Listen: Economists Mark Kuperberg and Kevin Hassett '84 Face Off on Economic Inequality
Debate of the Century
Earlier this semester, the American Enterprise Institute (AEI) at Swarthmore presented the "Debate of the Century," featuring Professor of Economics Mark Kuperberg and Economist Kevin Hassett '84 tackling the issue of economic inequality.
Kevin Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at AEI where he specializes on tax, energy, and budgetary issues, fiscal policy, and stock market. Before working with AEI, he was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at the Graduate School of Business of Columbia University. He was also the chief economic advisor to the presidential campaigns of former President George W. Bush, Sen. John McCain, and Governor Mitt Romney. After graduating from Swarthmore with Honors in economics, he earned his Ph.D at the University of Pennsylvania. He frequently writes for many publications such as the National Review, Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.
Professor of Economics Mark Kuperberg, who joined Swarthmore's faculty in 1977, teaches popular courses on macroeconomics. His areas of interest include macroeconomics, public finance, and law and economics. After receiving his B.A. from Amherst, he earned his Ph.D in Economics at MIT. His lecture for TEDx Swarthmore is titled "The Case for Big Government: The Case Americans Don't Want to Hear."
The College's only thinktank-sponsored policy group on campus, AEI at Swarthmore works with the AEI to bring speakers on relevant policy issues to Swarthmore in an effort to broaden intellectual diversity, enhance the quality of policy discourse, and promote the motto, "Competition of ideas is fundamental to a free society."
Paige Willey: Welcome everyone, good evening. Thank you for joining us on such a fortuitous occasion as the Ides of March. My name is Paige Willey and I have the pleasure of introducing our speakers but before I do so I would like thank the American Enterprise Institute which sponsors our little group here at Swarthmore and enables us to bring speakers and host events to broaden policy discussions on our campus. I would also like to thank my fellow members of the AEI executive committee here on campus who helped make this possible, Gloria Kim and Ben [Turmotte 00:00:29] and Nate Urban who can't be here have all put in a great deal of work. Joining me on stage are Dr Kevin Hassett and Professor Mark Kuperberg.
Kevin Hassett is a Swarthmore alumnus of the class of 1984. He is the State Farm James Q Wilson Chair in American Politics and Culture at the American Enterprise Institute where he specializes in tax, energy and budgetary issues, fiscal policy and the stock market. Before working with AEI, he was a senior economist at the board of governers at the Federal Reserve System and Associate Professor of Economics and Finance at the graduate school of business of Columbia University. He was also the Chief Economic Advisor to the presidential campaigns of former President George W Bush, Senator John McCain, and Governor Mitt Romney. After graduating from Swarthmore with honors in Economics, he earned his PhD at the University of Pennsylvania. He frequently writes for many publications such as the National Review, Los Angeles Times, the New York Times, the Wall Street Journal and the Washington Post.
Professor of Economics Mark Kuperberg who jointed Swarthmore's faculty in 1977 teaches popular courses on Macroeconomics. His areas of interested include Macroeconomics, Public Finance and the Law and Economics. After receiving his BA from Amherst, he earned his PhD in Economics at MIT. His TED X Swarthmore talk is titled the Case for Big Government, the Case of Arrogance you don't want to here. He has held visiting professorships at Haverford College, the University of California at Berkeley, Johns Hopkins University, the Woodrow Wilson School at Princeton University and the Wharton School at the University of Pennsylvania. He professes to be playing David to Kevin's Goliath here today.
Before we get started we have to lay down the rules. Too many imponderables could invite anarchy. As such I have rules for both the speakers and the audience so nobody feels left out. On that note, we also have a participation ribbon for whoever ends up losing this debate, just kidding, at Swarthmore everyone wins. The rules are these. First the format will consist of two sections, one of about 55 minutes and one of about 25. The first will ask the question is economic inequality a problem? The second will ask what if anything should be done about it? We will begin with each presenting their case for 15 minutes, first Mark and then Kevin, then proceed with their cross examinations of one another. Then they may take several questions from the audience. They then will move on to the second section in which they present their solutions, take questions from the audience and make brief concluding arguments. Finally, in case it becomes relevant, I ask that we use profanity sparingly. I don't want to be accused of moderating a debate of excessive tawdriness, some tawdriness is okay.
The rules for the audience are these. First, if you must make an early departure please use the doors in the back of the room only and exit quietly. Also, if you have friends joining us later, let them know that it's quite full and they may need to come sit up at the front. Lastly, for the question and answer, we've passed out some note cards, we ran out but if you have something to write upon, you may write down your questions and we'll collect the note cards if you pass them towards this aisle and a couple members of the council will come collect them before the question and answer sessions begin. Then upon collecting those, our council will select a few to read and to have the speakers address. With that being said, we're so grateful to you all for joining us tonight. I hope this is the Ides of March match up of your dreams and let us begin with Professor Kuperberg's arguments.
Mark Kuperberg: Okay, so first I'd like to thank Kevin for coming. He's always been a really good friend of the department, unsparing of his time coming to many events, giving talks. I was walking home one day and a student came up to me and said "Oh, you're debating this guy, who is he?" I said "Well, he's pretty famous." He said "More famous than you?" And I said "Yeah, outside of a square mile of Parish Hall, definitely." It's a pleasure to have Kevin here. I hope this will be more like a moderated two person panel discussion than a debate but we'll see. Okay. So here we go.
Okay, so I'm gonna talk about the types of inequality there are and what's happened to them over time in the United States mostly. The first type of inequality is inequality of income so economists divide income into two parts, labor income where inequality has risen a lot as we'll see and inequality of wealth and capital income where inequality is immense. Then there's inequality of opportunity, then there's inequality of consumption which I think Kevin is gonna talk more about then I may rebuttal that. Okay, so first we'll start with total income. It turns out 1980 is a very big year in this story. Difficult. Okay, thank you, oh it didn't show up right. Okay, anyway.
So 1980's a pretty big story, a pretty big year and until then in the United States incomes were growing pretty much evenly across income classes but starting in 1980 they diverged and you can see that in this picture. This is again another picture of from the end of World War II to 1979, this divides the income distribution into fifths, quintiles. Kevin'll talk about quintiles also. It's the common way to do it and you can see that all, even the lowest fifth, they're all growing at pretty much the same percent per year. That was until 1980. After 1980, it's completely different. The lowest quintile is losing money, the next lowest is gaining it a tad and the top fifth is gaining twice as much as the fourth fifth. If you look at it, I'm not fixated about the one percent. I know there are people who are. It is quite amazing and here you can see how amazing it is.
This is real after tax income, once again starting in 1979 and the top one percent, their income increased 200 and these things really do not work. 278% but they're still only one percent. Income inequality is increasing across the board in the United States and the one percent are simply the most extreme version of that. Okay, so this is a final picture on income. There's the one percent again, there's everybody else. This is real inflation adjusted after tax income so it's the best measure of income and you can see that starting in 1980 I mean it's grown but it hasn't grown very much for most people. Whereas it's grown, so over an entire 30 year period, the bottom quintile got a 40% increase, top one percent got a 200% increase.
Okay, labor income. This is a chart labor income and labor income was most equal. If we look at this thing which is the 90/10 differential meaning how much bigger are the incomes of people at the 90th percentile and the wage distribution versus the 10th percentile. You can see that it was most equal and really right around 1973 and it's becoming more and more unequal since then, you can see that in terms of this thing called the GINI coefficient so they'll be a lot of slides that have the GINI coefficient, let me just explain what that is. It's a measure of inequality, it goes from zero to one. Zero is complete equality, one is complete inequality. That would be like if we were all Kevin Hassett's slaves. As the GINI coefficient which is here on the right side, .55 is really quite high, it's more than halfway to complete inequality. It's gonna be tricky. Okay, and so this is the 90/50 differential. Once again 90% of the labor top ten percent of labor income versus 50% and that's also, it's gonna be tough. Okay, that's also increased tremendously. The 50/10 differential, the difference between the middle of the wage distribution and the people at the very bottom, the 10%, that really hasn't changed much since 1990, it's been pretty flat but there was inequalities starting in 1980. Okay.
Inequality of wealth. Wealth is much less evenly distributed than income and you can see that here so the distribution of income if we just look at the top three percent, the top three percent of earners have 31% of all the income but they have 54% of all the wealth. It turns this, I only learned when I was preparing these slides, that after tax rates of return are actually pretty even across income distribution. It's not the case, pre tax returns are not but after tax returns, it's not the case that high earners are earning higher returns on their wealth than low earners which they don't they have a lot of wealth, the low earners. As we can see the bottom 90% only has 25% of the entire wealth in the society. What that means is that this pie chart here, while it's the percentage of wealth is also the percentage of income. What that says is the top three percent are getting 54% of all the capital income, the bottom 90% are getting ... 90% so if you had 100 people lined up, 90 people would be getting 25% of the capital income and three people would be getting 54% of the capital income in the country.
Okay, and so this is the top three percent again, the bottom 90% and the middle group, well they're not middle group, they're between the four percent and the 10% to the top, they stay pretty flat, the bottom 97 falls, the top three percent has increased in terms of their wealth. This is kind of an amazing chart. It turns out that it's only the top 0.1% so not a lot of people but it's kind of amazing that the total wealth of the top 0.1% is now equal, that green line, is now equal to the entire wealth of the bottom 90%. These lines are almost touching and that is I would say pretty [inaudible 00:11:29]. Once again, if we lined up 100 people, you have to slice one of those people into tenths and that person would have 25% of the wealth in the country and 90 of the other people would have the same amount of wealth as the one tenth slice of that person.
Okay so capital versus labor income. It used to be in the old days, we used to teach this all the time. In fact, microeconomics in ec one is probably pretty much still teaching it. That the productivity and total compensation go hand in hand and that was true 1947 to 1973, was mostly true 1973 to 1979, it stopped being true 1979 to '90. What turned out workers are producing all this but they're only getting to take home the black. Workers are producing all this, they're only getting to take home the black. Workers are producing this whole blue thing, they're only getting to take home the black. The outcome of all that is here. If you look at the share that labor has of all GDP produced by the non farm business sector, used to be that was a flat number because it corresponded to the fact that whole conversation was moving hand in hand with productivity.
It bounces around a bunch but it was up til about, you could even say up til 2000, it was more or less flat. Since then it's fallen through the floor. That we say here that we make 100 to be ... Index everything to 100 for 2009, workers are now getting 97.5% of that, they used to get way up here, 110% of that. What that means is that all the GDP that's being produced, it's not just that labor income is unequal, we saw that. It's not that capital income is unequal, we saw that. It's way more unequal because the holdings of wealth are way way more unequal. It's not just that, it's that the share that capital's getting is increasing too. Okay.
Inequality of economic opportunity, there is a view which we could talk about later that inequality's okay as long as there's mobility. I actually take issue with that viewpoint from a philosophical perspective but maybe we'll talk about that later. Let's say you even believe that. That inequality is totally permissible as long as there's mobility. Well, not so much. Here's the United States versus these other countries, like Denmark, my God. Who would ever want to live there. The United States has less mobility, has more mobility than the United Kingdom, okay, Downtown Abbey's still going, but has less mobility than all of these other countries which I don't think most people realize. There's this thing called the Great Gatsby which I think is a terrible name because the book wasn't very good. This is sort of America in exceptionalism so the United States is both the most unequal in this picture and also has the least mobility. So that's a sort of a regression line I guess and you can see that it's not what people think. It's not the case that more inequality more means mobility, that would be an upward sloping line. What it means more inequality means less mobility.
That's true across countries, it's also true with the United States. These little dots are little bins of commuting areas, US commuting zones. You are looking at how much mobility is in different commuting zones within the United States. What you can see it's the same negative relationship that the more inequality a commuting zone has, the less mobility. Except for this guy who knows what he's up to. That holds across countries and it holds within the United States and that's [inaudible 00:15:41]. Let me try to figure out how to get you [inaudible 00:15:48]. Yeah. This is not [inaudible 00:15:51]. Can people move away from the door please.
Kevin Hassett: Okay, I'll pause for a sec while folks ... There are a lot of seats over here. Just try to be respectful of the fire marshal. Thanks, it's really great to be back at Swarthmore. When I think about what Swarthmore is, what makes it different I think the first thing that comes to mind is community, that Swarthmore builds a community that stays with you your whole life. I knew March before he got tenure. Yeah. I argued strenuously against it but not really. It may seem hard to believe but before he got tenure he was a really fun guy but it's not just Mark. I forget whether I even ever told you this but I took Mark's Macro class, we used Gordon's textbook, it was read then, I don't know if you're still using Gordon's textbook. Then I went to Penn to grad school. Like many of the gray hairs in the room, I married a Swarthmore girl. She went to Penn Law because she was a year ahead of me and then I went to Penn grad school because she was at Penn Law. Anyway, my first year in grad school, the Macro teacher that I had was Steve O'Connell who was at Penn. Steve, okay, I couldn't see, Steve was gonna try to come, he has guests from out of town in today but I saw Steve earlier today.
At Penn in the grad program, it's one of these old fashioned PhD programs, they still do this a little where they fail about half the people at the end of the first year so it's a very high stress period. They view that competition as creating better economists. After the first year, they take the best person in each class and they TA the class the following year. In my second year at Penn I was the TA in the macro class and the reason I was the TA in the Macro class is that I was the best student in the Macro class because he prepared me so well. There were a lot of smarter people than me in grad school but nobody was better prepared in Macroeconomics. My bonds to this community are very deep that when I was here everybody was talking about Bernie but it was a different Bernie, Bernie Saffran. I remember coming back for his memorial service and speaking there. Bernie Saffron taught an Econ Theory class to the Economics majors and everybody had to take the seminar that by far is the most important class I ever took in Economics in my life.
Then I go to Columbia after I graduate from Penn and who's a junior faculty member with me there but Phil Jefferson. We even attended the same church, Phil, do you remember that? Riverside Church but anyway when Steve decided to leave Penn I could remember either talking to you or to Bernie and recommending him heavily for Swarthmore and I think his long successful run here proves that that's a good idea. The thing about Swarthmore, we stay close, we cherish the friends that we disagree with the most cause we learn the most from them and I disagree over time, or maybe I don't disagree so much with Mark as he disagrees with me. If I write something, actually I was sort of surprised because I wrote a piece for the Wall Street Journal last Saturday about the Fed and everything that's wrong with the Fed and I didn't get this flaming angry answer from Mark. I fantasize that he agrees with me when I don't get an email. Over the years, I've written a lot about inequality going back to the '90s, a lot of scholarly work. Thinking carefully about how to measure it and both whether we should use income or consumption and if we are gonna use income, how to do it.
I have a paper in the American Economic Review that talks about how to measure horizontal versus vertical inequality and so I've been thinking about it for a long time and got more involved in it recently when Thomas Picketty, his book came out and I was asked to be a sort of disputant for that book, at the American Economic Association meetings and then the article that Alan Auerbach and I wrote about that appeared in the American Economic Review. I sort of dug deeply again recently into the topic. How do you know if you win a debate? From my perspective, maybe it's because I'm getting old and have perspective on these things, is that I win a debate if I learn something and I expect that maybe I'll learn something. I haven't taken your class in a long time though so maybe not. I'm not sure I have yet because we're looking at stuff that's in the literature. Mark didn't put up anything that is incorrect but what I want to do now is use my 15 minutes which perhaps begins now not to say why Mark is wrong. There are certainly some things that I could dispute along the way but to talk about how I think about what the right question is and how to think about inequality and then we'll start discussing where we disagree.
I think that the backdrop for me is that and this is a good friend of mine Deirdre McCloskey that has a recent presentation that makes a point that Deirdre's been pushing throughout her career about just basically the miracle of capitalism. That basically human GDP per person stayed at what is today under world bank standards, basically below the poverty level and it did so for a really really long time and then all of a sudden it took off and there's this miraculous thing that all of a sudden welfare all around the world ... So the dotted line at the bottom is world GDP per person, the triangle is Europe and the square is US. All of a sudden people started to flourish, their GDP started to grow, we started to cure disease and all these things that came about from the wealth that was created by capitalism. Then the question is well yeah but capitalism, it creates differences and differences for sure are concerning and maybe have political implications for the political scientists among us.
Let's think about what happened over time as GDP per capital was going up to the world income distribution and to the distribution of income within specific countries. This chart comes from my former colleague at Columbia [inaudible 00:23:02] work where he uses parametric estimations to come up with the world distribution of income and then does it by country. Basically I won't try to recapture the laser pointer magic that Mark just showed but let's just say that the red line is 1970 and the sort of purply, most purply line furthest to the right is 2006. The point is just that what's happened to the US income distribution is that it's moved towards me and it's gotten wider. When you look at inequality then you say "Oh, jeez, inequality's gone up." It sure has. If you look at, just go to any point in the distribution, just look at how wide the red one is and then how wide the purple one is. You'll see that inequality has for sure gone up but also the median of the distribution has moved that way.
This distribution is maybe [inaudible 00:24:01] normal but there's some dispute about that. The real interesting thing around the world and I said that, well it might be the industrial revolution that led to GDP growing a lot but really I have certain feel that I'm on pretty strong ground that it was the spread of capitalism but it's a lot of the work of [Chavea 00:24:19] that convinced me of this. If you look around the world, there's something that's sort of more radical that's happened and that is that as capitalism has spread then places that used to be kind of centrally planned and didn't grow that much and have lots of poverty but lots of equality became fast growing but with a lot more inequality. If you look at the Chinese, again we can use the color coding. The red to the far left, the sort of light purple to the far right, you can see that the red one is way more equal but the purple one is way to the right and I guess one problem I have when I think about inequality and what I hear people say, certainly not Mark, is that I wonder about someone who wants to try to make the case that you should have the red one.
That the red one is preferred to the purple one because if you think about the implication of the purple one, the dark line is the world bank percentage of the population is where the distribution hits the percentage of the population. If you go up, you can sort of see if you're good at integrating in your head. That the percentage of the population that is what the world bank below what the world bank would say is the poverty line goes from being, what do you think integrating in your head, Mark? You're from MIT, you probably can do that. 45% about in the red one and sorta maybe about two percent in the purple one. If you're thinking about like has the move towards capitalism and there's a lot of problems with China of course but has the move towards capitalism been good for ordinary folks? For poor folks? In China, then you would say "Well, gosh, if you look at the measure of the people in poverty by the world bank's dollar a day standard, it's had a radical effect." [Chavea 00:26:16] has done this for a lot of countries, every country that he can get data for and I actually think by the way that I hope there might be a philosophy professor here.
I was an honors examiner once and I can remember the disputes in the grading thing where I guess they're all off the record so we're not allowed to talk about it but it's years ago so we can do it now. The debates between the philosophy professors and the religion professors over whether someone should be high honors or fail. Some of those people if they're here, you could help me think about whether I think the world distribution of income is probably the thing we ought to think about. A poor person here, if I'm a [inaudible 00:26:49] then I'm in my initial position and I'm thinking about who I care about and who's poverty concerns me, whether a person in the US deserves extra heavy weight compared to a person some place else is something that maybe I would dispute or I guess I would dispute. If you look at the world distribution of income, it's really interesting how it's changed and again.
I guess just to mess this up, [Chavea 00:27:09] kinda moved the colors around a little bit. If you go to the far left, you can see that basically in 1970, half the world's population was below the poverty line and now we're at the green thing in 2006 which is way to the right. It has moved a massive number of people out of poverty and has done so at the cost of increased inequality, again the spread is higher in the green thing. If we look at global inequality, Mark showed a coefficient about within country inequality, this is something that Thomas has done a lot too in his work, he emphasizes within country inequality but if you look at global inequality, it's actually gone down a lot and in anecdotal work it's hard because there's not a lot of observations but anecdotally I think [inaudible 00:28:07] makes a pretty convincing case that it's the thing that has caused inequality to go down so much globally is the spread of capitalism. That you see places that are equal, they don't grow much and then capitalism is adopted and they're central planning is relaxed and then they get a chart that looks like the Chinese chart. That's kind of recent world history.
It's really kind of astonishing if you look at the sort of global poverty rate, how much it's gone down as this has gone on. To talk about how I think about this, I sort of am anxious with that as the backdrop story that we now have to interject discussion of American inequality about a sort of wholesale indictment of capitalism following from the fact that there's an income inequality and wealth inequality problem or it's getting wider in the US without sort of some acknowledgement that gosh the system that we perhaps helped spread has had this radical positive effect on global poverty. As we think about what we're gonna do next, we should at least start out with a certain amount of humble respect for what we've accomplished. I think that that ladder is often not part of the conversation. I think at the American Economics Association debate but I guess it was kind of like this, you were there, right Mark? I think.
Mark Kuperberg: No the fire marshal wouldn't let me in.
Kevin Hassett: Okay, it was pretty crowded but at the debate, Thomas made a good point which he said "Well, sure global inequality's interesting but the reason why you oughta care is that when income becomes more unequal then political power becomes more unequal." Political power currently is determined by people in countries so we oughta study inequality in countries because that's where political power comes because the danger is that the wealthy will get power and then the wealthy with the power will use it to, as Mark suggested, make you all my slaves. When I started looking at the way Thomas made the case I found some things that sorta gave me pause. I just wanted to share that with you quickly. The first is that if you read the work that I did, go to NBER.org and type in my name and you'll see a really long piece about Piketty's book coauthored with Auerbach at Berkeley or if you go to the AER, you'll see a shorter piece but there's a lot of stuff in Piketty's book where he made data errors.
They're very well documented and so I started just deciding I had to get the data myself and make my own charts rather than rely on his when I was discussing him. This main point that he makes that income of the top five percent of households which given the data that I could get quickly is about high up as I would want to go because there's not really good sampling at the top. It's one of the problems that Piketty, particularly the pioneers, in trying to get a better perspective using tax data at the top but still you can see that the percentage of income received by the top five percent of households in the US has gone from in 1970, what is it, that's about 16 and it's gone way up above 20. Nobody should dispute that income inequality has gotten I guess worse is assumes that it's bad but maybe since it did help destroy global poverty or really undermine it maybe worse is not the right word but let's just say that it's gotten bigger, the share of the top. In Thomas's work and I didn't here Mark do this but at this point we sort of stop and we flagellate America. We say "Okay, so what a crappy society we have, the income of the top five is clearly skyrocketing and maybe we need to be concerned that the rich are using politics to enrich themselves and enslave the others."
But over the same time period something that Thomas excludes from his charts that I think, Mark, your charts were pretax, pre transfer, is that right? Because it didn't say in your label but I think it was.
Mark Kuperberg: I think the CBO one was close
Kevin Hassett: Okay, yeah, I have a problem with the way the CBO, but in any case, the US, no, no, the CBOs measure and we can talk about this but in any case, this is just simple census data and this isn't in dispute. Everybody talks, I'm sure Mark teaches it in his Macro class that are not funded and maybe entitlement reform is necessary to restore budget balance in the long run and the reason is that basically transferred payments is a percentage of GDP in the US have gone over the same time period from about six and a half percent to like about 13%. The interesting thing is that increase of transfers relative to GDP is almost the same, in percent terms I'm going to the previous chart, as the increase of share of the people at the top. Both have gone up and so then you could say "Well, what are you getting out of those transfers and this is something that ... Oh and to stipulate because we didn't want to devolve into disputes about is the chart right, is the chart not right, I gave Mark my slides about a week ago but I saw his slides tonight for the first time.
It just reminds me of my seminar papers actually, it's not any tactic on his part. I always wrote them the night before, did you notice? The thing is that if we look at what we've accomplished with all those transfers, this comes from work with, I've got a number of papers on this I'm happy to give you guys to post or you can just look me at aei.org. Basically the top quintile and the bottom quintile, the red line is the top quintile, the blue line is the bottom quintile and in terms of consumption inequality which is what Hobbs said "Consumption is the measure that we ought to consider." Hobbs argued for consumption instead of income because consumption is what you take out of society because once you eat it's gone, except for maybe fertilizer. Somebody got that. If you let the consumption inequality, the consumption of the two looks quite a bit different and it makes complete sense. It's completely logical because we've increased transfers. Transfers go to people disproportionately at the bottom quintile and their consumption has been bolstered by those transfers. If you look at GINI coefficients as we calculate them using the overall consumption in the consumer expenditure survey, then consumption inequality which again is a great measure of welfare and it's what you take out of society is basically not trending much at all.
Mark talks about capital income, I'll skip the capital income figures. I'll just say what I take away from this is that if I wanted to give a thumbnail sketch now of what I think the American economy has done since 1970, it's this. It's grown a lot, it's produced a much wider distribution of income, it's produced an even wackier distribution of wealth as Mark said. Wealth is really unequally distributed and at the same time it's delivered growth in consumption for the bottom quintile that's about kept pace with people at the top by massively increasing the amount of transfers. Now you could argue then, if we're gonna step back and maybe go back to our [inaudible 00:35:39] initial position where we're talking about do we live in a just society then you would say society did pretty well. Society did pretty well because as income became more unequal, resources were redistributed in a way that made consumption not so unequal and so if you hate America then maybe this chart might make you wonder about whether that's correct but it also means that the dispute about inequality that we need to have is consumption keeping up enough and second, are these things sustainable?
Because right now the transfers that have generated this steady consumption share for the bottom quintile are not funded in present value and they might go away. If we don't fund them, then they might disappear in which case the starting from the initial condition of expanded income inequality could lead to a very bad outcome. The capital income is a percentage of national income, this is a really important part of Piketty's argument. We could go into it in Q&A but Piketty basically said that the reason why capitalism's gonna destroy itself is that the capital income shares going up and as the capital income share goes up, then capitalists are gonna invest in robots and the robots are gonna replace the workers. Then the workers won't have anything to eat. He showed this chart, basically US, UK and France. The problem with that analysis which is similar to the chart that Mark showed is that if you take out and I did this first in a discussion of Piketty at the Urban Institute right after his book came out. If you break out capital income, if you take out housing from the definition of capital and just look at capital. When you think of capital, when we teach capital in economics class we think of capital as an input that a firm has, it's a machine. A house is a kind of different thing.
Housing capital isn't making stuff, it is making housing [inaudible 00:37:43] but it's not necessarily giving people jobs either except for building the houses. The idea that the people who are putting the money in the bank and buying machines are gonna replace everybody with robots because their income is skyrocketing is actually just not consistent in the data that all of the trends that you see in these countries in the capital income share comes from housing. There's a big increase in housing ad the reason there's a big increase in housing is that lots of governments decided subsidize housing, like the mortgage interest reduction and so on. That's the housing capital share of national income in the data. Housing capital is driving everything that Piketty sees in the data about capital but the reason why that's relevant is that I've yet to meet a house that can replace a worker. The whole story that the rising capital income share is gonna lead to robots that replace workers is just not consistent with the trends we see in the data.
I'm gonna skip that, I'm gonna go to the last thing because what we want to do also in the second half after we question each other is we want to talk policies. I want to talk about work that I've been doing lately that I think is very important. It relates all the way back in the early '90s thinking about how do we measure inequality, what should we think about it? There are a lot of different things that can be unequal like access to each other's slides or whether you were born here or there. I think that focusing on income inequality has led to some bad policy ideas in part because it fails to appreciate this sort of importance of the spread of capitalism in reducing poverty but in part for reasons that are clear by this latest work that I've been doing. About six years ago, I met right after Davos, one of the Facebook founders, Sean Parker, and he had a question about inequality and we started talking and then eventually he funded and I agreed to be the head of the board academic advisors, a group called EIG, the Economic Innovation Group, that works on the problem of measuring inequality in a way that can sort of make a good policy as well.
The thing that we got obsessed with in our first conversation that we made a lot of progress in measuring is geographic inequality. One of the things that I think is interesting about America and challenging is that right now when we talk about inequality we sort of say "Hey, we need to have a higher top marginal rate." That will address inequality some but the inequality in America that's the most striking if you look at the data [inaudible 00:40:14] but it's not really been studied much or as much as it should, is the inequalities, the geographic inequalities, the inequality of place. There are a lot of places that are stuck with high unemployment rates and have been for a long time. In fact, the EIG, we started a distressed communities index where you measure performance on seven economic indicators, you can go to EIG, our website and sort of see. This is a map of sort of where the distress is but a distressed community is a place where if you're a kid the odds of you moving up are really really low. The schools are gonna be terrible, the crime is gonna be high.
Here's an example, again so this is not income inequality but this is something that I think moves us closer to thinking correctly about the right policies we need to adopt. In the average zip code in the top quintile of prosperity six percent of adults have no high school degree and the average bottom quintile zip code 23% have not high school degree. Six percent of adults live in poverty in the rich places, the poor places is 27%. 35% of adults are out of work, in the bottom quintile of distress by our measure of distress, it's 55%. Five percent of homes stand vacant, 14% of homes stand vacant in the distressed communities. Most interesting and this is the thing that's most troubling in the data is that these areas of distress stay distressed, that nothing has helped. People aren't talking about them. If you wonder why is it everybody all of a sudden is responding so positively around America to the messages of Bernie Sanders or Donald Trump, it's because they're talking to people who feel like our debate about income inequality at the top marginal rate hasn't done a damn thing to help Camden. If you look at from 2010 to 2013, that's when the recovery began. Nationwide employment went up 17.4%, in the distressed communities, it's gone down seven percent since the recovery began. The number of establishments in distressed communities has dropped 8.3% at the same time.
My view is that if we think about inequality we need to have a sort of more subtle debate than you often see certainly in public, especially recent Republican debates. It needs to include thinking about really I think the biggest inequality problem right now is spatial inequality, the fact that there are all these places that are broken and that are sort of academic arguments about GINI coefficients and marginal tax rates haven't done a darn thing to help the really distressed places. I've got a closing thing from Schumpeter but I'll go back to that at the end because I think that Schumpeter anticipated this. That was odd. Anyways, thanks so much. I think that that summarizes the way I think about inequality and the work that I've been doing and now we're going to move up here and begin to ask each other questions, is that correct? That that's? Okay, thank you. [inaudible 00:43:25]
Mark Kuperberg: Okay, do you want me to talk about what you said or do you want to ...
Kevin Hassett: Yeah, what, well whatever order you want.
Mark Kuperberg: Okay, all right.
Kevin Hassett: I just finished talking so why don't you talk?
Mark Kuperberg: Okay. I don't want to turn this into a love fest but I will agree. I just want to agree with ... Kevin was kind enough to agree with all my slides, I want to be clear on that, all my slides. I do want to agree with some things he said. First with respect to economic growth, former ec 21 alums will remember this statement I'm about to make. The current ec 21 alums we haven't gotten to it yet because we haven't gotten to growth theory. I posed the following question, I said "Is our standard of living greater than neanderthal man? Because we understand how to eliminate microeconomic efficiencies?" In other words, neanderthal man couldn't equate marginal utility to marginal cost but we can or is it because we know how to run a macroeconomy and so we can get our economy closer to full employment whereas neanderthal man didn't understand about [inaudible 00:44:39] demand and how to do that>
Kevin Hassett: So our magic is cash for clunkers?
Mark Kuperberg: Right, or is it economic growth? The answer is it's economic growth, that economic growth is the thing that's singly most responsible for raising standard of livings. On the other hand, nobody has a little magic wand that will raise a country's economic growth. There isn't a agreed upon methodology to achieve that but still there's no question that economic growth is essential, that's A. B, something I also say sometimes is that there's only two lessons in economics. Lesson one is that markets are wonderful, lesson two is that markets are not so wonderful. We're up to lesson two. We're already reacting lesson one because we're economists and so it's definitely the case that markets have achieved amazing things throughout the world. It doesn't mean they can't be improved upon. The consumption data that Kevin had I have some technical responses to that which I'll get to if we have time. I'm not a fan of the ... So there's a joke that goes like this. What's the difference between theory and practice? In theory they're the same but in practice they're different. The thing is this theory about consumption I don't have a problem with but in practice the data he's using is not very good. I have some slides on that because I did get his slides in advance but that's not the only kind of inequality.
I just want to be clear on this, why is my head so small in this poster? That is the only picture of me on the internet where I'm frowning like that too. The last thing I'll say is location inequality, big issue, but places are made of people so if you can change the inequality that exists among people, it'll disproportionately help those regions that have disproportionate amounts of poorer people or low income people so it's not like they're independent strategies. However it is certainly possible, I'm sure for sure true that you might want to have locational strategies that particularly target particularly distressed areas. That has actually not been that successful in the United States, we've been trying to fix that [inaudible 00:47:05] for like 50 years but I'll just simply say I'm totally in favor of all that but that requires more government, not less government and that's all I'll say.
Kevin Hassett: The first thing is that I said that I stipulate that your slides are correct in the sense that the data in the slides say what the slides say but not every slide was correct in the sense that the productivity and wages slide, it's just a technical point for the economists in the audience but Robert Lawrence has shown ...
Mark Kuperberg: Yeah, I have that.
Kevin Hassett: Yeah, but that wasn't [inaudible 00:47:38].
Mark Kuperberg: No, no, no, I can talk about that, that's definitely, so I call that ...
Kevin Hassett: Can I finish the point because they haven't read it.
Mark Kuperberg: Yes, go ahead.
Kevin Hassett: The point is just that if you go and you go add some output then the wage should be set equal to your value marginal product. They sell the output at the margin and then that should be what you get paid but the price is the stuff that you make, not the stuff that you eat. The labor market equilibrium is that the stuff that you make, that that productivity determines your wage. A lot of people have made charts that look like Mark's but again I couldn't tell from the documentation if it was one of these but I think it was because Lawrence's paper makes a sweeping statement that if you look at marginal product and wage in the US and you use the price of the stuff that we make, then the markets still look like they're functioning the way markets do in our micro classes. That chart I thought was misleading but you're saying that you've resolved the dispute between Lawrence and the literature, decided Lawrence was wrong, have yet to publish that paper but will dispose of it nonetheless. Is that your position?
Mark Kuperberg: I have a slide, would you like me to get it?
Kevin Hassett: No.
Mark Kuperberg: Okay
Kevin Hassett: No, no, I believer your slide, just say what it says.
Mark Kuperberg: No, no, Kevin's point is a good point. This is also inside baseball. I showed two slides that relate to this issue. One is the, let's call it the race between productivity and total compensation. That slide is iffy for the reason Kevin said but the second slide which is the share of GDP in the non farm business sector, that's labor versus capital, that is still perfectly fine.
Kevin Hassett: That is true but the income that's trending up is housing.
Mark Kuperberg: I have a slide about that too. I have this appendix with all the things I was gonna argue with him about.
Kevin Hassett: Okay.
Mark Kuperberg: You're right about that and he's right that, well we can talk about Piketty but [inaudible 00:49:44]. I agree with you ...
Kevin Hassett: He asked not to defend Piketty tonight and I said fine.
Mark Kuperberg: Kevin has been spending the last four years [inaudible 00:49:51] ...
Kevin Hassett: That's not true, I've been clarifying his errors.
Mark Kuperberg: Too smart to do that.
Kevin Hassett: I'm helping him improve.
Mark Kuperberg: So the last thing is about this total compensation productivity versus what you sell, the price of what you sell versus the price of what you buy. That's a real issue and that is a part of the story definitely but there still is that part that's due to an increase in capital share and I have a slide for that.
Kevin Hassett: Okay, so now I want to talk about policy and I want to think about, let's assume that the distressed community thing is a real thing.
Mark Kuperberg: Yes.
Kevin Hassett: It is a real thing, we all know it is. I encourage you to go download our study, we have granular detail we've estimated this for a zip code level data so you can look at your own town and think about what you learn. Again, the most distressed community is Camden, New Jersey in the country. I also asserted that I think that the income inequality debate, the way it's happened politically has been harmful for thinking about policy that will help and you seem to disagree in the sense that well, if we get some growth then we're gonna help Camden too. I think that my slide kind of shows that that's not true in a sense that at least since this recovery happened, these places are actually falling deeper and deeper down into despair. I would assert that if we think about how we could help Camden, first I know that everybody in this audience wants to. That in fact one thing that I often say when I'm talking about the distressed community thing is how many of you want to try to make a difference and everybody says I do. Then I ask, which I could say how many people here think you can, you can make a difference. Is there something that you can do right now to help. Well maybe you can help individuals but the fundamental problem right now, you don't have a way to do it.
This is the thing that we've been working on at EIG. That the basic idea is that first of all I don't accept that a lot of the things that currently dominate the inequality debate at the national level are gonna be helpful for this. Can we help Camden New Jersey by lifting the minimum wage in Camden New Jersey to $15 an hour? I don't think any of us think you can, do you think you can?
Mark Kuperberg: Probably not, not by itself.
Kevin Hassett: Yeah. Okay, can we help Camden New Jersey by taxing the rich people in Camden New Jersey more?
Mark Kuperberg: Yeah, probably not enough.
Kevin Hassett: It's not enough, so why is it that these places are distressed? It's basically because they don't have enough capital as defined in our micro models. The proposal that we've put out that comes back to that first conversation with Sean a long time ago is this that we think that the reason why the people who have tried to ... Most people don't talk about it. I think in part because they think that they've given up, they can't be solved. The few times people have tried things like enterprise zones or something but they haven't recognized that there's a fundamental design problem that the game theorists in the audience would recognize that there are two possible equilibrium in distressed communities. One is that nobody goes, no capitalists go and invest and try to give people the capital that they need to prosper. The other is that everybody races to get there. The design problem for policy is to try to come up with some kind of mechanism so that everybody's in a race to get there. You have to change the Nash equilibrium.
The policy that we've come up with that I think might be legislated this year is designed to do that and it's radically different from the kind of stuff that I think you would talk about in a presidential debate if you're talking about income inequality and then what? If we create a new kind of, call it investment fund, private equity fund, mutual fund, that invests only in, our people tell us we're supposed to call them domestic emerging markets. If you go to Vanguard.
Mark Kuperberg: Good luck with that.
Kevin Hassett: No, let me finish. If you go to Vanguard and you could move your money. You've got your TIA [inaudible 00:53:49] that's been in the stock market you're whole life probably, you're a lot, but if you could move it into a fund that can only invest in distressed communities then all you people who want to make a difference finally have a way to do it. Our simulation suggests that hundreds of billions of capital could move if we just made it so that people could roll unrealized capital gains into distressed community funds and then these places could only make money if they invest in places that are distressed and make a profit. Then if they do that, then there's gonna be a race to make a profit. The first people could make huge profits because right now real estate costs almost nothing in these places and then that would drive a positive cycle where people recognize that if you want to improve welfare, you need to give people more capital.
I assert that that idea, maybe it works, maybe it doesn't work, I think it might be legislated this year so there'll be arguments about it in the House and the Senate but the point is just that I think that that conversation about how to do that is fundamentally different from the conversation you usually see about inequality. That's the sense in which maybe I'm saying something that's different. I think the inequality arguments at college campuses and in the media and in politics have been kind of destructive because they've been kind of discouraging capital from playing along and helping to solve the problem.
Mark Kuperberg: Right, so the reason I ... Well, first of all I think it's worth a shot. Absolutely. Kevin's right, he talked about equilibriums and so what these communities are stuck in is a really low level equilibrium. I would disagree that it's only low level because it doesn't have enough capital. It's also low level as you saw because people have very low education levels, very low skill levels.
Kevin Hassett: Low human capital.
Mark Kuperberg: Low human capital, so it's a combination of very low physical capital, very little human capital, so I don't know that just giving the financial sector an incentive to try to invest there and not raising up the human capital. I don't know how well that would work. I'm perfectly happy to try that. I also don't think relabeling the most distressed communities in the United States as emerging communities is gonna convince anybody but it is a huge problem and I'm happy, go with God. Anything anybody wants to do I'm fully happy with that. Do we want to go [crosstalk 00:56:15].
Kevin Hassett: So we now have half an hour for questions and answers from the audience?
Mark Kuperberg: Oh yeah, why don't we do some questions.
Paige Willey: Sure, so before we proceed to the next section which is solutions, we thought it would be nice to intersperse a few questions that people have written down and passed forward.
Mark Kuperberg: Okay.
Paige Willey: The first question that we ask of you is how can you have a debate about economic inequality in the US and not even mention race?
Kevin Hassett: You should, the question's exactly right. I'll tell a story about this that that's a really important one and the distressed communities are certainly not heavily Caucasian. I think it's an important thing to talk about, we absolutely could have mentioned that by any metric that we're failing on that. The thing that is interesting for me about this topic in policy is just like my own personal experience that I gave a testimony that the House Financial Services Committee about how the economy's doing and the recovery a few years ago. I made some slides, a bunch of slides on how the recovery's going by race. If you looked at it then it was a great recession that started to end around 2010 for white people but it's a great depression for black people and it looks just like the great depression, the data. It's astonishingly similar and really disturbing. So I had these charts that said that and then something funny happened in the hearing that shows sort of how broken politics are. Maxine Waters, the democratic congressman from I guess New York state, is that right?
Mark Kuperberg: No California.
Kevin Hassett: California but Maxine Waters declared me at House Financial Services Committee a national hero for bringing race into the debate about this. At which point many of the republicans on the committee started to treat me as a hostile witness even though they invited me to the hearing. It was a very very strange day but afterwards Barney Frank came up to me and I said "Barney, jeez, the republican staffer that invited me, that I think he's probably feeling like that adversarial nature that or the love you showed me was something that they didn't anticipate and he's probably gonna be worried that he's gonna be fired because one side of that was that when you guys started loving me, that the republicans started hating me. Maybe that's a sign of how broken politics is." Barney said "Don't worry, his job is safe. I've got a meeting with republicans tomorrow and the first thing I will do is denounce you." He did, he actually did.
Mark Kuperberg: Okay, so my job is safe too. I'm gonna say something that may be a little unpopular with respect to this question. First of all, race matters a lot, there's no question about it but and I've been here a long time. I would say a think that's bothered me a bit in the time I've been at Swarthmore is the increased emphasis on ethnicity versus social class. I feel that that's not to say black lives don't matter, that's not to say that race doesn't matter, it totally does but I do think we here emphasize race and diversity issues more than social class, to the exclusion of social class in a way that really is inaccurate. I don't have the exact number but if you look at unmarried white, no, white females with less than a high school degree, they're mortality rate has skyrocketed and in all of the relatively advanced world, the only analog to the increase in their death rate is what happened in the Soviet Union, in Russia, after the Soviet Union collapsed. It is in the entire world, they single biggest increase in mortality for white women who have less than a high school degree. I just think that there's problems out there that a lot of the problems out there can not be reduced to race. That's not to say that race isn't a big part of the problem.
Kevin Hassett: The thing that makes race important in this and I think I might be disagreeing is that let's imagine that you're a person who is lucky enough to be born with all the talent in the world. We'll do a counterfactual and that you're thinking about ...
Mark Kuperberg: [inaudible 01:01:03].
Kevin Hassett: Yeah, yeah, yeah. You're thinking about investing in the future in your own human capital and are trying to get ahead. Imagine if you're a person who knows that 20% of the people out there are gonna not give you a shot no matter what you do, that maybe it's gone down a lot. I don't know what the percentage of racist people is, maybe someone has an estimate. I think the fact that that's got to be discouraging. I think that that's a unique characteristic of race in the US especially with our history that the policy certainly hasn't addressed. Is there other questions?
Paige Willey: Okay, I think this is more of a clarification question but it may be helpful to review and here your reply to this? From my understanding economic growth is the key to reducing poverty globally, however I am quite skeptical that the spread of capitalism that we, presumably the US, can humbly claim credit for is a key component to raising the level of economic growth globally so I'm wondering if Mr Hassett can elaborate on the point he made.
Kevin Hassett: Yeah, so actually I can turn it into a question for Mr Kuperberg which is have you read [inaudible 01:02:24] sort of links between capitalism and inequality? I find them convincing I said but do you find them not convincing?
Mark Kuperberg: I haven't read them.
Kevin Hassett: Okay, but again you can think about the China chart, right? There are a lot of ... So India was centrally planned, there are a lot of places where they are centrally planned and then not and then you start to see those income distributions look the way that they looked in that China chart. I showed the China chart for a reason but the person who asked the question to just Google [inaudible 01:02:57] and he's got these papers that go on for hundreds of pages that go case by case talk about what happened in this country, what year the change was and then you can see that the distributions tend to move around that period where they stopped having a really big government but the point is though that those big governments maybe weren't as clever as the big government you argue for in your TED X talk. Why were those big governments ... Why did they fail compared to reforms that they made and why would your big government not?
Mark Kuperberg: Okay, well first remember I said there's two lessons in economics, markets are wonderful, that was the first lesson.
Kevin Hassett: Right.
Mark Kuperberg: I disagree with the question writer that capitalism/markets hasn't been responsible for the increase in equality and growth around the world. I think it has played a very significant role. The second thing is the markets I'm talking about are, once again, it's like the second question, markets are not so wonderful. It's really after you've run your, have a market economy, what problems remain, right? Those economy's that didn't work, they didn't have big government and free markets, they just had big governments and big governments running everything. Yeah, that's not a good system.
Kevin Hassett: Yep. There's even just before we go to the next question, there are others. There's even literature on this that I commend to you, it's probably on your reading list but do you ask people to read Becker and Mulligan's stuff on optimal taxation? The basic idea is that if you want to have a big government then you need a really efficient tax system because the bigger the tax gets, the more the distortion that the tax creates. The most efficient tax is consumption tax, there's a big academic literature on this, and a value added tax is a consumption tax. It's not accident that European nations that have really large governments compared to our own that they have value added taxes to finance them. I guess part of your design for the bigger US government would be a value added tax?
Mark Kuperberg: No, I'd go for more of a straight consumption tax but that's pie in the sky, it's never gonna happen, progressive consumption tax.
Kevin Hassett: Yeah, the X tax.
Paige Willey: We've been getting a lot of really good questions, we can't get to all of them unfortunately and some of them the handwriting is too unique to read. I'll finish with this one and then move on to the solutions and concluding arguments. This one is personally addressed, Kevin, suppose I agree with all of your Piketty critiques, tell me why I shouldn't be worried about a long term low growth regime for the entire world leading to your lovely global income distribution curve skewing further to the right without actually shifting to the right, thanks [inaudible 01:06:02].
Kevin Hassett: So skew rather than shift, yeah. That could happen I suppose and again so Piketty's view is that we should look at the country level because that's where politics happens and that when wealth becomes unequal then that's gonna lead to political inequality and then the rich are gonna abuse everybody else. I submit that that hasn't happened yet and that I don't know whether it's going to happen. Larry Lessig who the Harvard Law Professor who ran for president. He and I were at a conference together and talked a lot about this a couple weeks ago and Lessig's view is that money and politics is really out of hand and that it's polluting democracy but not maybe destroying it yet.
He gives an example that really was stimulating for me to think about the role of money in politics and it gets back to the thing that Piketty said that I thought was his best point. That in Texas it turns out that they once had a law that said that only whites can vote in primaries but then everybody of all colors gets to vote in the general election. I would submit that there's nobody in this room that thinks that that's democracy. That's not democracy, right? Lessig said well now we're in a world where instead of the whites picking the candidates, the rich people and the PACs, they pick the candidates and then you get to vote and so how is that democracy? I think that that's a fair point.
Mark Kuperberg: [inaudible 01:07:38]
Kevin Hassett: Yeah. Perhaps but I think that that's not ... I'm an economist and there are political scientists I know in the room but that's the sort of next thing that we have to study because it could happen but I don't think that it's in the data yet, the bad things that we could imagine.
Mark Kuperberg: Okay, so we'll go back to part two.
Kevin Hassett: Okay.
Mark Kuperberg: Okay, could you with your magic wand.
Speaker 4: My magic mouse.
Mark Kuperberg: Get me back to my slide. Thank you.
Speaker 4: There you go.
Mark Kuperberg: Okay, so now we're up to what possible solutions are there and so first this is kind of a schematic of how economists think about things. We start with endowments, people [inaudible 01:08:32] market with labor and capital then they go to the market and then out pops labor and capital income. Then they can save some or they could go to school, there's actually some leisure here in the endowment which you could go to school and use up. That's how the system works, so just to [inaudible 01:08:52] it, think about Jack and the Beanstalk. He comes to the market with his cow, he gets some peas, trades for them, and then he plants them. That's a form of investment in savings and then the rest is history. The thing about this chart is that it says there are three ways you can intervene. You can intervene at the endowment level, you can intervene in the market itself, you can intervene after the labor and capital income has been determined. My view is we should intervene in all three places in part because I want to minimize the intervention in any one place. How do you do that?
First, you gotta think about why is there so much inequality in the US, once again I'm staying with the US. 1980, big year, I mean big bad year and so the ratio of the income, the wage of a college degree versus a high school degree was as low as it ever got, 1980 and it's been [inaudible 01:09:50] up since then. One way to interfere or influence the endowment side is to force their education. That, you need to do a lot of it, but if you did a lot of it, you would create more college graduates that would depress the wage of college graduates a bit, you would create less just high school graduates and that would raise the wage of just high school graduates a bit. You have to do that at a pretty big level to have effects throughout the economy but that's how you would influence the endowment side vis a vis education. Alan Kruger was the head of Council of Economic Advisors for Obama for a while, gave this talk which I've taken some of his other slides a lot. The rise of consequences of inequality, so that was 2012 but he used 1997 charts, this is a 1997 chart, somebody should update that.
According to this chart, Donald Trump is about 20% right. International trade 10% of inequality, rising immigration 10% of inequality, international trade, I think that number's gotten a lot bigger. I'm positive of that so that's a bigger [inaudible 01:11:07] technical change which is the economist favorite is probably, it's less than this. Anyway, you can summarize all that here which is this is just a very simple supply and demand model ec one where the demand for labor is simply a linear trend and the linear trend is in essence summarizing all these effects. The supply of labor is just what percentage of the labor force is high school graduate versus college graduate. It's amazing I think, I'll just use the word amazing, how closely the red and the blue lines line up with this tremendously simple supply and demand apparatus you're able to predict so well the gap between college and high school wages. One way is simply to create more college graduates, to work on the endowment side. The reason that [inaudible 01:12:02] works so well is that education in the US has sort of plateaued a bit so it was rising, rising, rising and then it's kind of plateaued since about 1960. I mean it's rising a bit but much slower. We're just not generating enough educated people and that's a big part of the inequality story.
That's true throughout the entire distribution so if you look at high school dropouts, high school graduates, some college, college, post college, the more educated a person is, the higher their wages are, that's across the entire education distribution. The second thing is training programs for people after they've gotten out of school so this is the summary of a ton of studies that are all ... The ones on this side are random controlled experiments and they're like drug trials, these guys are not. While a lot of people think these were, let's call them manpower programs, don't work, they're just a waste of government money, well this one is here but most of them are not. Most of them do wage people's wages substantially. Not all but most do so there's a lot of ... Camden could use a lot of this. Okay.
Minimum wage, so that's now interfering with the market box itself by changing the wage. Okay, so this is a chart that a lot of people know about, minimum wage in constant dollars. It was the highest in about 1973 and this year now. I have a different way to look at it which is the ratio of the minimum wage with respect to labor productivity. The argument against raising minimum wage is that workers will price themselves out of the market or the government will price workers out of the market for them but that's a fight between their wages and their productivity. Whether you're gonna get priced out of the market is what you can see is this is when things were really high back in '73 but now if that's number one, the ratio of the real wage to productivity is like 0.35 of what it was in 1973. There's plenty of room to raise the minimum wage before you come to the point where workers are being paid more than their productivity.
Labor unions, so you can see labor unions are down, that's I view not good. Finally, so the United States, it's actually a surprising graph. Why is it surprising is because we think of the United States as the land of opportunity but the flip side of the land of opportunity is that there's a lot of market generated inequality. Surprisingly not so bad actually so if you look at the GINI coefficient before taxes and transfers so this is the market generated inequality, the United States is here. It's, Denmark, where nobody wants to live of course, is better. Canada, better, but there's a whole bunch of countries that you wouldn't realize, you'd think no they must have more equal pre tax and transfer and income than the United States and they don't. Like Norway but after tax and transfer, after their governments have gone in to this is now manipulating this last box. Once the incomes are determined to what degree are you transferring around, the United States is the worst. The United States goes from being better than the middle, it's pretty close here but better than the middle in terms of market generated inequality to being the most unequal because we do the least with transfers and taxes. I would say there's room there too.
This is the same thing, I want to give Kevin another chance. This just shows this with respect to federal taxes and transfers. This is the reduction in the GINI coefficient, eight percent due to taxes because we do have progressive taxes to some degree, this is the reduction due to transfers and the little blue line is the reduction due to transfers and taxes, the amount of reduction. This is once again in that very last box you have endowments, market, incomes that we do in the United States tax and transfer that market income and make things more equal. It's just that we don't do it as much as other countries. Finally, and poverty, poverty will always be with us, the government hasn't done anything wrong so by a better measure of poverty than the official measure, the official measure's pretty lousy I think Kevin will agree with that. There's this other measure, supplemental poverty measure and poverty, that's the blue line, poverty has gone down pretty substantially and here is total safety net has reduced poverty from, if there was no government assistance, 27% down to 15% for everybody and for children 27% down to 16%. I think that's [inaudible 01:17:29]. These programs do work. Yeah.
Kevin Hassett: I don't need my slides [inaudible 01:17:39]. That's fine, that's a beautiful slide, it leads everyone to wonder.
Mark Kuperberg: No, let me show you this. Since we're here ...
Kevin Hassett: But your time is up.
Mark Kuperberg: Here you go.
Kevin Hassett: Your time is up. If we could leave that one up to, we can let people [inaudible 01:17:54]. I think that let's think about the problem from the point of view of somebody in the audience that you want your consumption to be higher five years from now. How do you do that? Or 10 years from now. How do you do that? You can invest in human capital. A lot of people are doing that right here and increase your wage because people want to pay you more because you've acquired this glorious Swarthmore education. It's a good strategy. It's proven over and over to work, especially I could add to pat the economic steam on the back again for economists. If you go to Greg Mayhew's website you'll see the Swarthmore produces the most economists per capita of any school in the country by a lot. It's because people like Mark fire people up to go off and get a PhD and learn how to do it right for a change.
You can invest in human capital. If you have more human capital your wage will go up but other than that then the other way it can happen is that you have more physical capital to work with yourself. Or think about it this way, if you want to go out to restaurants more five years from now, back actually when I was a kid, it used to be that they had interest rates that were positive, do you remember that?
Mark Kuperberg: Yeah, I know [inaudible 01:19:14].
Kevin Hassett: So you could put money in the bank and then you would get like some money from that, it was great, it doesn't happen anymore but you would put money in the bank and then you could take the interest on the money and you could go to the restaurant with that and so that you could have higher consumption in the future because you had some money in the bank which you could think of as the capital. If you want your consumption to be higher down the road, the two things you could do are human capital and physical capital or capital. If you don't do that then maybe you could borrow on your credit card and finance some consumption but then when you try to pay it back you're not gonna have the income to sustain that higher level of consumption and your consumption will go back down so you decide not to do it. I submit that the same is true for our country. That if we want our country to have more stuff five or ten years from now, enough stuff so that we can change people's lives or continue to reduce poverty, then we have to do better at developing human capital and do better at developing physical capital.
Human capital, there's a lot of work on education, it's very bipartisan work. Scholars at AEI work with Cory Booker on the newer schools for years and I think they've made a lot of progress there. There's been a lot of charter schools in DC that have radically changed lives. I think that the education part of the puzzle, we might have different prescriptions about how to do it but we agree. I think Mark might be more sensitive to, like he wanted people with more college degrees but I think that really the failure of our education system is biggest the earlier you go. We need to think heavily or hard about how we're gonna do that. The physical capital side gets back to the inequality debate. That there's way too little physical capital in the US right now. There are a lot of reasons but I think the biggest reason is something that's sort of a captive of the political process and that is that we have this bizarre stupid corporate tax system that encourages multi nationalists to make their new investments, move their money abroad.
I can remember that it used to be that when I was in high school we had to walk through the woods to get to the donut shop, we had an open campus where you could go to the donut shop. I can remember when I would walk through the woods to get to the donut shop there were always these kids that I didn't see in my AP classes who were like standing in a circle with this cloud of smoke around them. I'm not sure exactly what they were doing but I did recognize that there was some kind of correlation with what they were doing and the demand for donuts. I submit that if you were gonna take one of those guys and let him design a tax code that was responsive to the idea that if we want wages to go up, that human capital, capital, we need more capital that they would have come up with something better than what we got. Here's what we got. Right now, if you're a multi national and you locate profits in Ireland, you pay almost no tax. If you locate the profits in the US, you pay the highest tax in the developed world, the third highest in the world, do you know the two countries that have higher corporate taxes than us?
Mark Kuperberg: You mean the legal [crosstalk 01:22:20].
Kevin Hassett: No, I'm getting to this point. The statutory corporate rate is higher in two countries, Guyana and the Congo. Other than that ...
Mark Kuperberg: Now let's get to the effective [inaudible 01:22:30].
Kevin Hassett: No, no, but this so let me teach you my friend about the [inaudible 01:22:33] curve. How do they do this? How do they do this? Well, the way you do it, it's very easy, if you're a multi national, if you locate your intellectual property in a tax haven, then every sale you make anywhere on earth you can have that subsidiary or the parent in the US pay royalties to the sub in the tax haven so that the profits end up there. What multi nationals want to do then is expand their operations in tax havens and then locate the intellectual property in the tax havens and then because they get to that then they can mail all their profits to the tax haven. The US doesn't get any tax from that until they mail the money home which guess what, they never do. It just piles up and you hear people saying we need a tax holiday so they bring the money home, it's trillions of dollars off shore and so on. This is the game that everybody plays but notice what the person who loses is the worker in the US because in order to play this game to get the profits over there, you just need to make it in Ireland, you can sell it wherever you want and then the profits are in Ireland, you don't pay tax.
The corporate tax system in the US raises very little revenue. This is what you're saying about the effective rate but the reason it raises little revenue is that the multi nationals are really good at avoiding it by basically giving the jobs to other countries. How did we get here? I think we got here because the natural constituency on the democratic side, I think again has been too much focused on traditional narrow debates about income inequality and the idea that you would cut the corporate tax in the US is [inaudible 01:24:14] to the left. I've had very senior people in the White House tell me that they sort of get this but they can't bring it up with their own caucus because there are too many people that hate corporations and would never want to ... Or they don't actually hate them but they don't want to say they're cutting the taxes because it makes them look back.
On the right, you think about the corporate community, let's just say that the right is the community of big corporations, big money corporations. They don't want to have a tax reform because right now if someone who's a fiduciary for a corporation, you've got the best of all worlds. You've got the highest tax on earth so nobody tries to argue that it should go up and you don't pay it. What's better than that? If you have a tax reform, you're gonna be worse off. You argue don't do it. We're stuck with this system right now where there's no political momentum for a corporate tax reform which would give us one of the two things, higher education or higher capital. That would drive wages up. We've got a tax code that encourages people not to do that, not do to that and we can't fix it because we're sort of stuck. We're stuck because maybe big businesses are always going to oppose anything that you might do to make it so that the system's different. The people on the left need to recognize and this is work I didn't cite but there's a big literature. I had an early paper that shows that corporate taxes are a really important factor in determining blue collar wages across countries. That when corporations move their activity to Ireland that it benefits workers in Ireland.
When we talk about inequality let me leave you with the thought, the final thought, that I think that the inequality debate in the US politically has been kind of destructive. It's focused on the wrong things. I think that the things that Mark would propose just now, I think he already conceded that he wouldn't necessarily want to do in Camden but he also concedes that Camden is a big part of the problem. So you didn't want to increase the minimum wage in Camden, right?
Mark Kuperberg: Well, I'm just saying that that wouldn't solve the problem totally because the businesses there can't pay the minimum wage, right.
Kevin Hassett: Right.
Mark Kuperberg: The businesses there are hanging on by their fingernails.
Kevin Hassett: That's where the unemployed people are is where the businesses are hanging on but where the businesses are prospering, then unemployment rates are low. I think that where I disagree is that I think that we need to get a left in America that understands that capital can be their friend. Then we need to think about rules that we can adopt. Heres the final one, then I won't do a summary unless yours is so glorious. Suppose that we did something so that capital was really attracted to the US. I think that the economists in the room would stipulate that then the marginal product of workers in the US would go up. Suppose at the same time we did that, we did something like try to switch the Nash equilibrium to everybody's capital wants to go to the distressed communities. We did kind of capital, we're gonna attract capital and we're gonna do it with steroids. Then the concern that you have is that well that the higher marginal product is gonna be kept by the company, it's not gonna go to workers because you gave the chart, the marginal product of the wage is different.
Where I leave you is that I think the challenge for us is to think about what rules you could agree to so that when we do that, you're comfortable that American workers will benefit. I think if we do that then we'll see probably a much more productive policy debate. Thank you very much. So he doesn't have any rules to guarantee because I don't ...
Mark Kuperberg: You never know what charts to bring so I have a whole chart on the corporate statutory rate and the effective rate. Just a tiny point, the corporations that pay the lowest effective rate are mining and extraction industries. They can't move to Ireland, right? They can't actually drill for oil in Ireland. I think the low corporate effective tax rate is much more complicated than just people off shoring their profits.
Kevin Hassett: Right, in mining there are lots of special things.
Mark Kuperberg: Special deals.
Kevin Hassett: Special deals for exploring [crosstalk 01:28:32], you can actually Google, [inaudible 01:28:33].
Mark Kuperberg: The guys with the highest effective rate are computers and you think they would be able to move pretty quickly.
Kevin Hassett: But the thing that's interesting about the transfer pricing and tax literature is that anybody can play this game. Even the mining companies can say that the trick that they use to get more gas out of that well is something developed by their team in Ireland. Then when they use that trick, they have to mail money to Ireland as their return on that intellectual property. That's why the corporate revenues in the US are so low. With that, I don't think that we're ever going to ... If we don't address that and we only do education, then we're gonna leave the how do we get capital back here to workers products go up, that we're gonna leave that unaddressed. Shall we close?
Mark Kuperberg: Sure.
Kevin Hassett: Do you want to close, Paige?
Paige Willey: Sure. So you have no concluding arguments to make etc etc?
Kevin Hassett: I think that's correct.
Paige Willey: All right.
Mark Kuperberg: I'm good.
Paige Willey: Well, marvelous. I guess I would first like to thank our speakers for their time and for their knowledge. We also thank you for letting us sensationalize your ideological differences for the sake of advertising this event. Thank you to our audience for filling this cinema. This is beyond our wildest dreams for such an event and it's really encouraging for the future so thank you to all. Would you like to remain to chat with people?
Mark Kuperberg: Yeah, sure.
Paige Willey: Okay, excellent. Well, with that being said, thank you so much everybody.
Kevin Hassett: Thank you Paige, thank you all for coming.