Understanding Inequality and What to Do About It

NARRATOR: You're watching Economics Amplified, the latest thinking on the biggest issues, from U Chicago's Becker Friedman Institute. LARS HANSEN: My name is Lars Hansen. And I'm here in the capacity as the director of the Becker Friedman Institute. And I'd like to extend a warm welcome today about today's panel on understanding inequality and what to do about it. This is an example of our aims to make the Becker Friedman Institute on of the top intellectual destinations for the best economic research and the best discussions of the important economic questions of the day. So I am looking forward to this panel of distinguished participants. And I hope we can all benefit from their insights. We're certainly fortunate enough today to have Thomas Piketty, Stephen Durlauf, Kevin Murphy, and our moderator, Jim Heckman. I'd like to, in addition to the Becker Friedman Institute, I'd certainly like to thank the Harris Public Policy School for co-hosting this, and their dean, Dan Diermeier. And also, I'd like to acknowledge the contributions from the Human Capital and Economic Opportunity Network for their support for this event. These events require incredible staff efforts. And we've had an important staff efforts in the BFI, the HPS, and Harris to make this happen. You're not here to hear me. But let me just briefly say a little bit about the three different panelists. They're all very, very well known. So I'm not going to give elaborate introductions to them. Thomas Piketty is a professor at the Paris School of Economics, currently visiting the Harris School, and as you know, has done very important work on the role of political and fiscal institutions and their historical evolution of income and wealth inequality. Stephen Durlauf is the Kenneth Arrow Professor of Economics at the University of Wisconsin-Madison. I slipped there because Steve visits the University of Chicago quite often. So he's like one of us anyway. And he's done important work on social networks and economic development growth among a variety of other areas. Kevin Murphy, who is the George Stigler Distinguished Service Professor of Economics here at the University of Chicago and co-chair of the Becker Friedman Institute. He's known for his very important work of microeconomics across the board, important contribution to labor economics, inequality, unemployment, wage behavior, and the like. And then finally, the moderator, who is going to, I guess, keep everyone on track and organized and coherent is Jim Heckman. They will follow his lead on this, I'm sure. And he is the Henry Schultz Distinguished Service Professor of Economics and a Nobel laureate in 2000. Jim, as you know, has made important contributions to empirical micro-economics, econometrics, and a variety of other fields. So I'm going to turn the podium over to Jim. And he will take it from here. Thank you very much. [APPLAUSE] JAMES HECKMAN: OK, well, as Lars said, I am the moderator. And I want to be very moderate in my own comments. I do want to thank all of the sponsoring organizations. And I want to point out that one of the sponsors of this organization, the Harris school of Public Policy, is also having another event later this afternoon with Thomas. I believe it starts around 7:00 o'clock, 6:30. And the lecture will be followed by a reception. So I would advertise that event as well. So I just make the obvious comment that there are a few issues that are more gripping than the question of inequality in society, not only in US society, but society around the world-- its various dimensions, which aspects are really problematic, which ones may not be so problematic, and what public policy should be. And so we're going to have a discussion on this. And the format of the discussion is really going to be the following. Each of the speakers-- and it's a debate, not a debate, but a discussion. It's going to be a debate of the issues. Sorry. I'm making all kinds of slips. I guess I stayed up too late last night. It's not a debate. It may turn into a debate. But I'll try to prevent that, but a discussion. But the format then is really the following, that there will be presentations by each of our three featured speakers, 10 minutes each, roughly, where they can state a position, where they talk about inequality, what should be done about it, what's problematic, what effective policies might be. Then in the second part, which will be roughly 30 minutes, but it could be longer-- so it's at my discretion, our discretion-- we will also have a discussion among the three participants just following up on each other's initial thoughts so that we can actually discuss these issues in some depth. And then there will be some time, possibly, for questions and answers from the floor. But we want to collect them. We're going to have some people-- I don't know. I can't really see with these bright lights. But there are some people out there who will take written questions. And we will try to distill those questions. But in order to get the flow going, I'd like to be able to have these questions collected during the first hour or so, or the first 45, 50 minutes of this discussion, and then try to present some of the most interesting and broad spanning questions. So without any further introduction, Thomas Piketty, welcome to the University of Chicago. We're delighted to have you. And we look forward to your stay on campus. Thank you very much. THOMAS PIKETTY: Thank you. Do you want me to-- JAMES HECKMAN: Yes. [APPLAUSE] Thank you. Thank you, Jim. Thank you everybody for organizing this event. So let me first apologize for the fact that my English sounds a lot like French. And I hope-- Let me also apologize for writing such a long book. I know it's-- and also, I think there are reasons why it's long. The reason is that what I'm trying to do in this book is to put together a lot of historical material inequality. And I guess this is really the core of what I've been doing in the past 15 years is to pursue, together with Atkinson and Saez and several dozen economists all across the world, we have been pursuing a research agenda on inequality, which started a bit more than half a century ago with the work of Kuznets. So as you probably know, Kuznets was the first economist not only to compute the first national accounts for the US, first GDP series for the interwar period in the US, but also to use for the first time the federal income tax data-- so the federal income tax had been created in 1913. And he used this data between 1930 and 1948 to compute the share of national income going to the different income groups, the top 10%, the bottom 90%. So Kuznets had only one country, the US over a 35-year period. But this was a lot more than before. People had been talking about inequality forever, Marx, Ricardo, but with no data, which puts a strong limitation on what you can say. Or actually, it puts no limit on what you can say, which is a bit-- So at least Kuznets had data, which were not perfect, but which were much more than before. And he came with a very optimistic conclusion, which was a decline of iniquity in the US between 1930 and 1948. The orders of magnitude, the share of national income going to the top 10% dropped from about 1/2 to 1/3 of national income, 45%, 50% at the beginning of the period, to 30%, 35% in the 1950s. And then stabilized there for a couple of decades. And all what we've been doing which Saez, Atkinson and many other co-authors is in a way to expand this work to many more years and many more countries. And this was not done before, I think, largely because this kind of historical fiscal used looked to historical for economies and to economic for historians. So nobody was really collecting it in a systematic manner. So this is what we've done. And this is the story I try to describe in my book, using this material together with material on the evolution of wealth, resources, and simply income. And then, I try to propose interpretation. I try to draw a sense for the future, which I'm going to say a few words about now. But let me make very clear that I am much better at analyzing the past than the future. And I don't require anybody to agree with all of my conclusions. At the end of the day, we know too little. We know a little bit more than what we used to, I think. But we still know too little. So as there are different ways to interpret the same data, as we are in the social sciences, we are not going to have a perfect or controlled experiment to redo the history of income distribution over the recent decades and see what we have then. So we have to be modest. And still, I think there are important lessons to be drawn about the sources of inequality and the way to reduce inequality in some cases when this is necessary. So let me draw, very quickly, some of the conclusions, findings that I have learned from this research. In particular, if we try to understand rising inequality in the United States in recent decades-- so starting around 1980, you have a return to a level of income inequality which roughly corresponds to the level that Kuznets measured at the beginning of his period. So between 1950, 1980, we have a stabilization of the share going to top 10% group to about 30%, 35% of total income. And in recent decades, we are back to 45%, 50%, or maybe a little bit more than 50% at the end of the period. Why is it so? I think it's interesting. Very often, we talk about globalization, China entering the world labor market and putting pressure on the lowest skill and medium skill group in developed countries as the explanation. I think this is certainly part of the explanation. But the only problem is that globalization happened not only in the US, but also in Sweden, in Japan, in Germany, in Europe, everywhere. And you don't have the same rising inequality everywhere. So you need a bit more than just globalization if you want to explain what we see. And clearly different policies, different institutions, in the broad range of domain from education to labor market institution to progressive taxation, corporate governance I think have played a role. So there's no magic bullet or magic explanation. But there's a set of factors that have played a role. Unequal access to education, I think, is clearly possibly a very big part of the explanation for why inequality has increased so much more in the US than in the rest of the rich world, as compared to Sweden, Germany, Japan, Europe. In the US, we have, as we all know, very good top universities at the top. But the bottom half of the population, not only they don't go to Chicago or Harvard, but there's a kind of high school and community college they go to, I think there's a gap between the quality of education available for the bottom groups and the top groups, which is arguably higher than in Europe or in Japan. And this, I think, explains partly why rising inequality has been so large in the US. And this is possibly the main explanation. Now, this cannot be the only explanation. Why? First, because there are evolutions both at the bottom and the top of the distribution which are difficult to explain just with education. At the bottom, I think the decline of unions and also the decline in the minimum wage, an area where the US used to be in advance in way, with respect to other countries back in the 50's, 60's. And the minimum wage has been dragging down in the recent decades. Perhaps this has played an important role in the evolution of the bottom part of distribution. Now, at the top of the distribution, the rise in very top managerial compensations that you see in the US, much more than in Europe or Japan, is difficult to explain simply in terms of education or productivity. At least, I couldn't find evidence for when you pay top manager $10 million versus $1 million in certain sectors versus in others, in certain countries versus in others, do you get the extra productivity or performance that you would expect in these bases. At least, I could not find it in the kind of data I have been using, in particular with Emmanuel Saez and Stefanie Stantcheva. And our conclusion is that the top part of the distribution, it's not just an equal access to education. It's also the pace setting process, and to some extent, the corporate regulating system that has become more favorable to top managers for values reason. Possibly also the incentives for very top managers to put the right people in the right compensation committee have been increased by the huge decline in tax progressivity at the top that has occurred in this country versus much more than in the rest of the developed world. So let me just conclude marginally by pointing out that there's really a whole set of institutions that matter, from education, labor market institution, progressive taxation. Inequality is a complicated story. At least, if the story I am telling were simple, my book would be 10 pages long versus 600 or 700. It depends on the language of translation. So the entire story is complicated. It involves contradictory mechanisms. There are powerful forces that can lead to a reduction of inequality. But there are also forces that can lead to rising inequality for reasons which are difficult to justify. So in particular, the level of inequality in access to education, let me maybe conclude with this. I have data that I didn't use in my book because it was not available then, but which I found very striking, which was put together my colleague and friend, Emmanuel Saez together with Raj Chetty and other colleagues where they are able to match the administrative tax data of income tax return of the parents with the Social Security number of the children, of the students. And you have this graph where you put on the horizontal axis the parental income and on the vertical axis the to be in college at age 20. And not only do you get a straight line. But it's almost the first diagonal. It goes almost from 0% chance to go to college to 100%. Not quite, it goes from 20% to 90%. So if your parents are in the bottom 10% of the distribution, you have a 20% probability to be in college at age 20, right now in this country. And if your parents are in the top 10, you have a 90% probability. So it's not 100. But it's 90% as opposed to 20% at the bottom. And of course, you don't go to the same university that the people at the bottom when they go to university. So I think the gap between the official discourse in terms of meritocracy, equal opportunity, and what's really going on is just incredibly large. And I think the imagination of the elite to justify inequality and to have discourse about equal opportunity, I think imagination has no limit. Every country, I should say, it's not only in the US. In my country, in France, people also have representation of meritocracy, which are very strong discourse. But the reality is that sometime we put 3 times more of our public resources into the most elitist schools as compared to what we put in the basic university curriculum where the more disadvantaged groups go to. So the hypocrisy is present in every country. In every country, there is a tendency of the elite and the winner of the system to justify inequality with very strong claims about meritocracy, about the fact that inequality seems a benefit of the poorest group. And sometimes, these claims are true. But sometimes, these claims are completely off the mark. And I think it's very important to put these kinds of claims under public scrutiny, to have access to the data, so for instance, the data on university admission. In my book, I report estimates showing that the average income of the parents of Harvard University students right now corresponds to the average income of the top 2% of the distribution of US family income, which doesn't mean that nobody from below the top 2 is going. But it means something very precise as a number of people from below the top 2 who are going to Harvard is so small and the people who come from the top 2 are so high in the top 2 that the overall average is as if all students had been picked up from within the top 2. And it's actually very difficult to access this kind of data. And in fact, in this example, it was very complicated just to publish it. So we talk about transparency. But I think there's a lot of progress to be made in this area in order to have a more informed democratic discussion about inequality. So let me stop there. JAMES HECKMAN: Thank you very much. THOMAS PIKETTY: Thank you. [APPLAUSE] JAMES HECKMAN: That was very good, Thomas. Thank you very much. Our next speaker will be Steven Durlauf, who was introduced as a faculty member at the University of Wisconsin, who frequently visits the University of Chicago, and is a co-organizer of the Human Capital and Economic Opportunity Network. Steve? STEVEN DURLAUF: So I have to apologize for one form of inequality, which is I've lost my voice. And so I I'll-- I'll try to speak as loudly as I can. And it's obviously an honor to be here. I think in terms of my initial comments, what I'd like to do is to take a somewhat different perspective from Thomas in the sense that rather than focus on very broad theories of inequality, of income distribution, of dynamics, I want to focus specifically on the disadvantaged within the United States. By way of background, my view is that inequality, frankly, is too big a phenomenon for any small, low dimensional theory to speak much about it. In other words, when we talk about the 1%, that's really a very different thing than talking about the state of inner cities in the United States. And so what I'd like to focus on is specifically the relatively disadvantaged people in America. Now, in doing that, I would want to start off by telling you about three pictures that you may have seen, three figures which are very popular not only in academia, but in public policy discussions now. And then I want to link them together with some observations on my own perspectives on certain phenomena I think are important in understanding disadvantage in the 21st Century. The first figure I'm thinking of, some people call it the Heckman Curve. And it's the observation that if one looks at the rates of return to investment in children and adolescents, there is a significant decline between investments at the age of three and the age of 17. And so the Heckman research program on early childhood investment has identified these very large differences in rates of return, which are suggestive about something in terms of what needs to be done if you want to raise the relatively disadvantaged in terms of the entire developmental life course approach. Now, the curve itself is a nice observation. And it's a useful summary. But what I think is important are the mechanisms that underlie it. And there's really two things I want to emphasize. First, the work in early childhood development has been instrumental in creating a synthesis, a synergy, between psychology and economics that I think is extremely fruitful. Now, I'm distinguishing that from behavioral economics. And when I say psychological economics, what's important is the recognition and the development of a vision that social and emotional skills are part and parcel of what creates economic success, as well as a flourishing life. The second part of the work in early childhood development that I want to emphasize is that it moves beyond income. In other words, in thinking about the consequences of rich early childhood investment or stable families and the like, it's not just a matter of asking questions about wages or even employment. It's asking about interactions with the criminal justice system, with the stability of families and personal relationships as an adult. And so I put those on the table because I think that 21st Century inequality demands that we move beyond the conventional measures of income to thinking about perhaps Sen's notions of capabilities. But the word I prefer to use, simply, is what it means to have a flourishing life. In other words, there's many dimensions that define what we think of as desirable outcomes for individuals. So I put all of that on the table as one facet of thinking about disadvantage. In other words, recognizing that disadvantage damages people in ways that have to do with their psychological makeup. And that has to be part of the story of how to reduce it. The second figure, which is quite popular, is due to Raj Chetty, Emmanual Saez, Nathan Hendren, and Patrick Kline. And it's the so-called geography of economic opportunity. And what that is is-- it's a picture of the United States which shows very differing degrees of intergenerational mobility if one looks at relatively small geographic units. Now, the picture itself is of enormous interest and a very important piece of information. What underlies that is a longer tradition of research looking at the influence of social factors on individual outcomes. And so here, I'm thinking of giving pride of place to the idea that residential neighborhoods and schools are social units which are influencing individuals. And so what one has in conjunction, in parallel almost, to the psychological literature that's developed is a literature that is breaking down the barriers between sociology and economics. And I mean that in the good faith sense, of taking ideas in sociology really having to do with how identities are socially determined, how individuals are influenced by peers, role models, and the like, how aspirations are formed. All of these are being brought to bear in trying to understand how it is that exposure to poverty, exposure to disadvantage, has long-term consequences. And so in my judgment, a fundamental dimension in addition to the development of a psychological economics is a sociological economics, in other words, a recognition that human beings are very much influenced by this sequence of interactions they have at a social level. The third figure, which has gotten quite a bit of publicity, is something called the Great Gatsby curve. And this is a cross-sectional one. So I'm going to deviate from my only-looking-at-the-US claim. And it's the observation that if one simply constructs a graph for some advanced industrialized economies, it appears that those economies that have relatively low levels of cross-sectional inequality also have high social mobility. And so this was identified by Myles Corak originally in the work. And there's correct questions about the measurement and the like. I'm not going to sit here and state that this is some definitive fact. But nevertheless, there's a very important suggestion there. And that is there may be something about the economic and social forces that exist at a point in time that when more inequality exists, somehow we're translating into reduced mobility. That, in some sense, is the strongest attack one might make on the conventional notion of meritocracy, at least in the American case. Now, how do I think about these things together? And again, I'm going to give you my own perspective. And it's self-serving in the sense that it's the research that I've been doing for the last 20 years. The way that I think about these questions together is that one should think about-- and this is, roughly speaking, what I've called a membership's theory of inequality. And what I mean by that is that individuals throughout their life courses are members of different social groups. The most important one is obviously the family. There are these objects, the form called parents, who sort of, maybe, are going to tell you a lot about the dynamics of intergenerational mobility. But whatever the cross-sectional inequality is across parents, that is going to be translated into inequality across offspring. But even though that may be the most important membership, and that's the sense in which I link it to the psychological economics, there's other sets of memberships that are clearly salient as well. One example would be residential neighborhoods. Another example would be schools. Another example would be higher education. Yet another example would be firms. And here, there are interesting questions in my mind as to how technology has altered the extent to which workers of different skill levels interact in the same production function. It's a very different world driven by Microsoft versus the Ford Motor Company in terms of interactions of different skill types. So what I want to put on the table is a general vision that if we want to understand inequality, one of the many perspectives-- and this is obviously not a substitute for thinking about the fact of returns and the like. But one perspective is to recognize that individuals are influenced throughout their life course by the groups that they are members of and they interact with. Now, what turns out to be important in those types of theories, or that theory, is a couple of things. The first is that it represents a vision that says that the key mechanism in understanding persistent inequality is actually segregation. In other words, a sort of mating of highly educated parents, economic segregation, racial segregation of school districts, increasing segregation by quality level, by high school achievement, across colleges, all of these became mechanisms that translate initial inequalities into persistent inequalities, both within the life course and across generations. And so again, from my perspective, in thinking about what sort of policies are necessary to break disadvantage circa 2015, I put particular emphasis on policies that achieve various forms of partial integration. Now obviously, I'm not a madman who wants to interfere with the marriage process. On the other hand, policies be the location of publis-- he may think I am, but I'm not. [LAUGHTER] Policies, be they affirmative action, be they location of public housing, be they voucher systems, be they the drawing of school district zoning, all of them speak to the potential for altering who interacts with who. And in my judgment, that is where the currency of egalitarian justice is still, a Cohen's term, lies today. Thank you. [APPLAUSE] JAMES HECKMAN: Thank you very much, Steve, for that position. Kevin Murphy is the George Stigler Distinguished Service Professor. And Kevin has done a great deal of work, some 20, 25 years ago, on skill biased technical change, its importance, empirical importance, and its consequences in the labor market and for the larger society. So Kevin, please. KEVIN MURPHY: I'm going to deviate a little bit from what's happened so far. And I'm actually going to try to say that I think we can do a lot with a little bit of economics as opposed to a lot of different things. That doesn't mean we're going to go all the way. That doesn't mean the things that Steve talked about aren't important. I think they are critical actually. I think they're part of a more general focus on human capital and the strong complementarities that really exist in the human capital sphere, both within an individual over his lifetime, which talks about why intervention so early are so important, also across people, within the family, within the neighborhood and the like. That's going to tie back to what Thomas said about opportunities for different groups and the opportunities. But I think it's important to focus back on some very basic economics. We started today, Thomas talked about income shares. The trouble with looking at income is it fails to make the most fundamental distinction that economists make. I always end up teaching in the business school. And I love to talk about what separates economists from accountants. [LAUGHTER] And the biggest difference is economists divide expenditure into price and quantity. And you might have a 10% increase in the return to capital in terms of its income. But it's a very different story if it's 10% more capital earning the same return, or the same amount of capital earning 10% higher return. Those are very different things, have very different implications for what happens in the rest of the economy, very different implications for workers. So I want to talk about prices and quantities. And I'm going to focus mostly within labor because at least within the United States, I think far and away the most important changes we've seen over time are changes in the relative returns of different types of labor, low skilled and high skilled labor. If you look at the returns to higher education just measured at the income differential-- and let's say it's all the causal effect of educationn-- but between those groups of workers who end up graduating college and those who, say, stop at high school, comparing today to 1980, returns of somewhere between double and triple, depending on how you measure it. That's an enormous increase in the income gap. If we compare the workers in the top 10% to the bottom 10%, similar story, enormous expansion in those differentials. So one of the things we want to do is we want to understand where that came from. I applaud Thomas in his book for talking about long-term changes. I think long-term forces are really the story. I think the same things that have been driving the economy for decades, there's a lot of the same things that are going on today. So if you think about it, the links between inequality and another very important phenomena, which I'll call economic growth, I think are key to understanding both. So I'm going to step back a second and say, well, what accounts for growth. Where does economic growth come from? Well, economists worked on this for a long time. And basically, we can think about economic growth coming from three primary places. One, we get better technology over time. We learn how to do things that we couldn't do before. In agriculture, that might be hybrid corn. It might be the advent of the semiconductor. It might be earlier inventions of electric power discovery that you could use fossil fuels, numerous things that happened over time, new technologies came into play. In response to those new technologies, we invested in physical capital, that is, the machines and other things that utilized and implemented those technologies. We also invested heavily in human capital, increasing both the education as well as other skills of our workforce. If you follow the course of the 20th Century and into the 21st Century, the rates of increase in technology, physical capital, and human capital, are really astounding. If you focus on a worldwide basis, even more so. So that's a story in terms of growth. So all those forces work together. That is, we get more growth. We get more technology. We need the capital to implement that. We need the human capital to both produce the technology and implement that technology. Think about a modern automobile plant, where we now have robots replacing workers putting manual parts together. We needed a technology to develop the robots. We needed to invest the physical capital to improve the plant. And we needed the human capital to design, build, and maintain those robots, far fewer less-skilled workers. This brings up another part of the important question, which is technology and physical capital both tend to be complementary, at least in the recent century, with skill. So while technology, physical capital, and human capital grow together, work to increase the output over time, they work in opposite directions on inequality. Better technology and more physical capital tends to raise the demand for skilled workers relative to unskilled workers, creating opportunities for new skilled worker activities while replacing the activities traditionally performed by less skilled workers. It's a growth in human capital that counteracts that. So what happens to inequality in many dimensions, particularly across education, is a tug of war, with growing technology and physical capital on the one hand-- that's the demand side of the model-- and growth and human capital on the supply side. When demand grows faster than supply, prices-- here, the return to human capital-- rises. When supply grows faster than demand, prices fall. In that case, the return in human capital falls. That theory does an amazing job, I think, of explaining much of what we see, not all of it, but significant components of what we've seen over decades. Since about 1980 in the United States, we've seen the supply side fall short. The supply of human capital hasn't grown as fast as demand over that period. And not surprisingly, from the point of view of economics, inequality has risen and risen dramatically. It's interesting to talk about the rise at the very top of the income distribution because if you use the rise in inequality for college relative to high school, and say that exact same extrapolation would have happened to people way up in the distribution, and you do it the way economics tells us in terms of the expansion in the premium, it actually fits the data extremely well. So there's not a mystery really there. But it's not all about the top in. And Steve's right to emphasize that. The growth in inequality is a pervasive phenomenon in the United States. It has happened in the bottom of the distribution, happened at the top of the distribution, although the timing is somewhat different. More of the growth at the bottom was in earlier decades. But if you look over the period as a whole, it's a very pervasive phenomenon. And very pervasive phenomena in my mind require very pervasive answers as to why they happen. It could be a coincidence that 97 different things happened at different parts. But I think it's much more coherent to think about something going on. And I think these fundamental forces of technology and supply are a big part of the story. Let me talk a little bit about what happens when supply falls short. And this is a paper Bob Topel and I did. What's happened over time is, if you don't produce enough skilled workers, the wages of skilled workers go up relative to unskilled workers. Well, the forces of economics don't stop operating. Those skilled workers have an incentive to then supply more skill to the marketplace. They invest more in themselves. They work harder. Those supply responses exacerbate measured inequality because it actually weighs the wages and incomes even further for those high skilled workers. You get the opposite dynamic going on at the bottom of the distribution. Wages fall. They're working less. They invest less in their own human capital. And that creates a widening of inequality. So if the supply side doesn't keep up, the net is, of course, an even worse exacerbation of inequality. I think that goes a pretty good way to answering the questions of what we've seen. The other part that I think is important, and Steve got at this some in his discussion-- is that we don't want to focus entirely on income. Human capital, I think, is again a big part of the story. And the big difference between human capital and physical capital is that you take it home with you at night. When you go home at night, the human capital you have goes back to the house with you. And it affects many things-- your skill at raising your children, your skill at taking care of your own health, your skill at running your financial life, how good you are in dealing with friends, family, and the like. So the human capital shortfall is really, I think, quite critical. One question you might have is why do we have such a human capital shortfall. Here, I think, I would agree. I think one of the problems we have is we have a lot of people who don't have very good opportunities to develop human capital, tying back to the idea that really what matters is if you fall behind early, it's not impossible to catch up. But it's extremely difficult. And so if I grew up in a community and have poor choice of schools, that's going to limit the supply response. So one answer is it's critical that we enable more people to get the human capital they need. And it's not just education. It's get the other skills they need, the quote, "soft skills," that while people might call them soft, they're hard in terms of the fact that they're not so easy to get. And they're hard in the sense that they really matter for production. So call them soft skills if you like. But they're really hard skills from the point of view of what matters. I don't want to diminish their importance from that point of view. But we need to get that more investment in human capital. And you might say, well, I can't rescue everybody. Not everybody's going to be able to get more human capital. The saving grace of the economics is you don't have to, is if you were to increase the human capital of some segment of the population that's currently not keeping up, they would benefit because they would have more human capital and reap the high road to return that we see in the marketplace today. But the remaining low skilled workers would benefit. They would benefit because there would be less competing supply of low skilled workers. And that would then benefit them in terms of higher compensation, incentivizing them to be more attached to the labor force, to work more, to do the other things that, I think, improve all the rest of the aspects of your life. So the answer, I think, has to focus a lot on human capital. Let me say a little bit about physical capital because physical capital plays a role here. And there's been work recently, important work by people here right at Chicago working on changes in capital share. And it is true that there has been a fall in labor's share of income, rising capital share. And let me give you a simple way you might think about it. I'm not sure it's the right answer. But if fits pretty well. Let's think about what happened as technology changed. It's a little different than it used to be in the past. The new technologies are even better at doing what workers used to do than old technologies were. And that creates a greater bias toward physical capital. Well, the answer is, is that bad for workers. The answer is, in the short run, technical bias against workers will tend to be not as good for workers as if it was biased toward them because it will shift factor prices in favor of physical capital. However, in the long run, if we allow a supply response by capital, actually, that would be undone. And in fact, the direction of bias really won't matter very much. The growth in gain will all go to labor if, in fact, we have a very elastic supply of this physical capital. So think about it. If what you do, because there's technical bias, capital share maybe goes up. And you say, OK, good. I'm going to tax capital, keep capital from growing. Well, if you do that, you're going to lock in place the bad aspect from the point of view of labor. If you allow capital to respond the way it would, and capital would grow now even faster than it would have because its return is higher than it would have been historically, actually, more of that would get competed back to workers. And that's been the process of growth over a long, long period of time. It's not surprising from an economic standpoint that the return on capital hasn't changed very much over the last 100-something years while the return to labor has risen so dramatically. They're telling me I'm out of time. So I'm going to stop. But I'll tell you, if there's a shortage of anything right now, it's skilled labor. And we should do what we can to increase it and create more opportunity for people at the bottom. Thank you. [APPLAUSE] JAMES HECKMAN: OK, very good. We have now moved to the second part of this. And my job is to be a moderator. I'll try. I'll try to be fair because there are a number of issues that have been raised, in fact, so many that I think we could probably keep this discussion going for the next week. But we won't. [LAUGHTER] I think we should start off with maybe a discussion. Each of you stated some position. You have a relatively different emphasis on different factors. But economists are famous for quantifying and trying to get an idea of the relative importance of these different factors. And I was curious if each of you could make some statement. You emphasize different aspects of the source of inequality. And I would be very curious about just what the nature of the evidence is about the quantitative importance of this. I would just throw out this OECD calculation about three or four years ago-- you've probably seen thiss-- where they were looking at what the increase in inequality was. And this was income inequality. So it didn't get at the theme that Steve was talking about fully. But they said, well, for example, something like a [? sort ?] of a mating, the idea of people mating, well, maybe accounted for like 10%, 11%, 12% of the increase in inequality. They looked at the labor market. It was really the labor market only for men. That explained roughly about 30%, 35% of income inequality as measured by OECD, which doesn't take into account the top incomes. And then there was a huge residual. So it wasn't really very satisfactory in what that was. So I'd be curious what each of you might say about the quantification of this. And then also, if you could, to comment on a point that Thomas threw out at the very beginning of his talk. Kevin, your talk was primarily about the US economy and the developments here. And if I understand Thomas correctly, I think he was also saying that there was a very uneven pace across countries, even in Western Europe. And if we broaden the scope to include, for example, less developed countries and the like, then the whole discussion of inequality would be changed. So I would ask each of you maybe if you could A, quantify the sense of how important these things are, just roughly. I realize that this isn't really firm. And then to comment on why the uneven. It seems like an uneven pace of technical change or uneven change of inequality across different political, social, cultural environments. So who wants to go first? KEVIN MURPHY: I'm happy. [LAUGHTER] First, I'd like to say, if we're going to go to the international front, I think we don't want to just focus within countries. One of things none of us have really talked about here is across countries. And there's important stories there in terms of you're thinking a worldwide inequality of growth and incomes like in places like China and India, across the country of inequality differences. So I think we don't want to lose sight and solely focus on inequality within countries because that, I think, would miss a lot of the worldwide story. In terms of thinking about the US, again, I would go back to make the price versus quantity distinction. If a group is earning more because they have more capital, they have more assets, they have more human capital, that's one thing. I think for me, I like to think about what are the root drivers. And market economy prices are really the root drivers, whether they're prices of labor or prices of capital and those things. And for, I think, the vast majority of workers in the United States, I would say the growth within workers is really the big story. That is, the last 40 years or 35 years, from 1980 to today or 1975 to today, looks incredibly different if I'm talking about a college educated, affluent family than it would look for a high school dropout family. And it looks very different in terms of income, in terms of work. If you look at work effort across-- Bob Topel and I did this thing. If you look at work effort by where you are on the wage distribution. You go back in late 60's, it was pretty flat for both men and women. It's enormously upward sloping now. That is, this other supply response is there. So I would emphasize the labor market. I think the labor market is the place where the action is. I think it's the place where I think we have the most policy challenges. I would say when it comes to capital versus labor, I'd say the policy challenges are avoiding doing things that are silly. I think for capital versus labor, the one thing we could do would be to cut off what would be the natural supply responses that would help workers. Now, let me be clear. It may be that the supply response further exacerbates income shares. But the supply response will help workers. And that's the big difference between the two. That's why you don't want to just focus on shares. You want to focus on prices. JAMES HECKMAN: But you would agree that there is a difference in the way labor markets have evolved, even in terms of the price inequality, say, between Germany and, say, the US. And I guess the question is-- KEVIN MURPHY: Supply stores are different too. You don't want to just focus on demand. Again, that's the point is supply and demand matter in these markets. And supply matters a lot. You look at the US. It's pretty clear. I did a comparison years ago comparing Canada and the US. Supply differences made a big difference between what was going on. Canada and the US, right across the border. So I think supply is an important part of the story. And limitations on supply are important, not just because they affect that person, but they affect the overall marketplace. That's what makes them even more important. All right, OK, Thomas. THOMAS PIKETTY: Yeah, no, I agree with a lot of what you said. Just let me stress that it's really important to go beyond the US. I mean, the US is a fascinating country, of course. [LAUGHTER] But the rest of the world is important also. And so everything you say about the race between education and technology, the lack of supply of skills in the US explaining inequality, I think is perfectly right. But what's interesting is that different countries have done differently. So you don't have the same rise in equality in Europe, in particular, Northern Europe. You don't have the same rising inequalities as in the US. And I think a big part of the explanation is exactly what you've just stressed, which is insufficient supply of skills in the US, in particular, among the bottom groups of the population. But then the question becomes, why is it that the US society as a rule, and in particular, the wealthiest part of the US society don't want to pay for the education of the bottom groups, and don't want these kind of more inclusive educational systems that we see in those other societies. I think it's a big question. Some people looking at this from Europe have the feeling that maybe you're such a large country and very diverse. So the feeling of solidarity is more difficult. And some people conclude, looking at it from Europe, that they should go back to a smaller nation state and not go for more European division, which I feel very concerned with because I believe very much in political integration. But it's true that there's this lack of response to inequality in the US is something that is very striking. Another explanation which people give is, of course, the fact that high inequality feeds into a very unequal access to political influence, to political voice, to the financing of political life, especially when you are in a legal system where you have almost no limitation on how much private money can buy into politics. In any case, I agree with everything you said, about race between education and technology. But this raises broader question as to why some countries do not respond in terms of increasing the supply of skills for more inclusive manner, for a broader group in the population. JAMES HECKMAN: Steve? STEVEN DURLAUF: So let me make some somewhat disparate comments. The measurement one is problematic for the approach I discussed because the literature on what I'm calling psychological economics and the literature on sociological economics, they're still very much in their infancies. And so I'd be very hard pressed to-- except for the people on the stage-- quote any papers where the evidence, I would say, is definitive. There just are deep identification problems, for example, in disentangling the role of self-selection versus the effect of a residential neighborhood versus-- as nerdy as it may sound-- aggregated heterogeneity. Is it a good teacher that explains a classroom doing well? Or is it that the kids are interacting in a particular way? That said, I believe essentially everything I said feeds into Kevin's arguments in the following sense, which is the issue is the skills that people bring to the labor force, broadly defined. And really, what I was talking about were the mechanisms that are determining those skill levels. And so in my judgment, the fact that 65%-- that about a third of African-American adolescents fail to complete high school, that's the explanation. Once you know that fact, you have something that's first order in terms of understanding why that particular community is doing poorly. And so to the extent I would quantify anything, I'm just going to be parasitic on what Kevin said. The second set of comments I want to make had to do with the heterogeneity of experiences across countries. And Thomas, I think, very correctly argues that there's a large range of institutional differences and political responses that condition whatever the roles are of technology and, I'll say, the economic mechanisms that we have discussed. That said, I am personally somewhat less persuaded that the issue is that there's an instability in the US system, that economic inequality feeds into political inequality feeds into economic-- I don't want to exaggerate. But the reason I think that that's only a piece of the explanation is that it underestimates a word that economists are very uncomfortable with, which is "ideology." In other words, Americans think differently about what the obligations are of a government. It's not just a matter of solidarity. It's a matter of the objectives that they believe a society ought to fulfill. So David Potter, the historian, once said that the key distinction between Americans and the rest of the world is the rest of world believes in leveling down. We believe in leveling up. And so my argument would be that if you're looking at something [? as strict as ?] redistributive taxes, the answer to the question why they're lower here is really the same answer to the question, why was there never a socialist party here and many other chestnut problems in history. [LAUGHTER] JAMES HECKMAN: OK, now this is a good opening shot. But let me follow up though with this, if I could. I don't want to stifle discussion. And I certainly want to keep a flow going. STEVEN DURLAUF: I have a lot more-- KEVIN MURPHY: I have a couple more-- JAMES HECKMAN: OK, go ahead. [LAUGHTER] KEVIN MURPHY: I want to become Steve for a second because, I mean, Steve talked about skills. It was about human capital, skills brought to the workplace. And I think what he really meant to say, because this is his way of thinking, skills brought to life. And it's really important to remember that, this is not just about what you can do in the market. It's about crime. It's about addiction. It's about substance abuse. It's about many, many things, how your family relationship. It's so much broader than just earning. But again, it's all, in my mind, centered around human capital, which is such a central part of doing all that. I just don't see how that would not be the case. In terms of why countries are different, again, you don't want to fall in this game of thinking this is inevitable that we were going to fall short. But there is a part that I do want to emphasize, which is the idea that we have a lot of poorly educated people and people who are disenfranchised from getting human capital is not new. It's been around forever. It just didn't matter as much when there were a lot of things for people without human capital to do. And the march of technology has meant more and more over time there's not that much for you to do if you don't have much human a capital. And so I would say probably old problems within a country and old differences across countries can lead to different growth rates because they differ in importance as the world changes. So you don't need a change in one country relative to a change in the other to generate a divergence. It's really that they had already differences that were been brought out by what developed. JAMES HECKMAN: Thomas, you wanted to-- THOMAS PIKETTY: So we got the US attitudes toward inequality. Let me put up on what you said. I think it's this idea, every country likes to portray itself as being more of a meritocracy, more prone to equality. STEVEN DURLAUF: That's fine. I didn't the say the US was that way. I said that Americans think of themselves that way. THOMAS PIKETTY: Yeah, exactly. I think in every country, people see themselves that way. There's nothing unique about the US. I can tell you that in my country, also people feel unique. Everywhere people feel unique. In China, I'm sure they do as well. So the question is, is it true. What do we know about whether the US is outdelivering [INAUDIBLE] done, while as you say, in terms of mobility, a measure of mobility that we have is that there is actually less mobility than in the North European countries you describe. And so maybe at some point in history, in the 19th century, there was more mobility, at least in white America. But certainly today, that doesn't seem to be the case anymore. Now, regarding US attitudes toward progressive taxation, I think it's important to remember that progressive taxation was invented in America. Certainly not in Europe. And that's very important to remind, or otherwise, we are missing a very important part of the story, which is that attitudes toward income equality change all of that. They are not given forever. And they can change again. And they will change again. There's a very interesting speech, which I advise everybody to read, which is a speech given by Irving Fisher when he as the president of the American Economic Association. In 1919, he gave this speech. As you know, Irving Fisher was not particularly left wing. But he came to the American Economic Association. And he said, well, my fellow American economists, the big problem with the US economy today is inequality. Inequality is getting enormous. We have the top 2% of the distribution own 50% of the wealth. We are going in the direction of Europe, where the top 1% own 50% of the wealth. This was in 1919. And indeed, inequality was a lot higher in Europe at the time in terms of concentration of wealth. And Irving Fisher was very concerned with it. So what are we going to do. So of course, we're not going to have a Bolshevik revolution. But so he sought out. And he came with a solution, which was we need very progressive taxation of income and in the richest [INAUDIBLE]. And his proposal was simple, was OK, at the first generation, we are going to tax 1/3 of the returns, second generation, 2/3, third generation, 3/3. This is almost what happened in the sense that the top income tax rate were set at 70%, 80% during the interwar in the US. They have been there. At least they were until the 70's. There is no example of a country in Europe, certainly not France, certainly not Germany, no other country has gone so far in terms of tax progressivity as the US between 1920 and 1980. So not during a few years. It was in many, many decades. And apparently, this did not destroy American capitalism. If anything, the productivity growth rate, which must reflect innovation and also behavior which are conducive to productivity growth-- the productivity growth rate were higher at that time, in the 50's, 60's, 70's , than they have been in the recent decade. So I think it's time to look at this evidence again. I think this attitude about inequality was the idea that by definition, some countries don't want this and some other countries want that. Well, history tells us a different picture. It gives us a different picture. STEVEN DURLAUF: I think that that's oversimplifying the American historical experience. I'm not trying to reify some permanent difference in ideologies. The source of the movement to progressive taxation was derivative not from the fact of inequality. It was from this mechanisms generating it. And so I think that the way to make a politically successful argument for pro-egalitarian policies has to focus on reasons that are conducive to what I'm calling the ideology of United States, which has some differences from other countries. And it's no deeper than that. And so if you talk about the progressive taxation, that had to do with monopolies, rent seeking, and the like. It was not the very fact of inequality. And by analogy, attitudes towards Bill Gates' fortune are quite different from John D. Rockefeller's. THOMAS PIKETTY: Well, certainly Bill Gates attitude is a different attitude. STEVEN DURLAUF: No, the American public's is different. THOMAS PIKETTY: Look, of course ideology matters and there's an independent evolution of ideology from the evolution of money. But I think money also has an impact on ideology because the production of ideas, the production of views, of the political influence. I mean, I'm not saying everything is explained by this. But I don't think you would deny that this must have some impact. And there is some feedback from inequality to the financing of political campaigns, which also feeds back on these views, which do not just come in the vacuum. KEVIN MURPHY: I really want to come back to something that's been talked about here because it seems to me it's confusion because the idea that more meritocracy means more mobility, I just don't see how you get from here to there. In a world in which there really are real advantages of coming from a better community, of coming from a family that has more human capital, and all those things, having a bigger meritocracy where there was greater rewards to working hard, investing, whatever the heck you want to call it, those differences in opportunities may be exacerbated in that world relative to the world where they squish the differences between how well you do based on your outcomes because people have greater incentive to take advantages of the advantages that they have. So the idea that we can measure meritocracy by somehow linking it to say, well, more meritocracy means more mobility, I think it's just not correct. Just talking about most reasonable theories of investment, that's not going to give it to you. What it can do is exacerbate the underlying inequalities that exist because if you make the rewards to taking advantage of your advantages greater, they're going to manifest themselves more in the outcomes. And so I just don't get this link between mobility and meritocracy, just as an economist. I don't see where you get it. THOMAS PIKETTY: So you're saying it's OK if there's very little mobility. KEVIN MURPHY: No, this is not a normative judgment. I'm saying you can't say, well, if I had a meritocracy where everybody got paid what they produced and just how good you were is all that mattered, that world could have much less mobility because the children of the parents who could give those kids the advantages because they lived in the better neighborhood, because they themselves were more educated, would be able to do those things. Those are real advantages. It's not the idea that my advantage-- and this is why I think, Steve, you'd be all over this because it's not just my genes that I'm born with are my inherent endowment. So the view that there should be lots of mobility if it's a meritocracy is, well, the genes are pretty random. And therefore, the kid who was born in a lousy place, if there really is a meritocracy in terms of rewards, should get just as much as the smart kid born somewhere else. But in a world in which real environment matters-- parents matter, neighborhoods matter, schools matter-- that ain't going to happen. JAMES HECKMAN: Oh, I completely agree. To me, the issue-- JAMES HECKMAN: Let me come back to this quantitative issue that I raised. And by the way, we have people going around. I think we're almost near, if you want to. Collecting questions, a few questions from the audience. But let me come back to this. So historically-- I mean, I would just interrupt in the discussion a little bit-- there have been periods when there's been discrimination, when we think about a meritocracy really did provide opportunity for people who didn't get an opportunity to go to school or do things and so forth. So I think the question is quantitatively, or just now, we think about society, not just the US, but around the world, just what is the relative importance of some of these factors that we've talked about. And therefore, what should be the kind of policies? So if it really is a system where people are being heavily discriminated against, and literally, very smart, able people just can't go to school because they're born of a certain race or a certain ethnicity, then I think we would argue, right, that a meritocracy would probably move towards more mobility in that setting. But in a-- KEVIN MURPHY: Meritocracy and opportunity. JAMES HECKMAN: And opportunity. That's what I'm talking about. But that's another dimension here, which we really haven't been talking-- I think it's implicit in what Steve was talking about. And I would try to argue not just in terms of the labor market returns, but just the opportunity to participate in the labor market. And I'm just asking whether or not anybody here, maybe anybody here, would have a good quantitative estimates of just what's important and then what public policy should be. That's what I want to bring you all to because you recognize it. As I understand it, most of you would agree there are certain forces that are common across countries. Right? There is, I think, skill biased technical change. How countries respond to it, how systems supply of labor changes, that is different. But there are some common forces. But I guess that's the question. Are there common forces? Are there social laws that are common across all the globe? Or can we really talk about something that's more individual and idiosyncratic? And secondly then, what should be the policy response? If there are common forces-- I think most people are heading in that direction-- what should, in light of your opinion about where the really important aspects of inequality are found, whether it's mobility, opportunity, and exposed wages after the market has settled its outcomes, what should the appropriate policies be? What's indicated? I would be very curious about that. Thomas, you want-- THOMAS PIKETTY: Well, yes. Regarding the these policy response, I think it's clearly a combination of education, labor market institution, progressive taxation. For education, I think we have to get into the admission process to high school, to university. The idea that we can just let everybody do what they want and without any possibility to study what's truly going on in the admissions process and that we will get to more equal opportunities without having this more transparent-- I think this is not going to work. This is something universities are resisting a lot. But I think if we want to better understand what's going on, we cannot just wait. And in different countries, there are terms to go to a more transparent admission system and more transparent to positive discrimination system to allow our children from bottom income backgrounds to increase the probability to access a number of schools. If you cannot access the data on how the school selects their students and what parental wealth, the role is playing, what parental income role is playing, it's very difficult to make any progress. The other policy issue I wanted to mention-- Kevin mentioned the issue of possible increased importance of physical capital, non-human capital in the future, and saying, well, basically, , we should just wait for the supply of physical capital to make this beneficial to everybody. And I certainly agree that waiting can be a good solution and that the supply of capital can solve the problem. But I would prefer to have a Plan B, in case this doesn't work. And so I think to me, what's important is to have, again, is a possibility to adapt the tax system, both of the tax rate for progressive taxation of income, and also for progressive taxation of property and wealth, to adapt the tax rate to whatever we see. And if we see that the problem is solved by itself because of supply and demand of capital is making in the end all groups benefit from these new robots or whatever technology which are replacing labor. If we don't need to correct the trends, then I will be very happy. But the problem is that if we don't have more transparency about how the different income groups and wealth group are doing, then it's very difficult to adapt the policy system. So Bob Shiller made a proposal late last year or early this year to say OK, we should index income tax progressivity to whatever happens to income inequality and how fast the different person [? types ?] are [? running. ?] And I think for the ownership of physical capital and wealth, you can make a similar case, which is that you want to be able to adjust the tax system. Otherwise, it's a bit magical. You just expect that we should wait and that natural forces of supply and demand are going to solve the problem and that the distribution will be under control in the long run. Look, maybe this will happen, and maybe not. So in the meantime, we need to be able collectively to adapt the policy. KEVIN MURPHY: I never meant to say that the natural forces are going to solve all your problems. I mean, if you had a growth in capital, it would not necessarily solve the problem for the least skilled relative to the most skilled. It would exacerbate that problem if anything. You have to have the human capital response in order to help that low skilled group because they're not going to be helped by the growth in capital. That's going to further benefit the high skill group. And I think if there's a worry that we're running into a situation where there's a fixed factor other than, say, labor as a whole that's going to gain the benefits of improved technology, its skilled labor. I think that's the group that, in the long run, could avoid this. And I think we need to think hard about that again. That's what we have to focus on physical capital. Now, in terms of the idea that I'm going to index the tax structure to the changes in prices, I mean, I've always thought about it as one of the worst ideas I've ever heard. I mean, it's like assuring that there's not going to be a supply response. It's like if the price of oil goes up, we'll just tax it so much that suppliers get the same return they used to. Well, if there was a shortage of oil and then you say, oh, man, I haven't solved a shortage of oil. Prices are all going up. Oh, I'll raise the taxes even more. You're just going to feed into the problem. I mean, I just never understood that proposal. If you really made-- THOMAS PIKETTY: But you just need to redistribute the oil . That's simple in our example. KEVIN MURPHY: No, because you never get the supply. You may be able to get the money. Now, this gets my other point. This is an absolutely critical. If you're worried about inequality, you don't want to get to a world where we're taxing one group who's producing and giving money to another group who's not. That's the worst world. That's the most unequal world I could possibly think of. I mean, I am now either in this group over here. Or I'm in that group over there who, like-- And you think that's going to solve the other social issues we've got, the other things that Steve talked about? Heck no. We have to find a way to keep the broad segment of the population engaged, engaged in the economy, engaged in the activities of society. And that's the notion of inequality. That's why we have to go beyond income. Just giving people income I don't think is going to be the answer. We want them to get income by including them in the economy. So that's where I think we need to go. JAMES HECKMAN: Well, we'll get back to this question of incentives. But go ahead, Steve. STEVEN DURLAUF: I think one of the background issues is that there's a lot of frankly unusual terms, meritocracy and even inequality. In other words, I think the forward way to think about where political philosophy is even is we care about people having opportunities to flourish, and that that definition of flourishing is quite broad, and that to try to reduce it down to an intergenerational correlation coefficient, a Gini coefficient, all of that really is missing the point, that it's about individuals having trajectories. So with that as the background, my view immediately on policy is to think about-- what the term, Lars? Robustness. In other words, we have many different policies we can think about as ways to promote this vague notion I've referred to as flourishing, which includes both the creation of opportunities and letting people make mistakes. Quality of opportunity is actually a little too puritanical for my taste. People screw up. Teenagers get pregnant. They go to jail, et cetera. And those have to be accounted for as well. But the serious point is that if we think about human capital policies, I think one of the important advantages is that there's a certain robustness to them. It's fine to say, well, maybe we will create disincentives for capital or something or maybe not. That's the whole point of thinking about robust mechanisms that can facilitate these broader notions of flourishing outcomes but recognize that the level of ignorance we have in terms of the design of policies to promote research and development or to possibly inhibit that. So I think that that all has to be on the table in terms of talking about policy, to recognize the extent of ignorance, but not treat that as nihilism, saying there's nothing to say afterwards, but to then ask the question, given what we know, what would appear to be robust ways to proceed. JAMES HECKMAN: And how would you answer your own question then, your own notion? So how would you proceed specifically and say, OK, given that you don't really know fully, but what looks like a good policy proposal in light of all of the discussion and all of these issues about equality of opportunity to get access to the larger society and then income inequality in adulthood? What's indicated? That's what I'd like each of you to suggest. And should there be anything indicated? Kevin, do you want to say, well, eventually, let it rip. And eventually, it will come. KEVIN MURPHY: Like I haven't already, right? I guess what I would say is one thing that strikes me is when the returns to going to higher education went up in the early 80's, the number of people going on to school went up real quickly. That went up right away. But the sad part was a lot of people weren't very successful at getting their way through school. And to me, that signaled that a lot of people weren't well-prepared. And this gets back to the point of getting the kids early and getting them prepared early because it's very hard to catch up once you're behind. Now, the sad part is that's a long-term process. That is, if we could snap our fingers today and fix the educational system for every kid coming in at age four or five into the US, I mean, that doesn't start impacting the labor market for another 15 years. They don't become half the labor market for another 35 years. I still think that's what we got to do because I think like Steve said, that is our most robust policy is to get those people. In helping them, we'll help the other people, the people that we can't help and the people who are already out, down the pipeline. So I think focusing on the young. But also, if you give them better opportunities, many of them will take advantage of it. People are not all perfect. They don't all look out for their own interests. But enough of them do that I think if you give them more opportunity-- you go to poor people in this neighborhood, you go to people every place I know of, most of them want to do better. And a lot of them behind the eight ball because where they grow up and the situation they find themselves in. So I think education reform and doing things to improve competition in the education marketplace is really important. JAMES HECKMAN: So let me follow up on that. So Thomas, you've been a little silent on the distinction that Steve raised early in the debate or the discussion. And that was you're talking about the university admission and so forth. And take up the thrust of what's being said by the others here, that maybe that's a little too late. And so the question then becomes when we think about education policy more broadly, what would be an appropriate education policy, broadly defined, so we're giving opportunity. So for example, in France, for example, there's a very large population that at least here across the Atlantic, we hear about, for example, the French population that's of Arabic origin seems to be somewhat excluded from the society, from it's larger-- so the question is how would you produce that kind of integration, where there's more opportunity for somebody born of the Islamic origins, from North Africa, say. THOMAS PIKETTY: Right. So no, I agree that university admission in some cases is too late. So we need together with more transparency about university admission, we need to invest more at a much earlier age. And so I think if we take not only France, but Europe in general, I would say that inequality in funding for the primary education system or even pre-primary education system, and junior and high school education system, is less inegalitarian than in the US. There's a lot of inequality. It's definitely not perfect. But by and large, the supply of skills has been in recent decades a bit more inclusive than in this country. And this is perfectly consistent with what the two of you were saying. This is one of the big explanations for why rising inequality in the US has been stronger than in those other countries. So I fully agree with the fact that universities are very important. But that's not enough. You want to act much earlier. That's clear. Now, I want to emphasize again that the historical evidence we have from European countries, but also from the history of the US, is that broad-based investments in education and progressive taxation are not substitute. These are complementary policies. They can come together. They can work together. And they can deliver sustainable growth with productivity growth rates which are much higher than what we've seen in the US in recent decades. So the views that we need to keep this level of inequality in order to keep incentives and productivity growth just doesn't square with the fact, which is that the productivity growth performance of the US economy in the past or 20, 30 years, it's not been terribly good by historical standards, in particular, as compared to the earlier decades in this country. So all these policies, instead of just saying that's only human capital, that's only progresssive-- I think we need to conduct all of them together. I see no reason to oppose them as I thought Kevin was doing. JAMES HECKMAN: I can't pin anybody down to come up with a quantitative estimate, so I guess I'll just abdicate. STEVEN DURLAUF: What units do you want it in, Jim? JAMES HECKMAN: What's that? STEVEN DURLAUF: What units do you want it in? JAMES HECKMAN: Well, across the different dimensions we've talked about, social mobility, for example. You were suggesting maybe social mobility is greater in France or maybe some countries. That's not the image that we have here. But we're not there. THOMAS PIKETTY: But this is the data-- but I thought the graph to describe mobility and equality, all European countries have more mobility than the US. There is a graph to describe it. JAMES HECKMAN: Well, but how much of the mobility is a mobility of skill? And how much of it is mobility that comes after tax income? I mean, there's a real question about exactly how much-- STEVEN DURLAUF: I think these aggregated statements are often misleading. JAMES HECKMAN: Well, many of the comments from the audience are saying exactly that. They want to do all these aggregate-- STEVEN DURLAUF: Do want to say the United States is a particularly unfriendly place for immigrants? Yeah, I can give you a dimension where the United States is spectacularly mobile. And I'm not saying negative about France. It's just I think that there's a reification of inequality and mobility into these categories when in fact, the mechanisms are so different across groups, that it's misleading. KEVIN MURPHY: I agree. It gets back to the point I was trying to make before. Mobility is an outcome. It's not a measure of opportunity. THOMAS PIKETTY: No, it's an outcome. But it's an interesting outcome. KEVIN MURPHY: Absolutely. I'm not saying it's not. THOMAS PIKETTY: I'm just trying to use a kind of comparison, since you raised it-- elite institutions, educational institutions, the US versus France. In my book, I compare. If you take the average income of parents of schools like Harvard. I don't know how different it would be in Chicago or Stanford. So for Harvard, the average income of parents corresponds to the top 2% of the distribution on average. I did the same exact size. I report it in my book for Sciences Po, which would be one of the most elite institutions in Paris. What you get is your top 10%, which is a bigger base of recruitment, if you want. But this is still, of course, very elitist because this means that it's as if all students had been picked up as if they're in the top 10 [? resources ?] in the entire population. So I think no country is in a position to give lessons on this is the best model. This is a perfect model. I'm just saying that the inequality in access to higher education in this particular country has reached levels, which you can choose to ignore it and say, well, the less mobility is better because it means that very talented get rewarded, et cetera. But at some point, I think the numbers are striking. KEVIN MURPHY: But it seems to me that this actually is another dimension of policy that hasn't been discussed, and that is that income's being reified as the only thing to change. To give two examples, one, I think the differences between the United States and France in terms of these elite fractions, I don't think it has anything to do with income distribution directly as in affordability. It has to do something else, which is what's happening to kids during life course development. More generally, many of the issues around the table, the remedy may not be progressive taxes or some other leveling policy per se, but palliating and reducing the consequences. So I fully agree that there are serious problems with the role of money in politics in the United States. But that to me does not constitute an argument for more progressive taxes. It actually is an argument for something called progressivism, in other words, political reforms to try to address that. And I think that I could plausibly argue that if money is as corrupt as you've argued, there's no possibility you're going to get progressive taxes to self correct. On the other hand, we have ample American history on times when political reform itself was able to succeed and attenuate the influence of finances. And so again, I'm certainly not turning a blind eye to the role of money in politics. And I meant that as an example of the more general thing that many of the harms that are being discussed for inequality, it strikes me, can be directly addressed. And that's a whole other area of policy that probably should be on the table. JAMES HECKMAN: So let me bring the audience in, if only for the last few minutes. We only have five minutes left on the scheduled time. And there are a few questions that I think are of interest. And several have raised this question. And it goes back to one of the statements that Thomas mentioned, but also was mentioned by others. That's the role of firms and the role of price setting, very conspicuous in the public debate of this so-called 1%, the top end. People looked at CEO earnings. They've looked, for example, at very sharp discrepancies. This is not at the bottom. It actually is interesting. People started off talking, saying, we shouldn't only focus at the top. And we spent most of the time at the bottom. Now, I'm going to come back to the top in some sense. And that is, what's the role of firms. You've talked about skill biased technical change. But firms, wage setting policy, and some of the issues that arise in corporate finance, there seem to be very sharp differences? Thomas, you've documented that in your work with Saez, showing very sharp differences, say, between the English speaking countries, generally speaking, and some of the other advanced countries, in terms of the compensation or how concentrated income is. And you've linked that partly to CEO compensation and to performance more generally of the labor market, or the market, I should say, or maybe the manipulated market. So several people from the floor have asked about that. And I would ask Thomas to start initially, and then talk about this general question. That's a different aspect of inequality we haven't really talked about, high income earnings. THOMAS PIKETTY: So I think education is very important in order to explain human capital, to explain inequality in earnings. But at the very top, I think it's difficult to explain everything we see just with earnings and skill biased technical change and education and skills premium. At the very top, within the top 1% of labor compensation, it's not that the top 0.1 has a lot more skills than the next 0.1. When you make comparisons between countries, again, you see huge differences in how very top managerial compensation has changed relative to the managerial compensation just below to the 1% or the 2% below. And it's hard to imagine that it's because in the US, the average tier of the top 0.1% is a lot higher than in all those other countries relative to the next 1%. And so when you try to explain the level of top manager compensation, you put firm size, you put finance versus non-finance, you put every explanatory factor you want, you really don't explain much in terms of these very big cross-country differences in the rise of top managerial compensation. So you need to bring other factors, other institutional factors, change in corporate governance, change in the tax system. I think in the US, a huge decline in tax progressivity between the 70's and the 80's, 90's, has increased enormously as the incentives for top managers to bargain very aggressively and do whatever they can to get a pay increase. Other factors also matter. If you want to explain differences between European countries, which are also very important between Britain, Sweden, Germany, I think corporate governance, the implication of workers representative and unions in pay setting. In my country for a long time, employers and shareholders they didn't want any worker representative on board. As they say, workers are going to take crazy decision. We don't want them on board, at least not with voting rights. And then at some point, people turns and said, well, but look, in Sweden, you have 1/3 of the board which are made of worker representatives. In Germany, you have of the board which are made of worker representatives. And apparently, the Swedish firms, German firms, are actually doing better than what you're doing in France. So are you sure that this would be a catastrophe to try to involve them rather than just being in a conflict with labor? And in the end, last year, there was a [INAUDIBLE] picking one seat out of 12 board members for workers. So it is not 1/3 like in Sweden or 1/2 like in Germany. But I think it's important. This kind of institutional features has, I think, strong impact on wage formation in particular. There's a lot of evidence that it has impact on the level of top managerial competition. And in the end, in terms of efficiency and productivity, I think Swedish firms and German firms are doing just fine. JAMES HECKMAN: OK, we actually have run out of time. I think people will stay around. But I would thank every participant in this discussion. Apologies to the audience for not getting all their questions in. But I think we've had a very good discussion. I don't know if you're willing to stick around for a bit. We could have a follow up seminar, but I think we should let people escape. [APPLAUSE]

Channel: Becker Friedman Institute University of Chicago

Views: 12,513

Keywords: inequality, piketty, capital in the 21st century, labor, education, human capital, heckman, durlauf, murphy, uchicago, university of chicago, becker friedman institute

Id: qc3u5XGAVco

Length: 88min 15sec (5295 seconds)

Published: Wed Nov 18 2015