- 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)
