Is Inequality Growing in America? | Challenges Facing the US Economy

>> Jeff Jones: Welcome and thank you for joining us. My name is Jeff Jones. I am the Associate Director of Facilities, Operations, Events and IT at the Hoover Institution. Before we begin, I would like to share that we as a university recognize and value the right, the rights of individuals to express their views, which is why we do not permit the disruption of the effective carrying out of today's event.

Freedom of speech is a core value at Stanford University and the Hoover Institution. Our goal today is to create a respectful space for the exchange of ideas. Those who engage in disruption of this event will be issued a warning, and if the warning is not respected, may be asked to leave.

Today's event is being presented by the Hoover Prosperity Program, all right? So with that out of the way, Condoleezza Rice is the Tad and Diane Tobey Director of the Hoover Institution and the Thomas and Barbara Stevenson Senior Fellow on Public Policy. In addition, she is a founding partner of Rice, Hadley Gates & Manuel LLC, an international strategic consulting firm.

From January 2005 to January 2009, Rice served as the 66th Secretary of the United States and also served as President George W Bush's national security advisor from January 2001 to January 2005. Please join me in welcoming Director Rice to the podium.
>> Condoleezza Rice: Thank you very much. Thank you, Jeff.

And thank you to all of you for joining us for this very important conference on challenges facing the U.S economy. I think there's plenty to talk about, and so thank you for being here. This project, this prosperity lens on how to think about the challenges facing the US Economy is extremely important for a couple of reasons.

It's important first and foremost because it confirms something about our history, which is our nation's founders had deep insights about the sources of prosperity, not just the outcomes that that showed us that there was prosperity, but about the sources of that prosperity. They therefore created from the very start a system based on free, competitive markets, limited government, private property rights, individual choice, and the rule of law.

A century of social science research has shown that the market economy has improved living standards, expanded economic opportunities, and increased social mobility more than any other system in history since our nation's founding. As someone who once studied the system that was supposed to be the answer to capitalism, I am, after all, what was once called a Soviet specialist.

I can definitely say that these truths about prosperity have been proven throughout history. There's a second important reason about this work, however, that I'm very proud of here at the Hoover Institution, and that is that our founders understood the power of institutions. They understood that institutions were not just epiphenomenal moments in which interests came together.

But that these institutions, private property and individual choice and limited government, all put into institutions that are expressed in our Constitution and all that followed. That those institutions have power of their own. It's a kind of normative power. Institutions may be written down, in other words, de jure.

They become part of the law. But it's much more important if institutions have normative power, meaning that people really do respect them, people do believe in them. Sometimes as institutions gain power, people don't even express them. They're just a part of how you think about and how you react to the challenges.

That institutionalism was a definite part of our founders heritage. Madison in particular, spent years and years and years studying institutions, understanding the power of institutions and then taking those insights into the great documents of our founding. Now he did a lot of that work at Princeton. If Stanford had been here at the time, maybe he would have done the work at Stanford.

But he was in that sense an academic who wanted to understand how to use those insights to improve the lives of people. And one thing that I love about the work that Steve and Ross and others are doing here is that it follows in that tradition of understanding how those institutions provide the basis for prosperity.

Now, the institutional arrangements that have undergirded and pushed forward this prosperity are under challenge from all sides these days. They're under challenge from left and right, they're under challenge from populism. Populists are not undemocratic. They're actually very often elected, but they are anti-institutional. They believe that it is better to have a relationship between the leader and those that they lead than to have these intermediary elements called institutions that it turns out, are very important for passing prosperity from generation to generation to generation.

Now, given these headwinds, the country is at an inflection point. Does it stray from the institutions and the policies that are derived from them that have underpinned the growth and the prosperity that we enjoy as a country? And as we explore new solutions to harness the power of markets and to meet today's public policy challenges, can we still rely on and reinvigorate these institutions?

Hoover's mission includes promoting economic opportunity and prosperity. Our founder told us that if we were to pursue our aims through limited government, private enterprise and individual liberty, we would improve the human condition. The decades and centuries of American prosperity have improved the Hoover have improved the human condition.

And so to drive research and analysis and impact on these critical issues, Hoover has launched the Prosperity Program. Hoover scholars affiliated with the program include economists and political scientists and historians and legal scholars and classicists, and they conduct evidence based research on the institutions and policies that foster economic prosperity, have done so in the past and will do so in the future.

Today's conference is the first public event of this initiative, in line with the Prosperity Program's goal to share evidence and research insights with. With policymakers and with citizens so that they can make informed choices regarding the best path forward for our country. Leading this great initiative, I'm about to introduce Steve.

Steve, would you come and join me? Steve is the Peter and Helen Bing Senior Fellow at the Hoover Institution and the AA and Jean Welch Milligan professor in the School of Humanities and Sciences at Stanford. He's the founding director of the Hoover Prosperity Program and co-directs Hoover's initiatives on corporate governance, financial regulation, immigration and long range prosperity.

Steve has spent his career investigating why the world distribution of income is so uneven. And his most recent books include Fragile by Design, examining how governments and industry incumbents craft banking regulations in ways that stifle competition and increase systemic risk. More importantly, Steve Haber and I came to Stanford at almost the same time.

And so he, like me, has been here more than 40 years, but they hired him at 11 as well. So, Steve, over to you.
>> Stephen Haber: Thank you very much Condi for that very gracious introduction and thank you also for your support of the Hoover Prosperity Program. There's broad agreement that Americans want a future characterized by prosperity, opportunity and human dignity.

There is not, however, broad agreement about the institutions, policies and laws that will get us there. We have therefore invited a group of world class scholars and policymakers to have a structured discussion and to invite you all to join us in that structured discussion about a key set of issues.

These range from the fiscal deficit to the impact of artificial intelligence, from inequality to America's fundamental and political institutions and from trust in government to the policies that influence the rate of innovation. The goal of this conference, of our discussion amongst ourselves and with you is not to present silver bullet answers in the form of all we have to do is.

If it were that easy, these would not be challenges. Rather, the goal of the conference is to frame the challenges facing the United States as tractable questions. Provide evidence relevant to addressing those questions as in what are the facts that we know and what are the facts that we need to know?

And then explore the trade offs implied by different approaches to dealing with those challenges in light of the facts. I realize that's something that's sorta fallen out of favor. That was an attempt at humor, okay. Bringing this group of scholars and policymakers together has been been a team effort.

It's the product of cooperation amongst colleagues who have been leading different Hoover working groups on corporate governance, financial regulations, the economics of immigration, emerging markets and developing economies and the institutions that promote long run development. Let me therefore thank all my partners in this enterprise. We actually started planning this conference somewhere around April or May of last year to give you a sense of the care and thought that went into bringing this group of people together.

So let me thank my partners, Peter Henry, Dan Kessler, Ross Levine, Josh Ober, Paola Sapienza and Amit Saroo, who serve as the governing board of the Hoover Prosperity Program. Let me also express a very public thank you to the team that supports the Hoover Prosperity Program, Isabel Ismael, Jovan Hammerquist and Sue Thompson.

Some housekeeping. There is a QR code here. If you click your camera on that QR code, the agenda for today will pop up. I'd now like to invite the panelists for the first panel on Is Inequality Growing in America to the stage. This session is chaired by my friend and colleague Ross Levine.

I could give you Ross entire CV by way of introduction, but that would take the entire hour allocated to the panel. I will say, however, that we have been friends since the early 1990s when Ross read a paper of mine and invited me to the World bank, where at the time he was in the research group, and we have been standing by each other ever since.

I also say that Ross is one of the world's most highly cited economists, and I am thrilled that a year ago we were able to lure him away from UC Berkeley to join us at Hoover as the Booth Durbus family. Edward Lazear, senior Fellow of the Hoover Institution and co director of Hoover's Working Group on Financial Regulation.

Welcome, Ross and Pat. Floor is yours, Ross.
>> Ross Levine: So good morning and welcome to the first panel which is going to address the question, is inequality growing in America? Now, one thing is clear about economic inequality, and that is it is the subject of intense debate in the middle of politics, in the middle of economic policy.

It's related to issues associated with welfare, with issues of fairness and with issues of economic opportunity. But there are many things about economic inequality that are unclear, and that's why we're here this morning. And some of those have to do with very basic questions. Why do we care?

Why do people care about the distribution of income and wealth and consumption beyond their own wealth and income and consumption? What is it about relative differences that matter? What do different measures of economic inequality tell us? Do they tell us the same story? Are they different? Why are they different?

Do they link up to the reason why we're examining economic inequality in the first place? What factors such as technological change, perhaps it's trade, perhaps it's immigration, perhaps there are other factors that are altering trends in economic inequality over time. And very, very importantly, are there policies that might address legitimate concerns about economic inequality?

And what would the ramifications of those policies beyond inequality? So, fortunately for you all, I am not going to provide the answers, but I am going to have two. Prominent leaders in this field addressed those questions. We were supposed to have Eric Hearst, a third expert, and he came and told us this morning that he was just too sick to be here.

But fortunately, we're gonna have on my far right, Emmanuel Saez. He is the professor of economics and director of the Stone Center on Wealth and Income Inequality at the University of California, Berkeley. His research focuses on inequality and tax policy. Professor Saez has won several major prizes, including the John Bates Clark award and the MacArthur Genius Fellowship.

We also have Bruce Mayer is the McCormick Foundation professor at the University of Chicago Harris School of Public Policy. His research focuses on poverty, inequality, tax policy, and government safety nets. Professor Mayer has served on federal task forces, advised several agencies in the government, and testify to Congress on his research.

The way we'll organize this is each panelist will have about 7 minutes to introduce their topic, address the questions and issues that they want, and then we'll have 20 minutes of conversation among among us, and then we'll open it up to the floor. So Professor Saez, it's all yours.

>> Emmanuel Saez: Thank you. Thank you, Ross, for this generous introduction. It's a pleasure to be here. So let me say a few words for why inequality matters. In a nutshell, inequality matters, because we are social beings and we work and produce together and then we have to split what we produce.

And that has made us exquisitely sensitive to issues of distribution. Are we splitting what we've done together fairly or not? So in the modern economies, we split the pie at the workplace and through government. So that is at the workplace, that's where we produce. And then the produce has to be split between and across workers and business owners.

That's what economists called pre-tax income distribution. And then government take taxes. A large amount of economic production goes through taxes, 30% in the US. If you count all levels of government, up to 50% in some European countries. And those taxes are gonna get back to people in the form of various public goods and transfers.

So we can also talk about tax post-tax income after you've taken taxes and given back transfers. So there are many ways to measure inequality here. In my few minutes, I want to focus on the very top, because that's where the changes have been the most striking in the case of the United States.

And that's also where my research with colleagues Thomas Piketty, Gabriel Zucman has focused on. And so the US has experienced since 1980 an extraordinary increase in income and wealth concentration, and you can see this through many indicators. For example, CEO pay relative to average workers pay has gone from 30 in the 70 to about 300 today.

On wealth, if you look at the Forbes 400 richest Americans, you see that their share of wealth has grown dramatically over the period as well. So in our work, we've exploited primarily tax statistics. And from those, we found that on a pre-tax basis, the share of income going to the top 1% as increase has doubled from 10% around 1980 to about 20% today.

And then the further up you go into the distribution, the more dramatic the increase. So why is that relevant? Well, the first thing that related to sharing the pie, if the top 1% takes more, it means that there's gonna be less for the rest. And if you look through the distribution on a pre-tax basis, it's really the bottom, the bottom 50% that is a large group, half of the population that has taken the biggest losses in their share of income.

As a result, the income growth at the bottom 50% has been low, low relative to the average growth that the US has experienced. And so as Bruce Meyer will explain, thanks to post-tax, that is taxes and transfers given back to the bottom on a post-tax basis, it's not as bad.

But this raises a very serious issue of sustainability. It's gonna be hard for a society if growth on a pre-tax basis really accrues only to the upper groups of the distribution. Because on a post-tax basis, it raises issues of fairness. Why should the rich pay for means tested programs to support the bottom?

So that's why I think the pre-tax numbers are very important. The second issue is that top income and especially top wealth translate into power, economic power that we economists have studied in the form of monopolies. You build an enormous business, then you have monopoly power, that's why it's so valuable.

But then you want to stifle or buy competition, and perhaps more worrisome, wealth can also translate into political power. We've seen that in some countries. I think we are seeing it in real time today with Elon Musk, richest man in the world, who's deployed his wealth to control social media and then use it to influence political outcome.

So from an international perspective, we've studied many countries and inequality has grown over the last 40, 50 years in most countries we've studied, but the US is extreme among richer countries. Continental European countries, Japan have not experienced nearly as much of an increase in inequality. Which means that we can't blame it all on globalization and technological progress what societies do to regulate inequality matters.

And indeed, if you take a broader historical perspective, I want to remind everybody that the US was a pioneer in breaking top income and wealth concentration in the late 19th century, early 20th century. It started with antitrust to break the big monopolies, and then the invention of progressive taxation on income, inheritances, and high corporate taxes to make sure it was harder for the very rich to sustain their fortunes for a very long time.

So we learn a lot from from the historical perspective. My summary is that in the end, societies choose the level of inequality they want. There are market forces and so on, but because we're a social species, in the end, we can get organized. The way we want. And I look forward to debating that with all of you.

Thank you.
>> Ross Levine: Thank you. Please, Bruce.
>> Bruce Mayer: Thank you, Ross. So, I'm gonna talk about poverty. Society is best measured by the well being of the worst off. That was emphasized by Emanuel, particularly in his early work that I greatly admire. It was the extreme view in some respects of the philosopher John Rawls.

And it's a common idea. Whether a billionaire has a few billion more or less is of less importance. Poverty, whether measured with income, consumption or other indicators like housing quality or health insurance access, has improved in recent decades. That's true whether you look at absolute measures of poverty or relative measures of poverty that compare people to say, median income and those measures are explicitly measures of inequality.

It's true that the official poverty measure has only declined a little bit in recent decades, but nearly all researchers and government statisticians don't believe that measure. The main reason they don't is that the official poverty measure doesn't include in income the main things that we do to reduce inequality.

It doesn't include tax credits like the EITC and ctc. It doesn't include in kind transfers like housing benefits and snap. When one accounts for those parts of income, the Census Bureau finds that poverty has fallen quite a bit. Unfortunately, accounting for taxes and in kind transfers still doesn't solve the problem, doesn't give you the right answer.

Standard income measures sharply understate the well being of those at the bottom because the public increasingly doesn't respond to surveys and increasingly doesn't report their incomes accurately. If you look at what's reported in surveys, about half of pension income, half of unemployment insurance, half of snap, half of quite a few benefits aren't reported.

And if a person leaves out their main source of income, they may very well look poor even though they aren't. So what I've done over the past 15 years is work with the Census Bureau in a number of projects linking survey tax and program data. We've combined the major Census Bureau surveys with detailed tax records and program records from a dozen government benefit programs.

Including housing benefits, snap, social security, retirement and disability. We find that the linked data point to much greater falls in poverty over time. We focus on absolute poverty, but the declines are largest at the very bottom for those below half the poverty line or even lower and not nearly as big for people say at twice the poverty line, so that relative poverty falls quite sharply.

We estimate that over the 21 years where we can look at linked data, that relative poverty fell in half, returning to absolute poverty Rates, we find that they're a small fraction of what they were 50 or 30 years ago. And this pattern has been confirmed by other academic researchers, government statisticians, and most recently by the Congressional Budget Office.

In the last few weeks, even these measures understate the progress that we've made. As pointed out by Michael Boskin thirty years ago, the standard inflation measure that's used to adjust our poverty cutoffs greatly overstates inflation. Other people have pointed this out in recent years as well. While income data corrected for these problems shows that there were large declines in poverty, consumption data shows an even greater decline in poverty over time.

Consumption data looks at what people are directly able to spend on in terms of food, housing, and other goods and services, and it more closely connects to the well being of people at the bottom. People are more willing to talk about their spending than their income. So consumption data also provides a better way of getting around this underreporting of income that we see in surveys.

In work that I've done with Sullivan and Hahn, we showed that the share of individuals with consumption below poverty thresholds has fallen much more even than income since the 1970s and 80s. And is a small fraction of what it was back then. To resolve these two strands of looking at poverty, we have combined survey information on income with administrative information on taxes and government benefits in the same data set.

And you can see there that consumption lines up much better with income when you do that. While I'm focused on the very bottom, if you look at indicators of inequality for the bulk of the distribution, those also show improvement if you look at people's actual spending. So the ratio of spending at the 90th to the 10th percentile has fallen a bit since the 1980s.

And I will admit that most of that comes from a fall in the bottom half of the distribution. The top half of the distribution still experiences an increase in inequality, but not as big as the decline in the bottom half. So this is a fairly abstract academic discussion of income and consumption poverty, but if you look at very visible, tangible measures of well-being at the bottom BOTTOM those have also improved.

I have in mind things like housing characteristics and access to health insurance. For example, looking at housing, which is the largest expenditure for most people, looking at the American Housing Survey and comparing what those around the poverty line have had in the way of housing over time to those at the middle.

What you see, if you look at things like number of rooms adjusted for size of the family, absence of housing problems like leaks or plumbing problems. Or if you look at whether they have air conditioning, those around the poverty line today look like the middle of just a few decades ago.

And then lastly, there have been other indicators that are very important that have greatly improved health care access and quality. The lack of insurance in the US has declined sharply over time, especially for those with low incomes. So there are a lot of reasons to not believe all the doom and gloom that you may hear.

I'd argue the system is working quite well. And part of the reason for that is that as we find, there are fewer holes in the safety net than publicly advertised because of the the problems with the data that I mentioned earlier. And a lot of the programs that we use to help those at the bottom have been successful and have grown over time.

And they're a big part of the story.
>> Ross Levine: Thank you, Bruce. Let me ask Emmanuel a question, but first, let me sorta summarize what I've learned from the presentations and from reading your work, and you tell me if my summary on the big trends is okay. And it's perfectly reasonable for you to tell me where I got things wrong.

So if we look, there's a couple ways to think about inequality. One has to do focusing on poverty. Good reasons to believe that poverty levels have declined. Another way to focus on inequality would be to just look at your paycheck and if I understand correctly, good reasons to believe that such a measure of inequality has increased and basically been rising at a fairly steady rate since the early 1970s.

However, rather than just looking at the paycheck, it may be useful to look at what happens after taxes and what happens after government transfers. And if I understand correctly there, Emmanuel, your work suggests that at the top, that there's been growing inequality, the top 1%, top 10th of a %, top 100th of a % have increased.

And you're engaged in a very active debate with some people at the US treasury about that because of all of the complications associated with making those adjustments. And that if we instead say, okay, let's not look at taxes, let's try to look at what people are consuming there there's much less evidence that income inequality is increasing.

So that's my reading of the situation. So actually, just want to make sure that I'm okay with that, now I'll come back to a question. And so, and that is, Emmanuel, in talking about why we care about inequality, there's I would say that you focused on a few issues.

One has to do with, we care about inequality because we're humans and we care about inequality. You focus on the top cuz there's been big changes there. And also there's a notion of fairness and issues of economic power. But if I want to focus, if I want to use your measures, but focus on the bottom because what I care about and sort of a Rawlsian view is like what's happening to those at the lower end of the income distribution.

Rawls also pointed out that inequality might be good if it spurs people to work harder, if it spurs innovation. And if you're just focusing, even if you're just focusing at those at the bottom, this might be beneficial to them. And so I just wanted to get your thoughts about that.

I take it that you disagree and I wanna understand why.
>> Emmanuel Saez: I mean, I think you summarized it well in the sense that on a pre tax basis, the paycheck at the bottom have not grown nearly as much as overall economic growth. Once you start adding the transfers, in particular the health care expansions of of Obamacare, the credits for low income families with children, you alleviate, the issue, as Bruce has explained.

And fighting poverty, reducing poverty is very important. But if you take an absolute measure of poverty, you're always eventually going to win because with economic growth, some of it is going to trickle to the bottom. That's what the World Bank does with $2 a day threshold. And now virtually all countries except a number of them in Africa have won, have won that battle.

But even if we win that battle of poverty, inequality remains as a problem because the views will always be relative. How do we share the pie that exists? So I'm all in favor of thinking through, what are the best institutions that are going to promote equitable growth? And it's true in any economic system, you're gonna have inequality.

So that's why it's a good question you ask, is letting the rich develop big businesses perhaps good for the rest of society, but it's not necessarily the case. And I can see many examples where when the big businesses become monopolized it's typically not good for the rest of the system.

In terms of economic policies, I think some of them are extremely useful to promote equitable growth. Perhaps the most important one historically is the development of mass publicly funded education, so that everybody has access to education. So we really have to go topic by topic, I can't give you a general answer.

>> Ross Levine: Just to follow up, don't worry.
>> Emmanuel Saez: Sure.
>> Ross Levine: You can jump in. So the question I have here, I guess, is part of that seemed to be a focus on you want contestable markets. So if that's the issue, that's the issue. You want competition in contestable markets, and that is going to lead to expansion of the pieces.

So I guess as someone whose research is focused on growth, I'm very concerned with the expansion of the pie. And in your opening, you're sort of interested in the slices of the pie. And I'm sure my guess is that there's some sort of a balance there. And so why then the focus on inequality if the underlying issue is the contestability or is it a way of signaling that there's an issue?

>> Emmanuel Saez: I mean, maybe it's simplistic to say, but no matter how much we grow the pie, the issue of inequality will remain, will remain with us. And you know, the view at Hoover is that free market as Director Condy Rice put it so beautifully, you know, just in a few sentences, free markets, property rights, etc, limited government.

She said, that's the belief at Hoover that that's the key to unleash growing the pie. I wouldn't want to point out that historically the period of biggest growth in richest country, the post World War II decade, were accompanied with an extraordinary increase actually in the size of government paying for programs, precisely developed education.

So this is, you know, this is a, I think this is a fair debate for us to have and each society will have to discuss those things.
>> Ross Levine: Very good. Maybe we'll come back to growth in a little bit. But Bruce, I wanted to bother you with it, bother you with a question as well.

So in terms of, so if we look at consumption and we take account of government transfers, okay, we are treating what a person spends on and therefore their happiness is irrelevant of how they got it. And so if people, this is a hypothetical, if people care about having a job and obtain resources through the dignity of work, as people often say, is that distinct from getting a check from the government?

And therefore, even if consumption inequality hasn't increased, does it become relevant for policymakers to observe that situation and say that there's a concern?
>> Bruce Mayer: That's a great question. Let me answer that first. And then if I remember, I have three comments I want to make-
>> Ross Levine: Perfect.
>> Bruce Mayer: -Prior exchange.

So I emphasized that one of the main reasons poverty has come down over time is that government programs to aid those at the bottom have expanded. And they're not counted particularly well by the measures that are typically used to look at poverty and well being at the bottom.

Now, some of those changes were reductions of programs and orienting the programs to encourage work. So not all increases in government programs are good and some cuts in government programs are very beneficial. And I have in mind welfare reform of the 90s that reoriented programs towards work, cut unconditional cash aid through afdc, eliminated it, replaced it with tanf.

Expanded the Earned Income Tax Credit that transfers income and encourages work at the same time by subsidizing work. The current child tax credit does that as well. Subsidizing work while transferring income. And those changes meant that welfare rolls went from 4 million families to 1 million. And there was a 1 million, more than 1 million increase in the number of single mothers working.

And if you look at the living standards of single mothers, they increased quite sharply. And the worst off, single mothers seem to have done the best in terms of their improvements in living standards. So I heartily endorse encouraging work and the value of work. And programs that pay attention to incentives are very important.

So maybe overstayed my time. But let me say three things in response to the previous exchange. First, antitrust policy isn't necessarily the same as say, increasing taxes on billionaires dramatically. There are different policies. You can discourage the monopolization of industries without dramatically reducing top incomes or discouraging incentives that much.

Second, I think the main reason why we tolerate inequality is because we want to encourage incentives, we want to encourage work. If you just divide the pie equally, there's no reason to work. And we need to pay attention to that. Now there's a lot of disagreement as to how much incentives matter, how responsive people are at the top.

But Emmanuel pointed to how inequality has increased more in the US than in other places. But I think you can also point to innovation having increased in recent decades more in the US than in other places. And there may very well be a relationship. It's something that's hard to actually elucidate to feel figure out long run responses to changes in taxes, but that could very well be part of the story here.

>> Ross Levine: Did you want to respond, or?
>> Emmanuel Saez: I mean on innovation. I agree. We want a society that innovates a lot, whether, let's say, you know, a billionaire tax or a promise that if you found a business you are going to face antitrust, would that reduce innovation? I'm skeptical.

I feel like places like Stanford University, top universities that can attract talent, put them together is far more important. And many of those are indeed funded also heavily by the government as well as the private sector.
>> Ross Levine: So let me ask then for given your findings focusing on the top, what do you think accounts one, for the trends that you've seen and then two, why haven't those trends been identified at lower parts of the income distribution?

>> Emmanuel Saez: I think in terms of the trends in the United States, the rise of inequality is first a dramatic increase on top executive pay. Labor income phenomenon. We're starting in the 70s, people at the top, but the workers, the CEO, the management are going to get much, much higher pay.

It's the invention of stock options that are a way to reward the top executive. It's a little bit opaque, but at the same time it can bring enormous pay relative to what existed before. But then, and that was the 80s and the 90s. Since then, I think it's more a wealth phenomenon.

It's literally the rise of big businesses with very large shareholders, sometimes the founders, sometimes the heirs from families. And those businesses become more valuable. They make profits in part because of the problem of monopolization. And antitrust has not been very strong in recent decades. It's also perhaps a shift in the industry where the current businesses, say, in the high tech sector, have a tendency to easily become monopoly.

So those are the two phases. I would say in the bottom wealth is almost irrelevant, it's essentially a paycheck story. And there my view is that yes, as Bruce said, you know, the US has a pretty good working rate now, that is people are working. The problem is that the low paid jobs don't pay very well.

And there the policy that's perhaps the most relevant is probably the minimum wage. That is often controversial because economists tend to think it's a terrible thing, a minimum wage, you interfere with the market. Nevertheless, in the US case that has done a lot of local minimum wage experiences.

It's particularly high in California, for example. It's hard to find the disemployment effects that economists fear. And as a result, the minimum wage is effectively a pretty good way to support pay at the bottom. And the US had a very strong minimum wage up to the 60s, but it really stopped increasing at the federal level starting in the 80s.

>> Ross Levine: Maybe Bruce can jump in. My understanding is that the minimum wage hits very few people. The federal minimum wage, if you're not talking about teenagers, that was my understanding.
>> Emmanuel Saez: Yes, correct, the federal minimum wage essentially no longer exists because it's $7 per hour, nobody gets paid that.

But some cities, some states, Berkeley has a minimum wage of $19. California, I think it's 15 or 16 seen now. So in some places, the local minimum wage does have a bite. And there are many studies that have looked at that and tried to see what it does, you know, to the labor market, I guess.

>> Ross Levine: Also, I was interested. Well, if you want to talk about the minimum wage, that's fine, but I was really more interested in sort of broad issues of what's going on with income distribution. What are the factors that are influencing it? Why is consumption different? I'll bring another question in for you, which is it was my understanding that even if we're just looking at the paycheck, we don't have to do anything with taxes.

That the issues of income, of inequality, were not just the top and the bottom, that even within occupation there was a broadening of the distribution of income. Or since we're at a university, it's not just that the economists are making increasingly more than the English professors, it's that among the English professors the distribution has grown, and among the economists the distribution has grown.

And so, the notion of the distribution of income seems to me very, very complex in that there may be just a reward to talent and more rewards to talent and ability. Which then makes me confused about how to interpret what's going on at this level and what's going on at a big level.

So, I know that's fairly incoherent, but it's your job to make it coherent.
>> Bruce Mayer: Well, I think you're getting there. There clearly has been an increase in the return to college education, an increase in the return to skill, and you do see that there's been an increase in inequality overall in the top half of the distribution.

>> Ross Levine: But that doesn't necessarily mean unfairness. Right? That would be a return to.
>> Bruce Mayer: Yes.
>> Ross Levine: Okay.
>> Bruce Mayer: It's not necessarily an unfairness. It means that incentives are stronger to go get a college education, to work hard, to do well in school. And that has some positive effects.

And you need to weight those against concerns about inequality to the extent that they have bad effects. One thing that I wanted to say earlier, and I didn't really touch on, is that I have some concern that focus on inequality is divisive, is tearing down a system that basically works pretty well.

And that we would be better off if we emphasized that there's been a lot of shared progress, that living standards today are just a lot higher than they were 20 or 30 years ago, even maybe especially at the bottom. And that's something that everybody can buy into. But I will say that it, it's kind of just so commonplace an idea that journalists don't like to talk about progress.

They like to talk about things going badly. You hear, or at least I hear that if you're just saying that we're making steady progress, you're considered a Pollyanna, naive. And so that isn't much in the public discussion, despite the fact. That, you know, I'm a little older, quite a bit older than Emmanuel, and I can look back and see that life when I was in high school or college was nothing like what it is today.

It's just in so many respects, better. And I think that's worth emphasizing. And I don't think it gets enough. Enough play in public discussions.
>> Ross Levine: Let me just ask you a quick question, and then we'll turn it over to the audience. But what is it that we, most people miss when talking about economic inequality?

What are we focused on? I mean, I think maybe we're focusing too much on inequality and not enough on progress. But what are you just. What do people miss?
>> Bruce Mayer: Well, just, you know, I can think of lots of things that are just completely different today than when I was younger.

When I was a kid, fruits and vegetables meant mealy, delicious apples and iceberg lettuce. Now supermarkets just have this plethora of foods. And even if you're low-income, you can get, maybe you have to take a bus, to one of these places that have foods that you just couldn't get 40 years ago.

And when I was a kid, it was a birthday treat to go out to McDonald's. And McDonald's then was nothing like McDonald's today, it was low quality, didn't have many choices. I went through housing statistics. The housing people live in, well, more than 60% of those in the bottom 20% have central air conditioning.

We had one window unit in the house I grew up in. So it's just there's been this huge improvement that I think gets missed when we focus on inequality. And I think we would be better off. There would be more common purpose, more belief in things working. Because I kind of think that they're basically working if people focused on living standards rather than inequality.

>> Ross Levine: Should I turn it to the audience or do you want to say something?
>> Emmanuel Saez: Let's turn it to the audience. Let's end on the Pollyanna version.
>> Ross Levine: So, okay, I better get this right, or else I'm gonna be in big trouble. So we're gonna ask for questions from the audience, and there are two microphones that you can line up at.

We'll take three questions at a time. And this means that the panelists can avoid the ones they want to and then ask a question. And by the way, if you've been in a lot of academic seminars, there's typically long speeches with no question. So please do ask a question.

And that's it. Please.
>> Speaker 1: Hi. Thank you guys for coming. I had a question, probably primarily for Bruce. I think one of the issues that often doesn't get captured in a lot of these metrics around poverty is the administrative and psychological costs of doing a lot of these programs.

And some of the things like for example, you talk about taking the bus to go to foods you can't get to from 40 years ago. I mean there's real cost in that. There's the real cost in having insurance claims denied and having to keep doing those over and over again.

How do you think about those costs as you look at if the actual inequality and the kind of full costs of life are actually lower?
>> Speaker 2: On the point of income inequality within professions, I think there's a factor we need to examine the role role of and that is that with certain technologies it's expanded the audience size such that if people take a class online.

One person can teach hundreds of thousands of people compared to earlier when you're talking someone teaching say 30 students in a classroom and say four courses a semester. So there's more opportunity for someone to emerge as truly great and demand the income associated therewith.
>> Ross Levine: Question, or?
>> Speaker 2: That's the question.

What is the role of this expansion of eternity from technology leading to what we perceive as an inequality?
>> Ross Levine: Please.
>> Speaker 3: I've just seen the conflicting opinions about whether or not inequality has declined in particular in the past like four years post Covid. And so I was just wondering for your guys opinions on what has actually happened since COVID in the past 10 years.

Thank you.
>> Ross Levine: You want to take the.
>> Emmanuel Saez: Yes, I can take a crack on the scale. Certainly I would go broader than you and say that that's globalization gives opportunities for businesses to deploy their new products worldwide in a way they weren't or couldn't before. And that suddenly concentrates monopoly power and the wealth for the owners.

About COVID let me say a couple things. What's really striking about COVID is how enormously the transfers increased during just two years. You know, 21, 22 on a post tax basis. I'm sure you know, Bruce will do or has done the computation. Incomes increased enormously, you know, because people got replacement paychecks bigger than what they were earning before and that.

But that was only temporarily. The Biden administration failed to convert any of those programs into permanent increases in the, in the welfare state. And so now I would say we are pretty much back, you know, to the situation. You know, the working rate is very high, so that helps with inequality.

But the top is also going very strong and doing very well. So I think in the end, Covid didn't permanently change much.
>> Bruce Mayer: So the bottom has done very well over the last four years. So if you look at measures of consumption poverty, they've continued to decline over the last four years, and there is one.

Public point of debate that maybe I'd like to correct at this point, not here. Nobody has said anything that I'm complaining about. But a lot of pundits and politicians have argued that one of the programs that was expanded by Biden, the expanded child tax credit, cut child poverty in half and then when it expired it doubled again.

You just don't see those patterns at all when you look at consumption, poverty, people's standard living standards, they just kind of smoothly get better over time. And when you stare carefully at the income data, you realize that people were characterizing what was mostly due to the 800 billion we spent on economic impact payments and the almost 1 trillion we spent on unemployment insurance.

That's really what drove the changes in income based poverty that you can see, but ones that weren't nearly as dramatic as some pundits and politicians have been exclaiming. Thanks.
>> Ross Levine: Please.
>> Speaker 4: Sort of a two-part question for Professor Sayes who made some broad generalizations about inequality. Growth on a pre tax basis as we've talked about that sort of conflates both wages with wealth effects, compensation for labor versus wealth effects and sort of ask you to separate into two periods.

I think there's a lot of evidence that from the Reagan tax cuts in 1982 until the Great Recession in 2007 that there was growth in income for all five quintiles of the population. So the pie was in fact growing and growth in after tax income in particular, again, for all five quintiles.

Where inequality really started to grow more materially was after the Great Recession and the period of easy money with both fiscal and monetary policy sort of flooding the system and encouraging people to invest. And we've had phenomenal returns in the capital markets really ever since the sort of risk on period of 2009.

So if you look at it from that perspective, one would say that one of the causes of growth and inequality is, you know, who owns stocks, who owns assets and who doesn't. And what's ironic about that is that many on what I would call your side of the aisle, let's say the left, were against the notion that for example that George W Bush promoted of a nation of shareholders and encouraging people to be able to invest their own Social Security benefits 401K style instead of getting a check.

And similarly even in the workplace, in the private sector workplace, the left tends to be opposed to defined contribution plans 401ks. Which has been one source of people who've worked to enable them to grow wealth and in favor of retaining these defined benefit programs, which in the pension system, which in many cases are underfunded.

So I just wonder if you could disaggregate those two periods and separate out wealth grown in the capital markets versus, like you said, even in the most recent period. Well, the big explosion in inequality was cuz of high CEO pay, which I would think is a pretty small part of the sample, as opposed to who owns stocks and who doesn't, which affects a very larger swath of the population.

Thank you.
>> Ross Levine: Please.
>> Speaker 5: Hi, I would like to hear you address what I see as something of an inherent conflict in the way you're describing these problems. Bruce McCormick, you are talking about standards of living among the bottom half of the income distribution, that they have access to better foods, and things like that.

I'm wondering if a relative measure is more appropriate when you are also talking about access to higher education, greater opportunity that higher education brings. And yet we know that access to that higher education requires more and more income than ever before. It requires access to tutoring, test preparation, requires access to schools that prepare students to take higher education courses, et cetera.

So are you kind of creating a system where for the bottom half, having running water and flush toilets in their house and access to tasty apples is a measure of prosperity. Where for the upper half, it's the ability to go off and be an entrepreneur and go to a startup because you went to a great school.

So I'm asking you to address that tension there, thank you.
>> Ross Levine: Since I've been going back, I started there. Let's go, please.
>> Speaker 6: Sure, so, thank you. Historically, when we think about inequality, we think about it in terms of international inequality between countries and then within countries, right?

And recently I've come across the work of Branko Milanovic, who argues in favor of this idea of global inequality, right? That in a period of globalization, both of these categories have become increasingly irrelevant. So I'm just wondering how you think globalization should change. A, how policymakers measure inequality and B, how they act upon those measurements.

>> Emmanuel Saez: Yeah, so I can answer the first and the third, say a few words about it. I agree with the person who said, yes, the later period is where we saw a big increase in wealth inequality, driven in part by the increase in the value of stocks. You know, companies are more valuable, they make more profits, perhaps because they have more monopoly power.

I also agree with the person that the development of 401ks has been a way to democratize, you know, stock ownership. You could think, we should go beyond that certainly. I also think that Social Security, which provides a different form of safe asset that's not subject to the fluctuation of stocks, is a good thing.

I'd be in favor of increasing both from Reagan to Bush. I should say that there has been a dramatic increase in inequality in paychecks. That's suddenly enormous literature on that. On the third question on globalization, it is true that the fact that poor countries are catching up with richer country, you know, China, India, come to mind, is a force towards reducing inequality at the worldwide level.

And Thomas Piketty has done interesting work on that recently and shown that it's a force decreasing inequality. But say, most countries have converged to high to high standards, then the remaining inequality will be within country and this one is still extremely high. So even in a globalized world where all countries are rich, it's true we no longer have the problem of disparity across countries, but inequality within country that we've discussed mostly today remains always relevant.

>> Bruce Mayer: So a couple comments. There certainly are many dimensions to well being besides income and consumption. I mentioned health because I know that well. And we have expanded availability of free health insurance quite dramatically through Medicaid for kids and then Medicaid for adults under the Affordable Care Act.

And my research team has shown that that reduced mortality quite a bit for both kids and adults. And I don't really know about patterns on inequality in education. I do know that high school dropout rates have gone down a lot over time. But there's questions about the interpretation of those numbers in terms of internationalization that's been mentioned.

That is part of the reason that incomes at the top have gone up because there's been a broadening of the market. As the speaker said, you can sell your invention or your skills worldwide and that's meant there's been an increase in the return to those skills. But it also means that we should be a little less concerned about dominance of domestic markets because firms are increasingly facing international competition.

So it's a force that means that there is more need for domestic companies to compete. And that means that you just don't want to necessarily focus on the shares of a given company in the U.S.
>> Ross Levine: Thank you. I am sorry. I see some other speakers and we haven't exhausted the audience and we haven't exhausted the speakers, but we have exhausted the time.

I really want to thank both of you so much. I learned a lot. I appreciate it. Please talk to them during the break if you want.
>> Ross Levine: Thank you.