor standards,
less unions, lower minimum wages,
weaker job markets,
that help, that enable,
along with globalization
and technology, that enable a Downey
to get what he gets.
So look, I think Greg brings us
into a very important area
when he raises the issue of fairness
and whether we can have a
decent discussion about that
among economists.
I think if we don't,
we're missing the show.
We're really just ceding the field.
We're economists, we're ivory tower,
we live in a standard, we
can't judge what's fair.
I think that's a very big mistake.
Let me throw out a few things
I see as patently unfair,
and maybe there's a better
word for it, feel free to,
but I'd like you to
respond to this to say,
if that's okay, because this
is sort of another round,
is that okay with you?
So I'd like you to respond and explain why
either this is fair or unfair
is the wrong word for it,
as you will.
So, the carried interest loophole,
so this is where people who are
stock traders are able to pay taxes
on their earnings at lower rates,
at the rates that you
pay on capital income,
which are considerably lower
than the highest rates they
would pay on labor income
because of a loophole in the tax law,
so I think that's, I'd like
to hear whether that's fair.
I think the fact
that the pharmaceutical
lobby has manipulated patents
in such a way as to make the same drugs
much more expensive here
than they were over there,
than they are in, say,
other advanced economies.
This idea that there are CEOs paid
for global movements in prices
that don't seem to have much to do
with their skills or what
they're bringing to the table.
They're getting paid for profitability
that has to do with prices
set on a global market.
And one I don't think I mentioned,
high-frequency traders,
I think high-frequency
traders are seeking rents
in the stock market by
literally co-locating servers
closer to the market than other traders
and catching arbitrage price opportunities
in milliseconds, so that
strikes me as unfair.
By the way, none of these
by themselves would move
the needle a ton on inequality,
I'm not arguing that,
I'm saying that these are examples,
and I could go on with many more,
I suspect my five minutes is about up,
I could go on with many more,
I tried to tick off many during my talk,
that strike me as not only unfair,
but as unfair in precisely the way
that boosts inequality.
- [Charlie] Okay, alright,
I'll remind you all
if you have questions,
fill out your cards,
and they will make their way down to me.
In the meantime, Greg, if you
would answer those questions
then you'll have a chance
to ask some of your own.
- Sure, I will be very brief.
Carried interest, I've actually written
that I think we probably should reform
the carried interest laws.
I mean, my ideal tax system would be
progressive consumption tax,
so you'd be taxed on when you consume,
regardless of how you earned it,
just cause you wouldn't
have to debate things
like carried interest,
but I think the carried interest
exemption is problematic,
it's a very, very small
percentage of the population.
Pharmaceuticals and drugs in Europe,
there I think it's an
interesting policy question.
Drugs are cheaper in Europe,
that partly has to do
with price discrimination,
it partly has to do with
price controls in Europe.
Drugs have this feature
that they have very big fixed costs
and very low marginal costs.
Big fixed cost is the inventing the drug,
and then it's basically very, very cheap
once you've figured out how to do it.
For incentivized drug companies,
somebody's gotta pay
well above marginal cost
to pay for the fixed cost
to get the drugs invented
in the first place.
Sadly, Americans have been
paying more than their share
than the Europeans.
I view it as the problem
with European price controls,
the Europeans are free riding,
so I view that as sort
of a very distinct issue
from the US inequality issue.
CEO pay for performance.
CEOs are compensated often
as a function of their stock price.
One of the puzzles in the literature
on CEO compensation is they're compensated
as a function of their stock price,
and it should, you would
think, be their stock price
relative to overall stock market,
so you'd think that they'd be compensated
only when their price moves
relative to the overall market,
or relative to the overall
market in that industry, say,
and that's not the way
that contracts are written.
That's a bit of a puzzle.
I don't know the answer
to that, why that is,
it seems like if you were
writing the Apple CEO contract,
you would write it that way.
And on high-frequency
traders, we may agree here,
there's a great new book
out by Michael Lewis,
I'm a big fan of Michael Lewis's work,
his new one's called Flash Boys,
I don't know the details
of high-frequency trading,
but he argues that a large fraction
of high-frequency traders are basically
a form of wealth diverters
rather than wealth creators,
and I think that may be the case.
Let me say by the way that Wall Street,
Wall Street's a hard case for economists,
for me at least, to understand,
in the following sense,
I wanna make this distinction
between wealth creators
like Robert Downey Jr.
and wealth diverters
like Bernie Madoff.
According to Michael Lewis,
a lot of the high-frequency traders are
basically wealth diverters.
They're not doing something
illegal like Bernie Madoff,
so it's a legal form of wealth diversion,
but it's still wealth diversion,
and as a result, probably requires
new and better regulations
to try to avoid it.
But a lot of what people
are doing on Wall Street is
not wealth diversion,
it's wealth creation.
They are doing stuff like deciding
which industries are the
industries of the future.
When you invest your saving,
put it in mutual fund,
what companies are gonna get invested in,
what industries are gonna grow,
which industries are gonna shrink.
That is among the most
important jobs in the economy,
they are deciding the future
of the American economy,
so it makes perfect sense to me
that Wall Street's gonna hire
some of the smartest people,
a lot of you students that are here,
probably gonna go to Wall Street, okay,
some of the most smartest
students in the world,
does it make sense for
you to go to Wall Street?
It probably does from
the social standpoint
because you're gonna
be deciding the future
of the US economy,
and maybe you do it just to get rich,
but that's the magic
of the invisible hand,
but the jobs certainly
have high social value
if you make the right decisions,
and that's certainly how people in, say,
private equity, who take
long-term stakes in companies,
often get rich.
Mitt Romney got rich by
helping create Staples
and a lot of other companies like that.
That to me is wealth creation
and not wealth diversion.
- So I have a very different perspective
on the wealth creation-diversion question,
particularly in financial markets.
Does this work?
If you could put up one of my slides,
my second slide, that would be good,
but if you can't, don't worry about it.
Oh, okay, so, what I
kind of heard Greg just,
well, nevermind, I don't
wanna mess around with that.
What I kind of heard Greg
describe there sounded like
kind of the financial market,
or the equity market anyway,
that I was taught about in grad school,
and that I fear doesn't
really exist anymore,
and that was the one
that takes excess savings
from the economy and most
efficiently allocates
it to its most productive uses.
And I wish that were the case,
but I'm afraid it's not,
and I'm gonna focus a little bit
on the slide on the right there.
What I have observed financial
markets mostly doing,
there's some of that,
but what I have observed
financial markets doing
much too much of in recent years is
essentially figuring out innovative ways
to extract wealth from the economy
in ways that kind of
circulate around the top
and help explain that graph on the left,
with the super returns
to the super-managers,
without showing up in productivity,
which demonstrably is the case,
and equally demonstrably the case,
showing up in at least the last couple
of business cycles in very
serious financial crashes.
So I think it's actually very tough
to make an argument
that somehow financial
markets are allocating capital
to their most productive use
versus diverting wealth,
extracting wealth, helping
to inflate bubbles that,
once they burst, wreak havoc
on the vast majority of the workforce
while in fact the one sector
of the economy that recovered
before everybody else was
the financial sector itself,
in no small part due
to help from taxpayers,
so I see this financialization
of the economy
as actually a problem in two ways.
It's problem in terms of
macroeconomic instability,
and it's a problem in
terms of income inequality.
On the effective tax rate problem,
and this is related to this,
I think we have a factual disagreement
which we can figure out ourselves.
I'm picturing a graph,
and this isn't the CBO data,
so I have to go back and look at that,
I'm picturing a graph
that shows the effective tax rate
of the top 400 taxpayers
that the IRS releases every year,
and it's gone down a lot,
so I do think that as part
of a solution to this,
we should have more progressive taxation.
That should start at the top of the scale,
and one thing that would help,
both in terms of more progressive taxation
and dampening some of this
financialization problem,
this volatility that I
think is wealth-diverting
and macro-economically
instability-creating,
is a financial transaction tax,
a very small, couple of basis point tax
on financial transactions
that would generate a significant revenue,
350 billion over 10 years as scored,
and help to dampen both
some of this rent-seeking
and some of this instability.
- Alright, I have two follow-up questions.
So Greg, would you support
a financial transactions tax
if it were small based on the theory
that if capital gets to
its most productive use
by four o'clock, it doesn't really matter
if it gets there at 3:58?
- Well, I mean, a couple
things I'd wanna look at
before I signed on to that.
One is two what extent these things can
just move overseas, I mean--
- [Charlie] So let's posit
that it's harmonized.
- [Jared] Yeah, I agree with that.
- So there's a question of
whether we can move overseas,
and the question is do
you want supernational,
the problem is I don't
know what harmonize means.
You can get London to
agree, but does Barbados?
Do you want literally the
United Nations to enforce
this in every small country in the world?
I'm not probably willing
to cede economic policy
to the United Nations
given its effectiveness
and organization in other dimensions.
So I'm kind of nervous about that.
The other issue is
high-frequency traders may have
some negative aspects, but they also have
some positive aspects,
which mean they create liquidity.
If you wanna sell a stock,
you can do it very quickly at
a very small bid-ask spread.
If you wanna sell your house,
it takes six months, and the
bid-ask spread's quite high
if you wanna do it quickly.
So there's some benefits to
high-frequency traders as well,
so I think the question is
what regulations we should have
for them, I think, is
a very important one,
and I think it needs to be debated,
but I think it's fairly hard.
And I think looking at the whole activity
and saying this is all negative is
probably an overstatement.
In any event, I think it's
a fairly small fraction
of what Wall Street does, I think
the number of people actually engaged
in high-frequency trading as opposed to
longer term positions is fairly small.
- Alright, so for a follow up for Jared,
so Greg mentioned a
progressive consumption tax.
You guys would probably
quibble over the rates,
but would you support a
consumption tax, progressive,
if it meant then, I assume,
zero tax on capital gains
until they're consumed, I mean is that?
- [Greg] Yes.
- Every economist wants to do that,
and every tax discussion always ends
with a progressive consumption tax,
or maybe just a consumption tax,
and then the good guys say,
well, it should be progressive.
(laughing)
And I'm sort of just,
I think it has attributes
that I definitely support,
I think both theoretically
and in the real world,
that it has real efficiencies.
It ain't gonna happen.
I live in a world where
you really have to wrestle
with tax policy,
and I hope that many of
the students here go out
and wrestle in that world as well.
I think that before we
can start fantasizing
about a progressive consumption tax,
we should think about fixing
a pretty broken tax system
of our own right here.
The rates that,
and it's part of the inequality problem,
the rated on labor income
are typically higher
than they are on capital income.
It's one of the things that has created
the kinds of problems that
Thomas Piketty is writing about.
The inefficiencies of
loopholes in the code are such
that you can if you're smart enough,
you can buy the tax return you want.
There are big international players,
multinational corporations,
who pay a tiny fraction
of what they should pay
in the tax code,
so before I'd think about a
progressive consumption tax,
I would try to think
about actually reforming
our current system in ways
that probably Greg and I would agree on
in terms of closing a bunch of loopholes.
One quick thing.
We have another factual disagreement here,
but it's very narrow, and very small,
and very in the weeds, and it's one paper,
and you may know this
literature better than I.
I was very moved by a paper
by a guy named Eric Budish,
have you seen this paper?
Okay, he and his colleagues seem to look
very carefully at this
high-frequency trading issue,
with great data, and I mean
like to the millisecond,
and they concluded that in fact,
high-frequency trading reduces liquidity,
and the reason it reduces liquidity,
I wrote about this on my blog,
jaredbernsteinblog.com. (laughing)
The reason it reduces
liquidity is because you've got
high-speed traders that
are sniping stale quotes,
and when you're at a
non-high-speed trader,
you can really get
burned in that situation,
so they found it reduces liquidity.
- Okay, question for
each of you very quickly
on tax reform since this seems
to be an area of overlap,
yes or no on capping or eliminating
the home mortgage interest deduction?
- Yeah, I'd eliminate it.
(laughing)
- You're not running for office, I see.
(laughing)
I'd phase it out slowly.
- Of course, you'd phase it out, alright.
The only thing I'm surprised.
- I am running.
- There will be security to lead you out.
The only thing I'm surprised
neither of you mentioned is
family structure, so over--
- Well, he did.
- Did you?
- I thought he did.
- So not assortative
mating, the flip side,
so the rise in single-parent households,
and thinking of it as the opposite
of assortative mating
in that it tends to be
low-income households,
so it exacerbates not only the one earner,
one oar in the water,
but also fewer resources
to spend on children.
- Yeah, when people, we
didn't talk about this data,
but sometimes people look at things
like median household income
or median family income,
and that data is particularly affected
by household composition
because if you have more
single-family households,
so people are splitting up,
that's gonna tend to
reduce the median family,
that's absolutely true.
There's a guy at Cornell
named Richard Burkhauser
who's done a lot of work
about that, talks about
why it is that some of the
median numbers you see are
maybe misleading for reasons like that.
- Yeah you still get,
and once you make those adjustments,
you still get very significant
increases in inequality.
You can't explain it away.
- [Greg] Yeah, that's why
I didn't bring it up, yes.
- I wrote a piece, short
answer to the question is,
I wrote a piece that I
encourage you to read
if you're interested in this,
just an article that was in
The New York Times called
something like, marriage
isn't as great a solution
to poverty as you think it
is, something like that.
And the idea was this was
around the 50th anniversary
of the War on Poverty,
and there were a lot of people
who were kind of going around saying
if only people would get married more,
we'd have less poverty,
and there's definitely some truth to that,
and by the way there's a lot of truth
to the effect that a
two-parent, all else equal,
a two-parent family, kids who grow up
in two-parent families
have better child outcomes
than kids that grow up
in a one-parent family,
so I'm not disparaging
at all that research.
I think that the idea that
single-parenthood itself is
a cause of increasing poverty
or something that you
could even do much about
with public policy is somewhat overblown.
So read that article
and see what you think.
- Okay, so some with cards,
you guys can start collecting cards.
Meanwhile, question for
both you, start with Greg.
You've stated your policies
on income inequality,
but what policies that
you hear from people
who care a lot about
income inequality would be
most desirable to you,
irrespective of income inequality,
so whether it's universal pre-K education,
or something you say, you know what,
I kind of like that even if I don't share
their underlying motivation?
- I'm not sure exactly what
categories that category is,
but things like letting
skilled immigrants in.
Even if we weren't worried
about income inequality,
I think letting skilled
immigrants in would be
an absolutely good idea.
I think providing better
access to higher education is
an absolutely good idea.
Figuring out different ways of dealing
with educational reform at
the pre-college level is
an absolutely great idea.
I think it would help inequality,
but I think they're sort of
fundamentally good policies
in and of themselves.
- So I wanna respond, I don't think
that we've quite done
enough on policy, frankly.
We've kind of blown by some things,
but I actually think there
are a lot more we could do
in that space.
One thing that I'd like
to say about this is
that there is a kind of a thread,
and I think I hear it a
little bit in Greg's argument
that says, I actually
don't want to do anything,
really much, to the top,
I mean maybe you'd close
the carried interest loophole,
but basically, they're doing fine
because they deserve it.
I wanna help the bottom.
So Greg mentions educational access.
Better access to education,
particularly for folks in
the bottom half of the scale.
It's key, it relates
exactly to this problem
I mentioned earlier
of inequality reducing opportunity.
However, inequality itself
blocks those solutions.
You can't, shut that off. (laughing)
You can't ignore the top
and somehow help the bottom
when the top itself, through
money in politics in part,
through intensive lobbying
against increasing tax revenue,
which is a real problem,
so we're gonna need more revenue
if we want to have better
educational access, right?
And so, the linkage there at
least to me is very clear,
our high levels of inequality are blocking
the very policy solutions
that would reduce inequality,
particularly in areas
of educational access.
One other policy I would put forth is
because I think that weak labor markets,
the absence of jobs,
the absence of pressure
in the job market, is so important,
I mean unless employers
face such a tight job market
that they have to raise
the wages and benefits
of the workers they need, to
get and keep those workers,
they have to big their compensation up,
I would do some direct job creation.
I would actually help
the long-term unemployed,
folks who face discrimination
in the job market,
by directly creating
employment, for example,
to help improve infrastructure,
so I would do some direct job creation.
- [Greg] Can I ask Jared a question?
- [Charlie] Sure.
- The current, the typical top earner now
in the top marginal tax rate,
not the carried interest person,
but the typical successful
corporate lawyer, say,
who's playing normal tax rates,
if you live, say, in New York
City, pays New York City,
New York state, top federal taxes,
plus the new Medicare tax and so on, faces
a marginal tax rate of probably about 50%.
- Where does that start in their income?
Like, a million or something?
- Probably, I don't know, 400,000, say.
Where would you raise,
how high would you raise
the top marginal tax rate,
if it's now at 50, how
high would you raise it to?
- Well, I think 50 is getting up there.
Now I think that what I would
probably do is I would lower
the threshold, so that
more people would enter,
you remember, President
Obama, you remember,
President Obama ran this
election, (laughing)
and said that he was
going to increase taxes
on people above 250,000.
Well it ended up he increased
taxes above 450,000,
so what I would do is I would increase
the tax liability of folks
at the top of the scale,
not by cranking up the
marginal rates you mention,
now that's New York state,
you've combined everybody
that's probably higher than
some people in other states,
but I would lower their threshold
so that more people were in that category.
Now there is a literature on this
by colleagues of yours
that says you could go up
at least on labor income to 60, 70%,
that makes me a little nervous,
but I do think that lowering
the threshold would help.
- So really it's something people call
the upper middle class.
- Well, let me be very clear,
yes, exactly, that's right,
but let me be very clear,
I agree with something I
think you're getting at,
and I've written this,
we cannot solve our fiscal problems
simply by raising taxes on folks
at the very top of the scale.
That the idea that if we truly want to,
and I believe we should, be able to afford
this many government services,
we're gonna need to raise
more revenue than this,
you gotta bring those together,
and we can't do that simply
on the top one or 2%.
- Alright, we got a lotta cards.
Let me start with the ones where we've got
repeats here, a lot of folks would like
to have you both weigh
in on the minimum wage,
and in particular obviously,
balance the trade-off
between higher incomes for those affected
and loss of employment.
- I'm sorry, what was that?
I was thinking of something else.
- The minimum wage and in particular,
both of you walk us through the trade-off
that all economists are familiar with
and what the CBO laid out.
- So, if you increase in the minimum wage
in any sort of meaningful way,
there will be some job loss.
If you just increase the
minimum wage a tiny bit
and it doesn't affect anybody,
then sure, it won't matter,
but if you increase the minimum wage,
and they're talking about
$15 an hour in Seattle,
the President wants to
go up to $10 and 10,
by the way, with phases,
so it doesn't mean tomorrow,
so let's be clear about that.
I don't disagree with the
Congressional Budget Office
that did a recent study, I
thought they were high on this,
but they did a recent study
where they found that, they predicted,
that an increase in the minimum wage
in three years to $10 and
10 cents would lead to
about 24 million people getting
an increase in their wages
and about 500,000 people losing jobs.
That's something like a 98,
99% effective target rate.
24.5 million people get a raise,
some people lose their jobs.
It's not a perfect policy.
It needs to be complemented
with strong, say,
wage subsidies through
an earned income credit,
but it's a very important policy
whose benefits far outweigh its costs.
You know, everything in moderation.
- I would eliminate the minimum wage.
(laughing)
- [Jared] So much for moderation.
- Because I think we
have much better policies
to help people at the bottom
of the income distribution.
I think the earned income tax credit is
a much better policy,
and in fact, is a policy
that has been expanded over
the past several decades
and has gotten support from
both sides of the aisle,
and so I think, given that
we have a better policy
than the minimum wage, I would focus
on the earned income tax credit.
There is a debate in the
economics literature, by the way,
about how big the adverse
employment effects are.
Jared certainly cited one credible part
of the literature that has
relatively small effects.
I think you can find a range
of estimates out there,
but let me point out that if you believe
the effects of increasing the minimum wage
on employment are small,
then you believe the labor demand curve is
relatively steep, is fairly inelastic
for those students who
are taking economics,
if you believe the demand
curve is relatively inelastic,
then you believe that
shifts in supply would have
a huge effect on the wage.
So if you believe that
the minimum wage has
a small effect on unemployment,
then you probably believe
that the influx of unskilled
immigrants has a huge effect
on their wages, because you
can't have it sort of both ways.
I don't know what the truth is,
but if you're not very
worried about the minimum wage
dis-employment effect,
you have to be really worried
about the unskilled immigrants effects.
- [Charlie] A couple of people
would like you to weigh in
on the role of inherited wealth
in regard to income inequality
and then obviously your
views on the estate tax.
- Well I mean, I think that in the context
of our discussion, it's funny,
it's like sometimes, especially when,
not with someone as balanced as Greg,
but if you go on CNBC, which I do,
and you start having these discussions,
and someone argues, oh, you hate the rich,
or you're an enemy of the job creators,
I don't begrudge people
their success at all.
I do think that when you
get into inheritances,
there you have a very
tough argument to make
that somehow this is deserved.
I mean, there are people
running around America
who were born on third but
thought they hit a triple,
and I think that that is
problematic in a sense,
again, I don't know if
folks have read this book
by Thomas Piketty, but I
think that's problematic
in a sense of his kind
of economic mechanics,
which suggest that this
problem will only get worse
as long as the rate of
return stays pretty high
relative to the growth rate,
we'll see more and more inheritances,
and he has pretty good
historical data to support that.
I'm not sure he's right about the future,
but he certainly makes a cogent argument,
and so therefore, and estate tax
that targeted some of that
wealth at the very top
of the scale would very much be warranted,
and it is a scandal the
extent to which Congress has
not gone there and in
fact allowed the debate
to make it sound like
when you're talking about a wealth tax
that's really on the
top half of the top 1%
it's somehow gonna ding
middle class people.
That's absolutely false.
- I'll tell you the story of two brothers.
Their names are Spendthrift
Sam and Frugal Frank.
They both graduate from
Dartmouth, start businesses,
both are successful.
After a few years, they
both sell their businesses
for $20 million, and
they sit back to enjoy
the rest of their lives.
Spendthrift Sam has lavish
parties, buys fancy cars,
fancy women, spends all his money,
so when he dies, it's all gone.
Frugal Frank lives
modestly, lives in a small
middle class home, mows his own lawn,
when he dies, he wants to
leave his money to his kids.
Do we think that Frugal
Frank should pay higher taxes
than Spendthrift Sam?
That's what the estate tax does.
Estate tax says if you're frugal,
sorry, you gotta pay extra taxes,
we don't like frugal people.
Now see, sometimes you
think of capital income
as unearned income.
It's often referred to as unearned,
but I hate that phrase
because you earn capital income
by not consuming your
earnings in the past.
Capital income is the return to patience.
So you earn it by being patient,
not spending your money.
Now it's true that the person
who's inheriting the money didn't earn it,
but his parents earned it,
and you can't deny the
person the inheritance
without denying the parent
the ability to bequeath,
and from my view and perspective,
what the inheritance tax does is it says
we the government much
prefer Spendthrift Sam
to Frugal Frank, and we're gonna institute
a tax policy that does that.
I personally don't see that as just,
and so therefore I'd
eliminate the estate tax.
- So I would just say that to say
that it's denying the
inheritance is way over the top
because what we're talking
about with an estate tax is
a marginal tax rate on
the very top one or 2%
after you forgive, what's the cutoff?
I can't even remember what the cutoff now,
but there's some number
of millions, what is it?
- Five million.
- Five million, for a
couple, it's five million?
- No, ten million for a couple
- Ten million for a couple,
so you're deducting ten
million for a couple
before you're applying
a marginal tax rate,
so I think it's very much,
even though I think your
story is a very good defense,
to end with and that's somehow
denying the inheritance
as opposed to shaving a piece of it off,
I think is just overstating a case.
- So we'll call that a matter of degree.
Okay, someone wrote the
top 20 hedge managers
in the US collectively make more
than 150,000 kindergarten teachers,
so we'll assume the math is correct.
Two questions, one from here, one my own.
So, does it make you
somewhat uncomfortable,
this is mostly I guess for Greg
because how does it fit into
the Robert Downey story,
and probably the more
substantive question I guess is
given that we now know from things like
the Tennessee STAR experiment and so on
that good teachers actually matter a lot,
are there things you
would do in particular
on the school reform front
to channel more money
to those teachers who actually
are creating a lot of value?
- I'm not an expert on educational reform,
but I would focus on two
things on educational reform.
One is I probably would pay teachers more,
but then I'd also make
it easier to fire them
because I think there's a lot of evidence
that good teachers matter a lot,
and so we need to get
good people into teaching
and low salaries don't encourage that,
so higher salaries are good things,
but then also when the
people don't perform,
we should figure out ways to fire them,
and stories you hear about
sort of bad teachers sitting
in rooms because they can't fired,
but no one wants to
put them with students,
which New York City does, are a travesty.
Now on the hedge fund
managers, I have to admit,
I've always been puzzled a
little bit by hedge funds.
Hedge fund managers make a lot of money,
do they really outperform the market?
Well, sometimes they do
and sometimes they don't.
I have wondered, like if
I were advising Dartmouth
or Harvard, would I tell them
to invest their endowment
in hedge funds?
They all do.
I'm not actually sure it's the wise thing.
I put my own money in index funds.
I pay Vanguard 10 basis points,
so I don't have a single
dollar with a hedge fund,
but if people want to put their money,
if Dartmouth wants to put
their money with hedge funds,
I can't stop Dartmouth from doing that,
that's Dartmouth's decision.
- Jared, you wanna talk
about educational reforms,
in particular, there are
things, Greg pointed out,
making it easier to fire
bad teachers and so on,
that would certainly help
folks who are coming out
with the short end of the stick
in terms of income inequality.
So are there things like limiting tenure,
promoting charter schools,
things that are more closely associated
with the conservative agenda
that might actually help from your view
on the income inequality side?
- I think the firing teacher
thing is kind of like
a Republican talking point.
I haven't seen, if you
could show me some evidence
that somehow making it easier
to fire teachers would
help improve the quality
of schools, I'll definitely
be happy to look at it.
- [Charlie] We can call my wife,
she teaches at Mascoma High School.
- That's not evidence.
- [Charlie] I think she would weigh in.
It's anecdotal evidence.
- Exactly.
- [Charlie] You said any evidence.
- Okay, sorry, any non-anecdotal evidence.
This debate is fraught with anecdotes,
and I would say it needs
much more than that.
I am, here's the thing,
and again, I really do think we have
an anecdotal problem here.
I'm actually quite sympathetic to the idea
of different forms of schooling
like the charter schooling
in the following sense,
if you're a parent in a neighborhood
with a really terrible school,
and I could show you those neighborhoods,
I've lived in some of them,
the idea that you don't have a choice,
and that you have to send your kid
to that school because you're too poor
to pursue any other
option is just horrible.
And for us to somehow kick back
and say we wanna preserve that is
completely irresponsible.
The problem is, so I support choice
for people in that situation,
the problem is that the evidence
in favor of charter schools has been
anything but supportive
as far as I can tell,
and I'm not an expert either.
I think it's been like
pretty unconvincing.
It's also worrisome in an
adverse selection sense.
Remember, for you to take your kid
out of the public school
and put them in the charter school,
that's up to you as the parent,
and that means that the parents
who actually are concerned
about their kids' future are the ones
who are gonna make that move, leading to
an adverse selection problem
with the kids left back
in the already lousy public school,
which is now even that much worse,
so I don't know that it's
the solution that will help,
although a solution is
very much called for.
Rick Kahlenberg has done some work
that I've thought has been pretty smart
in terms of integrating schools that are,
integrating schools by class versus race,
and I thought that those kinds
of experiments looked useful.
- So could you each talk
about social mobility,
and in particular, I've
seen conflicting evidence
on whether social mobility
in the US has been impaired
relative to say the
'70s or '80s or before,
so could you give a
reading of your literature
on what's happening with social mobility
in the United States
and then to the extent
to which that affects
your broader views
about income inequality.
- I think the best evidence comes
from a recent study by Raj
Chetty and some co-authors.
- [Charlie] That's what was
referred to in the question.
- And Raj Chetty finds there's
been very little change
in income mobility.
He looks at the income
percentile of the parent
and the income percentile
of the child as an adult
and finds that the relationship
has not changed over time.
It's been pretty steady.
I think the most surprising
thing about the Chetty numbers,
which actually shows up in
previous literature as well,
is not the fact that it hasn't changed,
I think that's surprising but interesting,
but I think the actual magnitude
of the numbers often surprise people.
So let me give you sort of a sense of it.
Suppose that you have a parent
who's at the 99th percentile,
the top of the income distribution.
Where do you think his child's gonna be?
Now if we had a perfectly static society,
he'd be at the 99th percentile, too.
If we had perfect mobility,
no correlation at all
between parents and children,
he would be at the 50th percentile,
so someplace between 50 and
99th is the plausible range.
Where do you think the child's gonna be?
I want a volunteer, somebody take a guess,
you're a 99th percentile parent,
where do you expect your kid to be?
- [Student] How much does he inherit?
- Well, look at income, for most people,
inheritances are fairly small.
I mean, you're right,
for the billionaires,
but the typical 99th
percentile guy is not,
let's say he's making $400,000 a year,
inheritances are not gonna be huge.
This is not like you're Bill Gates,
so what income do you
think he's gonna have?
- [Student] 92nd.
- 92nd, I think that's
what most people think,
they think it's gonna be pretty high,
although obviously not 99th.
Turns out it's about 65.
So what you find in these
studies is to me more mobility
than most people expect.
Now of course the glass is
half empty and half full,
so it's some place in the middle,
but I think when actually
people look at the data,
I think they're usually surprised
about the amount of mobility there is.
I should note by the way,
there's actually some debate about that.
Those are the Chetty numbers,
there's a guy named Greg Clark
who has a book that finds
much higher numbers using
various historical records
from the UK primarily,
but I think the Chetty numbers
are the best that we have.
- I think that the mobility discussion
sometimes takes place in a way,
and I don't disagree with the facts
that Greg just shared at all,
but I think that the mobility
discussion takes place
in a way that somehow gets skewed,
as if somehow because we
have X amount of mobility,
the inequality problem isn't as severe.
And in fact, I would
say that that's wrong.
I very much agree with
a lot of the research.
The Chetty stuff didn't surprise me
because I've been seeing
and doing research
like that for a long time.
It was actually pretty well-known
that income mobility was stable.
The problem is you've got stable mobility
and increasing inequality,
so the gap between the
bottom and the middle
and the middle and the
top is getting wider,
but the rate at which people are moving
across those quintiles is the same,
or deciles or percentiles is the same,
so it's as if the,
if you think of the economy as a building
with a really terrible
apartment in the basement,
and a decent apartment in the middle,
and a great apartment at the penthouse,
what you actually need is
as that building gets longer,
and the distance between
the hovel in the basement
and the penthouse at the top gets
further away, you actually
need a faster elevator.
So the fact that mobility has been stable,
I don't take much solace in at all.
We actually need accelerating mobility
if we're going to offset
greater inequality.
Unfortunately in the United States,
relative to other countries,
we have considerably lower mobility
in precisely the metric
that Greg mentioned,
this idea of how well
the son or the daughter,
typically sons because we
have the data on sons longer,
but how well the child does
relative to the parent.
If you look at other advanced economies,
that correlation between
how the child does
relative to the parent
is considerably lower
than that of the US.
And if you plot inequality
against that mobility,
you'll find that the US is an outlier
with very high inequality,
very low mobility,
relative to other advanced economies.
- Now that you've taken
the discussion abroad,
I have questions for both of you.
Are there lessons from other countries
that we either, regardless of your view
on income inequality,
that we ought to be considering,
and I'm thinking of
German apprenticeships,
or the Scandinavian countries
that have redesigned
their welfare systems,
different unemployment schemes,
so are there lessons from abroad
that we could adopt
that would presumably
be pro-growth in the US
and help deal with some of the
stuff that we talked about?
- I don't see Western
Europe as being a model.
- [Charlie] What about Scandinavia?
- That we would want
to emulate, generally.
I'll tell you one thing
that we do see in Europe
that I do think we probably
will and should adopt
in the United States,
and that's a value-added tax.
I think as Jared said earlier,
we're gonna have to raise taxes on more
than just the rich,
and I agree with that,
given the large promises
that baby boomers like
Jared and I have made
to ourselves and promised
that the next generation's gonna pay for.
We're gonna eventually have
to raise taxes, I think,
to finance that entitlement system,
and I think a value-added tax will be
a plausible way to do that
since it is a consumption tax,
and relatively efficient way to do that.
I say that even though most
Republicans hate the idea
because they think it's a hidden tax,
and therefore too easy
for Congress to raise.
I think there's some truth to that,
but I think it is also
a very efficient tax,
and in that sense probably
gives fairly low distortions
compared to other taxes.
Another thing that Europe has that we have
in terms of tax system is
much higher energy taxes,
and I've written in many places
that higher energy
taxes are the way to go,
not only because they're
relatively efficient,
but actually it improves efficiency.
Not only it not having dead-weight losses,
it actually internalizes a
lot of negative externalities
associated with energy consumption.
- I think there's a lot we could learn
from Europe in terms
of reducing inequality,
and interestingly, you know,
your quip about Europe being
kind of a macroeconomic basket-case
in some of these economies,
I kinda look at that
as more of stuff they learned from us.
What did they used to say about China,
we sell them toxic assets,
and they us toxic toys.
(laughing)
So anyway, you know it's interesting
that you mention the
apprenticeship program,
I think Germany apprenticeships are
actually a very interesting model for us.
I recently ran a program
at the Center on Budget
and Policy Priorities
on paths back to full employment,
and all the papers there
are on a website called,
I think, pathtofullemployment.org
or something like that,
but there's a paper by
Harry Holzer and Bob Lerman
on precisely this idea,
and I think it's a neat idea
in terms of using on-the-job training
and apprenticeship programs to increase
the employment of particularly
mostly non-college educated kids
who are having trouble
getting into the job market.
I think Europe has done
some pretty active manufacturing policies
that are helpful.
The President himself
is trying to replicate
some of those in a very small-scale way,
since he doesn't have Congressional help,
but I think helping to, I
think there are bridges,
or nexuses, between the government
and the manufacturing sector
that some European economies tap well.
There's work sharing, which is in Germany,
but other European programs did this,
it's a way of using unemployment insurance
to keep people on the
job during downturns,
I think that helps.
And I think a much deeper safety net
in terms of work supports.
We want low income people to go to work.
I said let's provide them with jobs.
We also need to provide
them with work supports.
Greg likes the earned income tax credit.
I like it, too.
It's a $60 billion a year work support,
so it's something we already
are into pretty deeply,
but I would do more of that,
including childcare as well.
It's a very expensive
proposition for working parents.
- So in just the few minutes we have left,
I wanna turn to politics,
so one of the things that
characterizes both of you is
you both worked in
presidential administrations.
Obviously part of what has
to be done is leadership,
and if we were to just take the things
that you agreed on today, right,
leave aside the disagreements,
there's an awful lot there,
so could you each finish
by talking about the role
of political leadership
in advancing the most important things
that you think have to be done
from an economic standpoint.
- I think fundamentally,
for better or worse,
the American people get the
government that they want.
And that if we want better policy,
it's not so much to convince
our so-called elected leaders,
but rather to convince
the American people,
that these are the right policies.
We call them our elected leaders,
but in some sense,
since they wanna get elected,
they actually have to be
our elected followers.
They follow the American people,
so for example, I'm in favor
of higher energy taxes.
I've written several places about that.
I think a lot of economists are.
I'd guess I could get Jared
on board with that one.
I think we could talk til
we're blue in the face
to our elected leaders
about the virtues of higher energy taxes,
and they'd say, yeah, I
understand the arguments,
but I wanna get elected.
I think we need to convince,
if we were to ever have that,
we'd have to convince the American people,
and therefore, I think that
when we economists talk
to the general public, in forums like this
and op-ed pages, we're in some sense doing
more of a public service
than when we talk to our elected leaders,
because ultimately it's
you guys who decide
what the policy should be.
- Sorry, what's the question again?
(laughing)
- [Charlie] Political
leadership, although.
- Yeah.
- [Charlie] Or followership.
- I think Greg pretty
much nailed that one.
I think the idea is that there is a,
I've worked, as you mentioned, it's been
my great privilege to
work at the highest levels
of political economy power, as it were,
at least in government,
and I can tell you that there are people
that I would call very smart,
and I think Greg would agree,
who have very good ideas
on how to ameliorate some of the problems
that we've been talking about,
and as you've correctly suggested,
your work is getting to this,
there's actually a circle
around some of these ideas,
kind of in the middle of the scale,
that's not too far left
and not too far right,
that a lotta people agree with,
including politicians in high office,
and they can't get anywhere with it.
What do they say,
that D.C. stands for
Dysfunctional Congress.
There's a serious, the way
I would put the problem
that Greg described, to
put it in economic terms,
which may be not so
resonant, is that people have
a very high discount rate.
They don't really give much
of a crap about the future.
And I think the job that
economists have to do,
and policymakers, is to try
to somehow pull the future forward
in ways that people today
actually think about
in meaningful terms,
what kind of world they
want for their kids,
what kind of world they want
in terms of opportunity,
in terms of education,
in terms of climate.
That has to intersect with politicians
who are willing to tell the truth
about how you get to that kind of world,
and that intersection is
very, very tough to achieve.
I haven't seen it for a long time.
I feel like we've been
drifting away from it,
but that's what's needed.
Unfortunately, in grad school,
they don't teach you much about this,
and I don't know that
I have great insights
in how to get to that world,
but that's the one we need
to try to head towards.
- On that point of agreement, we will end.
Thank you both, and thanks to all of you.
(applause)
