Galbraith on Inequality

James Galbraith of the University of Texas and author of Inequality and Instability talks with EconTalk host Russ Roberts about inequality. Galbraith argues that much of the mainstream analysis of inequality in the economics literature is flawed. Galbraith looks at a variety of different measures and ways of analyzing income data. In the podcast he focuses on how much of measured inequality is due to changes in specific counties or industries. Other topics discussed include the state of economics in the aftermath of the Great Recession and the importance of the government safety net and other social legislation.

Explore audio highlights, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Apr 29 2013 at 7:25am

Galbraithinequality.mp3 could not be saved, because the source file could not be read. Try again later, or contact the server administrator.

Am I doing something wrong or has this week’s episode not been uploaded to the server yet?

Apr 29 2013 at 8:21am

Same for me. Not showing up on iTunes either.

Lauren [Econlib Editor]
Apr 29 2013 at 8:51am

Sorry folks. The server we use for the mp3 files seems to be down. I’ve contacted the tech person.

The file was uploaded at 6:30 a.m. and was working at that time as usual. The server seems to have gone down soon after that.

I’ll keep you posted.

Frederick Davies
Apr 29 2013 at 9:19am

Have you actually thought of sharing the MP3s using Bittorrent? It would make it safer against downed servers.


Frederick Davies
Apr 29 2013 at 10:13am

It seems to be back now.


Lauren [Econlib Editor]
Apr 29 2013 at 10:46am

Yes, it’s back now.

We apologize again for this morning’s technical download delays. As most of you know, it’s rare for us to have any downtime at all on EconTalk. This was one of those rare moments when there was a confluence of events.

Thanks for your patience. We hope you enjoy this and our other podcasts!

Justin P
Apr 29 2013 at 12:04pm

What would be the effect of a higher minimum wage on the incentive to bring low-wage immigrants into the market? The answer to that is that if you have a job which is paid decently enough so that a documented worker, a citizen or permanent worker, will take it, then you have no incentive to bring in an undocumented immigrant to hold that job. Because you couldn’t pay that person a cut-rate wage. And that is the reason why this is attractive to a certain type of, I think, very thoughtful conservative, who are very concerned about maintaining the American labor market for American workers. That in fact it would discourage the use of brokers and shady labor contractors to bring in people to fill jobs at cut-rate wages. And they’re right about that. I think it would have that effect.

Two issues…
1: The fallacy that because something is illegal, people won’t do it. If making something illegal (paying a below mim wage) caused people to stop doing it…there would be no crime…etc

2: Still assuming that businesses and consumers would support that wage, assuming no under the table pay schemes. A clothing shop for example…surely they’d still need a person on hand for CS but they could also substitute capital for other aspects of the business (inventory, any inhouse bookkeeping could get contracted out, check out could go self-service like at Grocery stores, etc.) It seems like people like Galbraith don’t realize that there are entire sectors in the buisiness community that are always looking for was to cut costs (Quality)…give them enough incentive and they’ll cut out labor as well. People in QA already look for ways to take the human element out anyway, since labor is the biggest source of variation and quality issues.

In my industry…we use labor to stack pallets, because right now it doesn’t make economic sense to buy an automatic palletizer….raising the min wage to oh say $12 bucks an hour…guess what?!? That’s 5 people with no job anymore. That’s no more possibilities of getting hit with a Sec5(a)(1) General Duty clause fine for ergonomics, that’s a lower insurance premium for taking out an at risk job…

Justin P
Apr 29 2013 at 12:23pm

Guest: We had private charity, we relied on private charity, up until the creation of the Social Security system in the 1930s, and the reality was that most old people didn’t live very long. And I’m enough of an economist to believe that when you pay people to do something, they’ll do more of it. And what Social Security does is to pay them to stay alive.

You can really see the economics hat being thrown to the wayside and the pundit/advocate hat in full force. Is there NO other possible explanation as to way life expectancy was lower in the 30’s than in the 70’s?

Kudos to Russ for keeping his tongue cool. Your a better man than I am.

Apr 29 2013 at 1:10pm

It’s funny Galbraith uses the phrase “I’m enough of an economist…” when he goes on to make a patently non-economic analysis.

His credentials as an “economist” were challenged after another interview he gave several years ago, here:

Adam Baum
Apr 29 2013 at 1:15pm

This guest made one assertion which gives the discussion any substantive value, that is that “means testing” social security would be “cumbersome” and duplicative. I might add as a person who despises stealth taxation, I despise anything that conditions the receipt of benefits on other income or wealth.

“Means Testing” should be opposed by anyone in interested in fair, simple, transparent and efficient taxation. Additionally, if it is based on wealth, rather than income, it seems to expand the government’s capacity to tax (to wealth) without allowing for Constitutional authority. Quite frankly, I do not know why Russ would ever consider stealth taxation, with its implications for bad governance and economic disincentives to be a fair price to “fix” Social Security and Medicare. I would make the same suggestion to Russ as I would to Warren Buffett. If you are taxed inadequately, feel free to cut a check to the Treasury. They will gladly cash your check.

However, the rest of the discussion by the guest was wanting. As is typical of the left he discusses income distribution without any notion of compositional turbidity.

When he discusses the minimum wage, his assertion about the lack of political assertion in the UK is not an economic point. Ther world is full of examples of politically popular but economically stupid policies.

Of course, it is in this sort of defense of this statist shibboleth that he reveals it to be what it really is-a matter of social philosophy for which no supporting evidence is necessary and no contraverting evidence is possible.

Beyond his glib summary of the body of evidence regarding the MW as supportive of a (higher) minimum wage, he seems unwilling to concede that their might be ANY tradeoffs to increasing the MW.

In summary, he seems like a man best described by the phrase “the apple doesn’t fall far from the tree”. He may do more (and by this I mean any) empirical work than his late father, but it seems pretextual-something to provide a veneer of scientism to advancing positions inculcated from his father.

I am reminded of the following quote from his father’s novel “A Tenured Professor”. It is inapplicable to the Galbraiths now, only because the guest recent passed into his sixties.

“Leading active members of today’s economics profession, the generation presently in their 40s and 50s, have joined together into a kind of politburo for correct economic thinking. As a general rule — as one might expect from a gentleman’s club — this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen.”

I suspect it was written in a mirror but completely unaware that it was an indictment ofs much of the authors fellow travellers as it was his opponents.

Adam Baum
Apr 29 2013 at 1:20pm


“lack of political assertion”

should be:

“lack of political opposition”.

“indictment ofs”

should be:

“indictment of”

“recent passed”

should be:

“recently passed”

authors should be author’s.

Apr 29 2013 at 3:42pm

This was a very interesting podcast. I had great curiosity about whether there was any “common ground” between Russ and Galbraith… and, if so, what it would be.

The answer to that question was the discussion on the limitations of analyzing inequality by focusing on changes in median income.

Galbraith’s focus on unemployment as the driver of inequality made a lot of sense, for this reason:

Free market economists tend to oppose heavy regulation of the workplace, such as minimum wages, legal restrictions on the voluntary contracting between employer and employee, etc. Rather, they argue that key proctection for an employee against unreasonable actions, policies, etc. from their employer is to quit their job (or not take it in the first place). Though I’m not a libertarian, I think it is correct that this – the ability to quit – is the ultimate piece of leverage that an employee has at their disposal to improve their working situation.

But what this means is that the state of the labor market has a huge impact on the employee/employer balance. We can see this by the huge collapse in the number of quits in 2009. The most common reason why people quit their job is to take a better job. A drastic fall in the number of quits suggests that either people are suddenly much, much happier with their jobs… or that it is much harder to find a new job and therefore employees have less power to improve their employment situation.

Anyway, this is what I thought about when Galbraith pointed to slack labor market as a driver of inequality. And it is a reason why I, like Bryan Caplan ( would like to see more focus on the labor market from free market economists. So many of the problems that lead to ineffective regulatory “solutions” would, to a great extent, solve themselves if we had a tight labor market.

The other key piece of the puzzle, which Galbraith mentioned, was the insecurity issue. As someone who has been involuntarily unemployed a couple of times, I can tell you it’s a lot harder to build up savings (for emergencies, retirement, kid’s education etc.) than it is to burn through them during a layoff.

I don’t know if the data bear out Galbraith but intuitively it makes sense that bad labor markets drive inequality and lead to many of the problems that the government tries to solve (or pretends to try to solve) through intervention.

To me, this is the great opportunity offered by Scott Sumner (to cite a previous podcast guest). To the extent that his suggested monetary policy would improve the labor market, it would be of greater benefit to employees – and do more to limit inequality – than virtually all of the government regulation of the workplace.

BTW, I think a podcast with Bryan Caplan on this topic (see post I linked to above) would be great.

Apr 29 2013 at 4:46pm

“But they would also experience customers with more money coming through the door. And my view, as a matter of employment theory, is that businesses hire more workers when they need them. If they have more business and they are expanding, then they’ll hire more people.”

These ideas never make sense to me. If increasing wages increases demand then why don’t profit seeking employers just raise wages immediately they would never go out of business!!!!

Kount von Numbacrunch
Apr 29 2013 at 6:44pm

I thought Professor Galbraith made some valuable points regarding the harm arising from expanding credit/debt, the financilization of the economy and the prevalence of widespread, unpunished fraud.

I’d like to recommend an interview with William Black of UMKC. I heard an interview with him on the gold money podcast some time ago. He helped prosecute fraudsters in the ’80’s and ’90’s and has some good observations to share.

Apr 29 2013 at 7:38pm

Unions support minimum wage hikes because it justifies their own perpetual claims for more. In a highly unionized society like the UK, which he uses for support, increases likely make little difference since there is chronic high unemployment. In a period of high unemployment minimum wage hikes probably have little effect since those who would earn it are the ones not being hired anyway, as in our current condition. Galbraith’s minium wage position denies a very basic principle of economics.

Really just had this on in the background and will be reviewing it. Thanks Russ.

Ken P
Apr 29 2013 at 10:57pm

I understand people wanting to increase the minimum wage on the grounds that it provides some floor level of wages. However, I can’t imagine people actually believing that it won’t have any bad effects and not seeing that it will fall on exactly those who are the least employable. At higher wages, employers will attract and choose different workers.

I agree with him in not wanting to means test Social Security, tho. For one thing, it would disincentivize saving.

Jonathan Andrews
Apr 30 2013 at 2:54am

As always, a very interesting and informative discussion, thank you.

Firstly, just a comment on James Galbraith’s assertion about the minimum wage discussion in the UK (where I live). It doesn’t seem to have had much impact on wages because it is low. Particularly in London, there are few people who are working at minimum wages (for what it’s worth, the lady who cleans our flat every week is paid by us almost 50% above minimum wage). It’s pretty much off the political agenda perhaps because the squeezing of the Government’s budget has affected the poor and the right is unwilling to take on this challenge.

Secondly, I don’t know if this means much anyway but during the 1970s, powerful trade unions did push up wages and the UK did struggle economically. I would assert that their imposition of an effective minimum wage was a key factor in the rise of unemployment through that decade. However, in fairness, it’s a pretty murky picture.

Finally, I don’t understand what Ralph is on about; the UK in the 1970s might have been described as a highly unionised society but, you may have heard of a lady, called Maggie Thatcher, who had a very significant impact on that. Also, “chronic unemployment” according to the CIA world factbook, UK unemployment 7.8%, US unemployment 8.2%

Apr 30 2013 at 7:26am

I’m a relative newbie to econ talk and this felt like the first talk I’ve listened to where Russ was talking to someone who disagreed with him on many subjects.
If the subject of minimum wage in the UK comes up again I would really like it if you could talk about tax credits which, as I see it, are a subsidy to businesses which pay low wages (other opinions are available.)
To anyone who is interested the minimum wage in the UK is currently 6.19 GBP which is 9.78 USD which we consider too low, there is currently a campaign to get businesses to pay a living wage of 7.45 GDP or 11.54 USD.

I really like the podcast 😀

Shayne Cook
Apr 30 2013 at 7:54am

Thank you both for a very interesting discussion.

With regards to recommendations of a higher (or lower) minimum wage, it has always seemed to me to be grossly inefficient and patently absurd to have a U.S. Federal/National minimum wage – at any level.

Especially given Dr. Galbraith’s work measuring the relationships in wage disparity (and unemployment) by county (and economic sector), it would be vastly more efficient to specify and control minimum wage at County Government level, rather than Federal level. The only Federal intervention into wage rates should be that it mandates all County Governments to have and maintain a minimum wage within the County’s legal jurisdiction. Additionally, each County should be given flexibility and responsibility to adjust it’s required minimum wage up (or down) dynamically, as County local economic conditions – wage disparity and unemployment rates – warrant.

Simply elevating the U.S. Federal minimum wage to $9 per hour, or $12 per hour, or any other level, will simply drive migration – a migration of ostensibly productive people from the Counties that DO NOT have the local economic vitality to support that wage level, to those counties that DO have that vitality.

Apr 30 2013 at 8:40am

Mr. James Galbraith’s positions in this podcast are so deeply flawed on so many levels that it is difficult to choose where to begin a critique.

He said, “I’m very much in favor of a strong minimum wage, which should be substantially higher than it is now. And the reason for that is that it helps to set a standard for the performance of the labor market. Which I think is something that we observe very clearly, particularly in the part of the country I happen to live in, is really undermined by allowing a low wage standard to prevail for workers at the low end of the scale. What you get is a market which becomes very insecure, relatively unsafe, very hard to monitor and protect [?] safety and health standards and causes a lot of other problems that would basically be greatly reduced if you had a much stronger minimum wage.”

He appears to believe that he is smarter than the market. This is a common and easy logic trap that begins with the mistaken assumption that the arbitrary number he produces for a commodity—in this case $12 for low wage labor—is equivalent [he actually believes it is superior] to the price produced by the market for low wage labor.

In reality, the market price for low productivity labor is the result of the interactions of hundreds of millions of people each making decisions based on their specific circumstances, whereas the number Mr. Galbraith chose is a single number pulled from the mind of a single person. So where a market price is the depth of the ocean, Mr. Galbraiths “minimum wage” is a tiny drop of water in a glass somewhere on land which presumes the depth of the ocean from a great distance.

Dr. Roberts has been asking many of his guests what they think about the condition of the present field of economics. My answer to that question is that it asks too little of its participants. Ask Mr. Galbraith, for example, to start a company that implements his ideas. His company, presumably, would pay its low wage workers $5 dollars more per hour than the market rate, guarantee health insurance for all its workers, guarantee any former-workers health insurance once they reach age 65, and pay its former-employees who are under age 65 a “safety net” wage and provide them health insurance until they find work elsewhere. Obviously, he would be bankrupt in under a month and out on his face in the street. The market would relieve him of his assets quickly because he is so clearly incapable of managing them efficiently. Once his ideas were properly vetted in such a real world environment, a University could then properly evaluate his teaching credentials and we could properly ponder the likely outcome of applying those same ideas in all businesses through legislative action.

Noah Carl
Apr 30 2013 at 3:25pm

Near the end Galbraith says, “the wage rate is not an important determinant of whether firms move to a more advanced technology because they’ll make money by moving to that technology even if they’re paying a relatively low wage.” Here he mistakenly assumes that the emergence of labour-saving technology occurs at random, whereas in reality it is endogenous to the wage rate. If the government suddenly increased the minimum wage by a large amount, firms would have a strong incentive to invent new labour-saving technology.

Apr 30 2013 at 7:28pm

Jonathan: We agree on all points. Good to hear it from someone in the UK. Unions (labor market monopolies) and minimum wage laws cause unemployment. Thatcher (R.I.P.) was a gift from God. And yes we currently have a state of chronic high unemployment in the USA. You can raise the minimum wage all you want if people aren’t being hired at that wage. Unemployment hits hardest those who would earn minimum wage. An engineer can sweep his own office and dump his own trash. We agree. I wasn’t knocking the UK; Galbraith used the UK as evidence for his claim.

Apr 30 2013 at 9:50pm

The most useful thing here was Russ’ example of how to interact with someone like Galbraith. When I was at UT he was the example everyone in the engineering and business programs used to explain why Econ was in the college of liberal arts, i.e. how to reconcile the general worthlessness of a UT BA with the actual skill learned in Econ. Presumably, Russ doesn’t have a heart of gold, so the rest of us can learn from his good manners.

Cowboy Prof
May 1 2013 at 1:49am

This was a jaw-dropping interview.

I particularly enjoyed Prof. Galbraith’s perpetual wealth machine. If we raised the minimum wage to $12 per hour, then there would be more people with more wealth to buy stuff to justify higher wages.

My only question is why only $12.00? Why not $12.01? Or $47.00? Just think of how much stuff people could buy with that wage!

And if we doubled Social Security payments to retirees, it is very likely we could get the average lifespan to 135 years.

May 1 2013 at 10:03am

[Comment removed pending confirmation of email address. Email the to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]

May 1 2013 at 1:50pm

Is this economics to institute one individuals arbitrary preferences over those of an another? It is certainly not a moral thing to do. And that is exactly the theme of the arguments for Social Security, Medicare and Minimum Wage made by the interviewee. He argues that because there is some measurable good from these programs that the rest of us should have to tolerate them and in the case of Social Security and Medicare pay for them.

I really wish that the interviewee had been asked if it is all right to use violence to establish these preferences? Is it all right to put a person in prison and steal their property if they refuse to pay for the health care of some old person who did not bother to save money for this purpose? Is it moral to steal property or imprison a person who freely contracts with another for labor but pays them less than the arbitrary $12 per hour?

I am disappointed in the Minimum Wage discuss that focused on aggregates but not on the Marginal Employee. It is the Marginal Employee who is most negatively affected by this dumb idea and it is not just about entering the workforce but about the Marginal Employee entering into a contract where that employee believes that they are better off than not entering into the contract. Also there are lots more people than just bum children of wealthy folks that work at the Minimum Wage.

Dave the Marine
May 1 2013 at 2:13pm

Some have already stolen my thunder about the minimum wage. I to failed to see how it would cause a decline in illegal immigration as it would seem to encourage them to stay “undocumented” in order to keep their employment.

The other point is that if 12 dollars is good wouldn’t 50 be even better if it in fact didn’t cause businesses to do other things? I think his pushing of the minimum wage was an effort to try and keep his friends from “pushing away from him on the blanket at the picnic”, it’s only purpose to make him feel better about himself.

Doug F
May 1 2013 at 2:33pm

You have to love this:

“$12 is my number.”

My number is $905.80. That would provide annual wages of $1 million (*). Imagine how many “customers with more money coming through the door” businesses would experience! Everyone wins!

(*) Assumes 46 weeks worked, 4 days a week, 6 hours a day. Millionaires should have some time available to enjoy their wealth.

May 1 2013 at 4:32pm

I’m glad James and Russ actually argued. I’ve enjoyed the recent podcasts where Russ and the guest have agreed, but it was great to hear some contention.

Derek Lanham
May 2 2013 at 12:31am

Capital versus Labor… I sell software in the US and in India (as well as other places), and the labor rate makes a very distinct impact on the ROI, and therefore the investment. It seems James concept of raising minimum wage and that not impacting employment is not sound. If minimum wage went up, I would sell more software due to the labor savings impact of my software, and my clients would hire fewer people. I have lost several deals where clients were paying their employees $8 or $9 per hour, but other firms paying $15-20 makes my product a much more compelling ROI.

Greg G
May 2 2013 at 10:59am

I am not an advocate of a higher minimum wage because I don’t think we are close to being able to determine what an optimal minimum wage is. And the optimum level will be different in different markets.

Nevertheless, there is, at some level, an optimum minimum wage. Some here think a zero mandatory optimum minimum wage would be the correct level. That seems too low to me but perhaps they are right.

Several commenters here have made the argument that if someone thinks that a rise in the minimum wage to $12 an hour is good, then they must think that a further rise to some preposterously high level is even better. That simply does not follow. Believing the optimum level of anything is higher than the existing level does not in any way imply that you believe there is no upper limit on the optimum level.

An equally bad argument offered in the comments is that, if a businessman thinks that a higher minimum wage for everyone would have positive economic effects, then that belief should cause him to believe that he could get a better result by raising the wages he pays by himself in the absence of a higher minimum wage. This also does not follow.

There are enough good arguments against a higher minimum wage. You only weaken your position when you make these bad arguments.

Aaron Zierman
May 2 2013 at 2:51pm

@Greg G

I’ll agree with you that there are perhaps better arguments to be made. Most certainly better ways to make those arguments.

However, I’m curious… what exactly do you feel is a “good” argument for minimum wage?

May 2 2013 at 4:38pm

Greg G wrote, “An equally bad argument offered in the comments is that, if a businessman thinks that a higher minimum wage for everyone would have positive economic effects, then that belief should cause him to believe that he could get a better result by raising the wages he pays by himself in the absence of a higher minimum wage.”

Greg, Perhaps you can accept the argument in a simpler form: “What is clearly wrong for an individual is VERY unlikely to be good when forced up everyone.”

Still think it is a bad argument?

May 2 2013 at 6:22pm

Several commenters here have made the argument that if someone thinks that a rise in the minimum wage to $12 an hour is good, then they must think that a further rise to some preposterously high level is even better. That simply does not follow. Believing the optimum level of anything is higher than the existing level does not in any way imply that you believe there is no upper limit on the optimum level.

What is optimum? Who is getting the benefits of this optimum level? What are the criteria to determine it? I argue that no such criteria exists as there is no economic theory that suggests that intervening in mutually agreed upon labor contract makes that transaction more efficient and makes both parties better off. There is a lot of economic theory, the Austrian one in particular, that suggests the opposite is true. Moreover, if you can provide the criteria to determine the optimum Minimum Wage and be able to calculate that number, then you are still left having to prove that your optimum condition is better for those who were happy with the terms of a contract outside of the Minimum Wage. And the only level of Minimum Wage that is guaranteed not to make at least one party in the labor contract worse off is: 0.

May 2 2013 at 7:07pm

I often feel I live in a parallel universe, and this Econtalk podcast is yet one more unfortunate example. Russ does his best here, as well as on numerous other occasions, to suggest that a minimum wage will have significant ripple effects (fewer jobs, capital substitution, etc.) and yet the responses here to such an observation are typical of other academics and uninformed pundits. In this case, the mindless prattle includes the following appallingly illogical possibilities: (i) there will somehow be increased spending (as if the extra wages don’t come from other cash sources and instead fall from heaven) so that everyone is actually better off; (ii) that marginal choices (e.g. technological substitution) somehow would have already been made if desired, and increasing the cost of inputs won’t change those decisions; (iii) some “studies show” that increasing the minimum wage has neutral to positive outcomes (as if there weren’t tons of studies and data to the contrary as well). How does this silliness continue?

Russ, you might point out that anyone who has run a business, been part of a business, or who can think like a business-person knows immediately that significant changes would be made in the face of a massive labor cost increase. Do these academic economists have any sense for how businesses actually operate (no offense to Russ)? The P&L for a typical McDonald’s franchise has 20% cost of sales in non-managerial labor (i.e. at the minimum wage typically), and has a 5% net profit margin. A minimum wage rise from $7.75 to $10.10 (current proposal floating in congress) wipes out the ENTIRE profit of the franchise, and then some. The costs can’t get passed through as increased prices, at least not in any real-world market (other food choices, home cooking options, etc.) This isn’t solved by some appeal to Labor getting its “fair share”, or nonsensical assumptions that some Keynesian multiplier will save the franchise owner with increased demand. No, the manager will radically, and I mean radically reorganize with significantly less labor, or will simply go out of business. That might not be what the economist’s model says, and perhaps there are peer-reviewed academic papers saying it won’t happen, but anyone actually operating a business of any type knows this fact intuitively, and from all prior experience.

May 4 2013 at 1:39pm

Guest: We had private charity, we relied on private charity, up until the creation of the Social Security system in the 1930s, and the reality was that most old people didn’t live very long. And I’m enough of an economist to believe that when you pay people to do something, they’ll do more of it. And what Social Security does is to pay them to stay alive.

Since the Amish and mennonites do take part in the SS system one could test his hpothesis that SS extends life.

May 4 2013 at 1:44pm

I am sympathetic to his goal of narrowing the income and wealth gap but Social security, medicare and minimum wage laws seem like absurd and expensive ways to reach the goal. That makes me think that he is for some reason an apologist for our politicians.

Why not replace those with a minimum basic wage guarantee?

May 4 2013 at 2:17pm

Why does no one mention the old idea that accelerating inflation helps the wage earner and the poorer people and borrowers and that decelerating inflation helps the lenders the rich and capital owners? Has it been completely disproved?

Scott G
May 4 2013 at 2:48pm

Here’s my favorite part of this week’s Econtalk.

Galbraith: It’s a very reasonable system.

Russ: Well, it [social security] raises the burden on you. Because you have less money for your own retirement.

Galbraith: Well, but it lowers the burden on people who would otherwise have a significant burden. So it seems to me that it’s a very fair system. Which is why it’s so popular.

Russ: I don’t think its fully understood. It might be popular even if it were understood. I’m willing to accept that.

Galbraith: People do understand it, and that’s why they like it.

Russ: What percentage of the U.S. workforce thinks that their Social Security “contributions” that come out of their paycheck every week are put aside for them? I think it’s a nontrivial number. I’m sorry, I could be wrong.

Galbraith: That’s a polling question.

Russ: It’s a rhetorical question.

Galbraith: It’s a polling question; I’m not a pollster.

Russ: Let’s move on…

Note the confidence with which Galbraith asserts the popularity of Social Security, but then when asked a simple question to back up his claim, he quiets down. He refuses to even guess at the percentage of people that understand how Social Security works.

Greg G
May 5 2013 at 2:25pm

I thought I had left an uncontroversial comment above. Apparently not. I’ve been away for a few days without a computer so apologies for the delay to those who asked me questions in response. I do think that many of the responses have the flavor of not being able to take yes for an answer.

The very first point I made was that I am not an advocate for the minimum wage. So I am a bit puzzled why you would expect me to supply you with good arguments in favor of it.

But, in an attempt to comply anyway, I would suggest that you consider the fact that we have had many previous times when the minimum wage was increased (and in some cases to higher than current inflation adjusted rates) Many of them were followed by periods of healthy employment and economic growth. Now that doesn’t prove that the rise caused that growth but it sure is good evidence it didn’t prevent it. You never want to find yourself arguing that something can’t happen…that has already happened.

Yes, the reformulation of that argument where you jettison the nonsensical strawman is indeed a big improvement…which was my point to begin with .

You make two contentions. The first is that we have no good criteria that would allow us to determine the optimum minimum wage.

The second is that you have a criterion which allows you to determine with complete confidence that the optimum minimum wage is zero.

It is rational to hold either of these positions…but not both at the same time.

I will accept your claim that, in the “parallel universe” that you speak of, a rise in the minimum wage rate might be the end of MacDonald’s as we know it.

Here in this more mundane universe however, MacDonald’s has survived and thrived through many increases in the minimum wage rate. I am always amazed at how consistently theory trumps reality in economics. The Multiverse: It’s not just for physicists anymore.

Hudson Cashdan
May 5 2013 at 3:42pm

I find it curious that Galbraith chooses 1980 (Reagan) and not the early 1970’s (end of Bretton Woods) to demonstrate the economic distortion caused by financialization. The choice of dates allows him to direct blame towards his political pet peeve and away from any interpretation that would lend support for a more restrained monetary regime (and likely smaller govt budget).

And why care about inequality irrespective of costs? US is large and diverse- if a family in the middle earns 40% less than the family on the coast, is that a problem if their cost of living is 50% less? If we studied the income necessary to maintain a certain quality of life throughout the country what would it show? I’d guess we would likely find a large disparity of nominal incomes but among a population with roughly the same quality of life. What would be more interesting to see would be the evolution of income distribution within regions whose cost of living is largely similar (same dwelling pool, grocery stores, barber shops, day care, insurance costs, etc.). This is not easy to do but would be more informative.

Simon Cranshaw
May 5 2013 at 11:59pm

For guests who support the minimum wage, I’d like to ask if they feel unpaid internships should also be illegal and if not, why not.

Aaron Zierman
May 6 2013 at 10:29am

@Greg G

You stated:

“I am not an advocate of a higher minimum wage because I don’t think we are close to being able to determine what an optimal minimum wage is. And the optimum level will be different in different markets.
Nevertheless, there is, at some level, an optimum minimum wage.”

I guess that this would be why I was confused. You stated you weren’t an advocate of a “higher” minimum wage, but then you also stated that there is an optimal minimum wage.

And your attempted response was still nothing in favor of what this “optimal” minimum wage would accomplish. With the one argument you made, it could easily be pointed out that without said raise in the min. wage, economic growth would have been even more pronounced.

I guess my real problem is that I have a hard time really understanding what the goal of even an “optimum” minimum wage would be. Also, how could it possibly be measured for success?

Greg G
May 6 2013 at 2:02pm


The goal of any optimal policy is simply to achieve better results than a suboptimal policy would. With the minimum wage controversy the issue is what level is best for low wage workers and the overall economy. It is indeed very hard to isolate and measure that, which is a point I made in the first paragraph of my first comment.

Right after the part of my comment that you quoted, I conceded that it might be possible that the optimal minimum wage could be zero. I’m not sure why any of that caused you to be confused but I have reached the limit of my ability to make it more understandable.

Of course you are right that you (or anyone else) can “easily” explain a failed policy prediction by making some assertion about counterfactuals. That’s the problem. That is exactly why that form of argument has so little value. Anyone can do it anytime.

Russ recently put up a video of a debate about the minimum wage on Cafe Hayek. That video is an excellent place to look for anyone who is unaware of what the claims and theories on each side of this issue are.

Aaron Zierman
May 6 2013 at 7:56pm

@Greg G

I have listened to that debate, actually. I found it very informative. To be honest, I think we are talking in circles here, and that we most likely agree in our viewpoint of MW.

I think that a more clear way to restate what you were saying is by simply saying that “optimum” MW is best set by prices in the market, not by an arbitrary dollar amount set by a government for all markets.


Julien Couvreur
May 7 2013 at 2:14pm

With his “being enough of an economist” and all, I wonder how Galbraith reconciles his views on social security and the minimum wage.

He stated that paying people for something encourages them to do it (social security and healthcare payments keeps people alive longer). But he supports the minimum wage, which is charging people more for hiring low-skilled workers. Yet, he doesn’t seem to this presumably discourages them to do it.

May 8 2013 at 11:38am

Kount von Numbacrunch,

There is an EconTalk with William Black (he’s one of the best guests I’ve heard here). Here’s the link –

Adam S
May 9 2013 at 9:47am


Great podcast, one of many where I felt I learned a lot.

However, the temper tantrum you threw when discussing the welfare state was extremely condescending and unprofessional. You strongly disagree with Galbraith’s assertions. Great! I disagree with a lot of them as well. But offer some counter examples based on hard evidence instead of going directly into angry mode. I’m positive there are plenty of facts to support your point of view.

That exchange really lowered the quality of this podcast to me. It reinforces the stereotype that libertarianism is the domain of angry, snarky people (the “yeah, way to go get him, Russ!” comments listed here aren’t helping either). I’m neither angry nor snarky, but I’m very attracted to libertarianism. So if I might make a suggestion, could you tone it down a notch in future contentious debates? You’re a brilliant guy, but the snark isn’t helping your case or helping to promote your ideology.

Roger Powell
May 9 2013 at 12:42pm

Adam S

I just listened to the podcast and I would hardly characterize Russ’ response as a “Temper Tantrum”. It’s true that the discussion got a little contentious and once or twice I was frustrated with both of them for interrupting each other – but on balance I thought the discussion remained civil despite the fact that they have very different views on several important topics.

The first part of the interview was more interesting to me — Dr Galbraith has informative things to say about income and inequality. It seems like he’s spent quite a lot of time with the data and his conclusions are thought- provoking.

I was a little nonplussed when he drifted out of his area of study and adopted some positions that didn’t seem well thought out. I knew the one on the minimum wage was sure to get a response from Russ. (BTW – Jim Dorn, Russ’s partnet in the recent MW debate just put up this: )

In general, I think Russ does an admirable job of interviewing guests with whom he may have some substantial disagreements on many issues. He is good at finding common ground. I much prefer that to an “echo chamber” where all we would hear from would be Hayekian viewpoints.

May 10 2013 at 11:37am

I agree with Roger Powell that Mr. Galbraith was reasonable, informed, and interesting when he discussed his research on income inequality. How fascinating that the change in average income distribution–to the extent that there was change–was the result of the credit bubble. If that is true–and it certainly sounded reasonable in the podcast–then the following chain of reasoning is worth discussing:

1. Changes in income distribution got larger because a credit bubble massively inflated sectors of the economy where borrowed capital is heavily utilized.
2. The credit bubble was largely the result of the lending practices created and nurtured by Fannie Mae and Freddie Mac.
3. Fannie Mae was born under FDR’s New Deal in 1938 as part of the “National Housing Act.” Freddie Mac was born in “The Emergency Loan Finance Act of 1970,” which was passed in Nixon’s first term with Democratic majorities in both the House and Senate.
4. So the Democratic Party, which runs on a platform that purports to reduce income disparity, wrote the legislation that increased income disparity–with a nod from the socialist republican president known for price controls and Watergate.

(Wikipedia was the source of the dates above)

mike connors
May 19 2013 at 8:54am

Non economic observation. I listen to most of Russ’ podcasts and can’t remember a guest who was as listening challenged or who ranted off topic as much. Way too many interruptions to suit me.

Greg Andreassian
May 21 2013 at 6:54pm

Listening to Professor Galbraith, I can not help but believe he has never worked in the real world, not even as a teenager.

May 24 2013 at 1:58am


That is a very interesting and convincing example of how a minimum wage rise could wipe out a typical McDonald’s restaurant. I would add that, by government definition, all those fast-food jobs at risk from a minimum wage hike are “manufacturing” jobs.

And yet the expert guest economist assured us that “most manufacturing is so far above the minimum wage it’s not going to be affected by this.”

Perhaps he doesn’t know that mopping floors at a burger joint is officially “manufacturing.”

About this week's guest: About ideas and people mentioned in this podcast:

Podcast Episode Highlights
0:33Intro. [Recording date: April 16, 2013.] Russ: Before I get started I want to mention I recently hosted an event at Butler University that was co-sponsored with Liberty Fund. The event was called "Capitalism, Government, and the Good Society." Richard Epstein, Mike Munger, and Robert Skidelsky spoke on the topic and then I moderated a conversation between the three of them. Today's guest, James Galbraith, was supposed to make that a quartet, but weather intervened and he wasn't able to arrive in time for the program. There will be a very nice video of the event, produced by John Papola. When it's available we'll put up a notice at the EconTalk home page and I'll tweet on it. I remind you that you can follow me on Twitter at EconTalker. And we may get an EconTalk podcast out of it. But in the meanwhile I'm happy to have scheduled this interview with James Galbraith so that listeners can get a sense of his worldview. So let's get started.
1:33Russ: Our topic today is inequality, but we're going to get into some other issues as well. Now, James, you have a very different view on the topic compared to either what I would call the mainstream view on either the left or the right. Many on the left argue inequality is partly caused by a lack of progress by the median worker; since the 1970s, the average person has been left behind; and so it's not just inequality that we need to worry about--it's stagnation. On the right when we talk about inequality the argument you often hear is that--and this is certainly a common view among many economists, left and right--that the growth in inequality over time is due to technological change, differences in productivity that have been biased against low-education, low-skilled workers. Now, what's wrong with those arguments in your opinion? Guest: I think, particularly in the case of the second, they start from a hypothesis which was framed before there was any factual foundation, a body of evidence against which one could judge it. Russ: It sounds good. Guest: The way you've characterized the first position, it's really not about inequality at all, but rather tying up the term into a larger set of concerns about the stagnation of wage growth. And I think that's a substantially different set of issues. How does my approach differ? I've been working on this for, oh, between 15 and 20 years. And from the beginning I realized that if you wanted to speak sensibly about the subject you had to enrich the available body of measurement, in order to be able to get a clearer picture of what's been going on, both in the United States and the wider world. And that's been the foundation of now three books on the topic, of which Inequality and Stability is the latest. Russ: Well, let's take each of those claims of the left and right--and I certainly agree with you that the claim I attributed to the left does conflate inequality with what you might call middle class progress or middle class prosperity or the middle class, period. But I think in our debate, as a nation and out in the world, I hear that all the time. Those issues do get mixed together. It's unfortunate, because I think they are two different issues, but they do get mixed together. So let's start with this argument about technological change. It seems reasonable. We see, if we look at the growth of, say, income over time, measured by college or lack of college or high school diploma or no or part--no diploma but some high school--there are large differences in the growth rates over time in those numbers. Do you think those are important? Are those numbers wrong? Guest: I think the mistake comes from beginning the analysis by dividing up your sample population according to the reported educational credential, and then treating those groups as the primary units of analysis. Fundamentally that's not going to tell you--if it turns out that something else was decisive in differentiating incomes of people who happen to have these different educational credentials, this approach to the analysis is not going to allow you to discern that. And it turns out that if you start with a much more eclectic approach to the primary information set, to the classification, you can distinguish the things that are important from things that aren't. And there simply isn't any evidence that inequality is being driven by educational status as such. Clearly, it's quite possible, indeed the case, that people with higher levels of educational credentials also tend to be people who have access to kinds of employment and to kinds of asset holdings which will lead them to have very rapidly growing incomes and be the beneficiaries of, be on the winning end of a rise in inequality. But that's a far cry from saying that this is in some sense causally related to their educational status. It's not. Russ: So, you are arguing--let me stick with the standard argument for a minute. The standard argument is that as globalization has increased and as technological change has encouraged the information economy, people with high levels of education are particularly benefited by that move toward the information economy; people at the low end of the distribution are competing because of globalization with low-wage workers outside the United States. So they have trouble sustaining any wage growth. The high end is benefiting from the increased demand for their services. And that, I would say, is the standard economists' view. I have my own issues with it. Guest: Right. That view has been in circulation since the early 1990s, when it was advanced in a very prominent article in the American Economic Review. And, at that time--as I said, the evidentiary foundation for it was practically nil. What you had were some surveys, widely disparate times, showing that income inequality had increased between the 1970s and the late 1980s, for example. And it was very hard to know. First of all, this is data restricted only to the United States, so it's a very, from the larger standpoint of economic analysis, provincial perspective. But secondly, given that the information set was so limited, you really couldn't tell when the increase in inequality had occurred specifically or link it to the changes in the structure of the American economy over the course of the 1970s and 1980s. So what I did in the first book I did on this, which was a book called Created Unequal: The Crisis in American Pay, appeared in 1998, was to construct new inequality measures based upon data from the Bureau of Labor Statistics (BLS), Employment and Earnings datasets. Which enabled one to basically track out the rise of inequality in pay structures on a year-to-year basis. And it became very clear from that the rise in inequality was a temporally limited phenomenon--that things had been driven up very dramatically by the recessions of the early 1980s; that what people who lived through that period knew to be the dominant fact of the time, which was that a lot of well-paid blue-collar workers were losing their jobs, was in fact the thing that's most closely associated with rising inequality in the wage structure. And that's clearly--it's a deep stretch to link that to educational status. The fact was that they were well-paid, unionized jobs, all across the American mid-West that got wiped out in the surge--first of all in the recession and then in the surge of globalized trade that followed it. But mainly it was the recession of the early 1980s that you can see very clearly in the data.
9:32Russ: So let's--before we get to the larger picture that you have to tell with your data, I want to go to the argument that I mentioned earlier from the left. Which again is somewhat of a mainstream view, I think among many economists, left and somewhat to the right, which is that, putting inequality in itself to the side, that there has been middle class stagnation for the last 30 or 40 years. You are critical of that view. Why? Guest: I would say I'm skeptical of it. The median wage, as a technical concept, is a very slippery entity. One can easily imagine a world in which every individual has growing income from work, wage income, over their lifetime, as a result of seniority and promotions and so forth. And yet the median wage remains stagnant. And the reason for that would be that people at the high end, at the end of their careers, leave the workforce and retire. People who come into the workforce as young people come in at lower wage rates. So the population, the person who is at the median, is changing all the time. One of the things that did happen in the United States over the 1980s and 1990s is that you got a great many older white male workers who retired, left the labor force. Or were forced out--again, in the slump in the early 1980s in particular and then again in the late 1980s. And a great many people came into the labor force, mostly in service jobs, who were younger, predominantly, or more predominantly female, members of minority groups, and immigrants, all of whom were going to enter the labor force at relatively low, below-average wages. And the effect of that is going to be to pull the median, which is the middle, the pay to the 50th percentile, the middle worker, is going to pull that to the left. So you are going to have a situation in which the median is stacked--it's not necessarily reflective of any individual's experience. Russ: I make that point about every three episodes of this podcast and also at my blog, Cafe Hayek, but it doesn't seem to dent the mainstream. Nor has your critique of the standard technological change view. So I share in any frustration you have over this. Guest: Yeah. I don't think it's a political point, actually. I think that it just suggests that these very compact statistical representations of what's going on are not very informative.
12:55Russ: So, give us your view. How would you characterize what's happened in recent decades to the distribution of incomes in the United States based on the different pieces of work you've done? What's causal? And give us any stylized facts, too. Guest: Sure. Let's distinguish a couple of things. One of them would be the distribution of pay, which is to say what people get in return for labor for work hours, wages and salaries. If you isolate that element--and that's leaving aside the component of income that doesn't come from work, that comes from asset ownership--if you just isolate the pay from work you find that it tracks very closely to the unemployment rate. And the reason for that is that people who are, I suppose, like you and me, paid on a salary basis--our incomes don't vary very much with economic conditions. But people who are paid on an hourly basis and whose hours vary from week to week depending on economic conditions are very sensitive to the economic situation. And in a weak period their weekly earnings, which is what is actually being measured, tends to fall. And in a strong period tends to rise. And so the pay structure, as measured, which is really a structure of weekly earnings, tends to become more compressed and egalitarian when the unemployment rate is, let's say 4% or below. As it was in the late 1990s. You can see this very clearly in the data. Now, if you are looking at incomes, the picture is entirely different, because the picture is governed, the inequality of incomes is governed, by the contribution made by capital income. By stock options realizations and capital gains and related--also incomes paid by firms which are basically drawing on venture capital and paying out the proceeds of that kind of investment to their employees in hopes of breaking into new markets. And so you have incomes which are extraordinarily concentrated in a small number of sectors and parts of the country. The financial sector is always very important because it's the source of the funds and [?] the fees on all of this. And then whatever it happens to be financing at any given time is important. So in the late 1990s you see this in the technology sector. And in the mid-2000s you see this in real estate. And it shows up very clearly in the data, and it's not ambiguous about what's going on. But that income inequality which is driven by capital incomes is really reflecting the experience of a very small piece of the population. One of the things I do in the book is to isolate how many counties it would take to make this effect go away altogether, and the answer is: 15. Russ: Yeah, that's rather remarkable. And those 15 are concentrated, if I remember-- Guest: This is from 1993-2000, and these are--Manhattan--New York, NY--is always an important piece of the picture. And the other big piece in the 1990s is Silicon Valley and King Country, Washington--Seattle. So, it's, as I say, looking at the data and breaking it out in this way gives you a pretty clear and unambiguous picture of what's going on. Russ: Yeah, I found that fascinating, so let me just try to restate it. If you take 15 counties in the United States, and you take them out of the data, and these counties would be from--I would summarize it as where the financial and high tech sectors have a strong role to play in employment and wages-- Guest: in the 1990s-- Russ: You take those out of the data, then between 1993 and 2000 you see no change in equality in the United States? Guest: No change in income inequality measured between counties. Now some counties are very large and there are obviously increases in inequality that would still be within counties. But the component that exists between counties is a very important one. And you can isolate it in the data very easily. It tracks the overall inequality measure very well, say, something that's done from the Census. And you can show that the extent to which incomes [?] in a very small number of places, really driving the changes. Russ: So, going back to your earlier point, that was a time when unemployment was relatively low, and what was pushing the change in equality that did exist were increases in the demand for the services of people that were really good at computers and finance, right? Guest: Well, it's really--increases in the demand--a lot of these firms never developed markets. It's really the financing of the investment of those firms, and the incomes paid out from those investment flows that's driving it. Markets are developing at this point but not all of these firms, perhaps even not many of them, are actually making their money out of cash flow from the public. Russ: I'm thinking the workers, though, whose skills were in demand and whose salaries were being paid accordingly-- Guest: If you happened to be employed, and this is a tiny number of people, by one of these emerging firms that was a favorite of Wall Street at the time, of course you--people were falling all over themselves to bid for your services. But it was even better to be an owner of those companies or chief executive, because then you were participating directly in the rise of the stock prices. Russ: And that's at the very high end, presumably. Guest: Sure. It's at the top. These are people whose names we know. Because part of their corporate strategy was to advertise how rich they were. Russ: I often like to point out that we should care about why people get really rich, if we are going to worry about it all; and somebody who gets really rich by developing a great piece of software or a company that makes my life better or a basketball player I like to watch or a singer I enjoy listening to is different from a Wall Street exec who perhaps has done nothing productive and who has not made my life better. I would make that distinction. In that particular case, the 1990s, as you point out in your book, in the tech sector there was a lot of investment made that turned out to be somewhat valuable. Some of it failed of course, and those firms disappeared and their owners lost all their stock money. But others thrived and the ones that thrived tended to be the ones who made the world a better place. Guest: Uh, up to a point. I mean, one could also argue that some thrived because they had extraordinary protection of their patents. And other intellectual property. And that they managed to fight off the Justice Department's Antitrust Division very effectively. The identity of these companies is not a secret. Some of them are not that well loved by the customer community. Russ: Which ones are you thinking of? Do you want to-- Guest: Oh, gee, just guess. Russ: A lot of them, I love. I mean, I like Google, I like Apple, I like--I'd probably like Cisco if I knew enough about them. Intel. Some of them in the tech sector, yes, maybe not as loved as others. Guest: I think there's a large company up in Seattle that you haven't named which has at least a reputation of having an ambivalent relationship with its customers. Russ: Yeah, it's true. They are still here, though. Guest: They are indeed.
21:14Russ: Let's look across industrial sectors. A remarkable aspect of your findings that you didn't highlight--I was struck by it--maybe I've misinterpreted it. But you looked at two different eras of economic change. You look at, I think, 1993 to 2000, and then you look at 2000-2006 or 2007. And instead of looking across space, which is what we just talked about, you look across industrial sectors. And you find that there are very large differences in how industrial sectors have performed. Guest: There are, of course. And after the NASDAQ bust in 2000, you can see the rise and fall of--several little cycles that occur during the George W. Bush years, of which the first was driven by the wars. Driven by the reaction to 9/11, by the invasion of Afghanistan, eventually by the war in Iraq. And one of the things that shows up both sectorally and geographically is this funnels money into enterprises that are closely linked to the government and in locations that basically circle the national capital. Which becomes at that point the locus of income growth in the country. It's a very strange phenomenon for what was ostensibly a conservative Republican administration. But there it is. Russ: Well, government got a lot bigger under George Bush. Guest: It certainly did. And any country which is launching major military operations is going to experience that. And then, the Iraq War is the peak, the first year of the Iraq War is the peak of this phenomenon, because after that the buildup, it doesn't go away but it doesn't continue to get larger. And so its effect on the growth rate of the economy basically washes out after that. And what you see carries the economy forward into 2006, 2007 is real estate. The construction and the loans being made to increasingly dubious borrowers that eventually blows up, 2007, 2008. Russ: So the data that you are looking at in those analyses is from the BEA, the Bureau of Economic Analysis. Guest: Yeah. Russ: The one thing that's striking about it--I wasn't sure of the level of the data, whether it's--it's not county? Guest: It's county level, yes. There are two kinds of resolutions here. One is geographical at the county level, so you can map things out over the 3150 counties the country has. And the other is by sector within states, so that you can again look inside each state's boundaries at the distribution across various economic activities in that state. Russ: So, when you are looking at different industrial sectors, say you are looking, to take one example, at finance. You are looking, actually, at a very different kind of data than is usually used in these kinds of discussions. Usually what people are looking at are individual or household data. Guest: Correct. Russ: Sometimes from tax returns, sometimes from government samples of various populations. Guest: Usually, most of the other researchers working in this area are either working with tax records or working with the Current Population Survey (CPS). But you are looking at something that in many ways is more appealing, which is, first of all you are not looking at wages. You are getting a very complete picture of income that goes way beyond earnings. It includes bonuses, dividends. My understanding is it's also based on payroll. Is that correct? Guest: Yes. Two different kinds of data. Russ: So let's stick with the industrial sector ones, the statewide data. Guest: That's payroll data. Russ: So you have, every firm in theory, or at least a sample of firms in the state in, say, finance, based on what they pay their workers, inclusive of everything. Not just wages. Correct? Guest: That's right, yes. Russ: Does it also include transfer payments at the statewide level? Guest: No. Russ: Okay. So this is--I would call it 'compensation.' Guest: Yes. Russ: It does not include-- Guest: 'Pay' is the word I use, because we are looking at what the employing unit pays out. Russ: It's disbursed. Guest: It's not what the individual earns, because an individual might have multiple sources of income, multiple jobs, other assets. It's not what the household earns, because the household may have multiple earners. And there's no adjustment here for household size. In other words, it is not a measure which is directly related to individual household welfare, which is an important topic; it's not what I work on. It's related to the payments structure of the economy. And that has a real usefulness for a lot of questions that economists have been concerned with, including the one you mentioned earlier, which is: What is the role of technology? The role of technology, really, when you think about it theoretically, it's about what businesses will pay for specific jobs, and if you have to approach that through for example what people are reporting as their incomes, tax records, or what a sample survey is reporting for household income, then you are really looking at it through a rather murky glass. Because you are several layers removed from the effect of the technology on the structure of business. Russ: And you are also often missing types of payments and benefits that are not captured by some of the data that people focus on, such as wages or income. You don't include vacation days. Do you think those data include health benefits? I don't know what they include there. Guest: I don't think that they include health benefits. Russ: I assume not. Guest: That's a question I'd have to double-check. Russ: But what struck me when I looked at that--and to help the listeners who don't have the table in front of them, and I don't have it in front of me but I remember it: What we're looking at here is disbursement pay--that is, pay--by sector, across states, over a period of time. So when I looked at the 2000-2006 or -2007 changes by sector, I was struck by two things. One, I was struck by the enormous increases by sector for some of the sectors, where pay to workers over time doubled in a very short period of time. That's correct, right? Guest: Yes. Russ: You might say, well, in the heyday of the Internet it's not surprising that the people who could successfully manipulate web pages and do the things that were desperately in demand, it's not surprising that those wages and salaries and benefits went up a lot. But this is across fairly wide definitions of sectors. So you list, I think 15 high-growth sectors. Am I remembering correctly? Guest: That's right. They are, however, in relation to overall employment fairly small. And so, again, what we're picking up is the same phenomenon that is described at the geographic level, which is that the rise in inequality is really a matter of the increasing difference between a small, favored sector that is experiencing a credit-driven boom, and the rest of the economy, which includes almost all the rest of us--who are going along as before, experiencing very little direct effect of this phenomenon.
30:16Russ: But I was struck by--you have the last line in both these tables, one is the pre-2000 change, one is the post-2000 change: there is a line called 'All Other Sectors.' And there's huge growth in all those sectors. Not compared to the top 15 or the top 8 or 6 that grew the most. But I was struck by how much growth there was across the economy. And I mention that again because we are often told that nobody is benefiting from these changes except people at the top. I accept the idea that there are sectors that are benefiting a lot more than others. But I was struck by how much positive change there was across the economy as a whole outside the highest growth sectors. Guest: Oh, I don't know what to say about those numbers. They are not that dramatic, and these are all in nominal terms so there's no inflation adjustment here either. Russ: That was my next question. Guest: The point of the tables you are looking at is to permit the reader to get some sense of what the proportionate changes were in sectors so there was really no need to adjust them. But the All Other Sectors as compared to the high-growth sectors in these tables, they are relatively low paid and their nominal wage growth is--well, in both cases you are looking at a phenomenon that is probably ordinary for a trough-to-peak business cycle change. Russ: Do you have that table in front of you? Guest: Yeah, 6.1 and 6.2. Russ: Can you just read the bottom line; say what time period they are and give us the change? Guest: This is 1996-2001, and the All Other Sectors number is $31,000-$38,000 Russ: That's over 25% in 5 years. It's nominal, but inflation wasn't very high then. Guest: Yeah, but it's also from a trough, close to a trough, to a peak. It's a period of substantial business cycle expansion and a major drop of unemployment. For 2003-2007, roughly $39,000 to roughly $44,000. A 10% increase over 4 years, so that's 2%, 3% a year. I don't think there's anything remarkable about that. Russ: Well, it is to me, just because of what we commonly hear. Obviously, this is a very complicated area. There's a lot going on. There are interactions--when we change one thing, we change other things that we can't hold constant. I just find it interesting how pessimistic most people are about the state of our economy. Even in good times. We're not in good times now. But even in good times. Guest: Just looking at that first table, which is 1996-2001, this was a very strong period for labor earnings. The unemployment rate went down to below 4% for I think 4 consecutive years, and you had a lot of demand for hourly labor. This was also the period when poverty rates--well known, remarkable moment for prosperity, poverty rates declined to historic lows. Russ: But even in that later period, the 2003-2007, which, a lot of people have described it as not much of a recovery after the 2001 recession; that any gains that occurred in that period--they may have been temporary, because obviously credit issues that we are going to talk about in a second. But it's interesting to me how big those gains are. Guest: Well, people do experience income gains in a credit boom. I don't think anybody will look back on this 2003-2007 period as a-- Russ: Golden Age? Guest: As a Golden Age. You can make an argument for the 1990s in that there was this technological transformation going on, where clearly everybody was living in the backwash of that. But the 2000s, we are looking at, on the one hand, the growth of government thanks to the wars, and on the other the impending real estate debacle. It's very hard to see permanent benefits from either one of them. Russ: I agree.
34:55Russ: Let's go to the longer picture. If we go back to 1980, say, or even into the 1970s, your suggestion then is that a lot of the changes in economic prosperity that differed across groups depended on how close you were to that credit increase of various intensities at that time period. Is that accurate? Guest: Yes. There's a real change in the driving forces behind American economic growth after 1980. Before that there is, you could argue, a fairly balanced set of institutional spurs to growth, with the result that you get a growth path which is reasonably steady, both public and private components. After 1980 we become very heavily reliant on the credit cycle and the credit cycles become increasingly intense until you get the great debacle and the end of the last decade. Russ: So, when you say 'credit cycle,' what do you mean? Guest: The growth basically of bank credit and associated private sector venture capital extensions, with the cycle coming when the flow stops. Which it did in 2000 in the tech sector and 2007 in the real estate sector. Russ: So, do you see that--what was going on differently in the pre-1980 credit cycle, then? I'm trying to understand what's going on differently. Is this a statement about monetary policy or other things going on? Guest: A lot of other things going on as well. Monetary policy plays a much smaller role in the 1950s and 1960s than it came to play in the 1970s and 1980s. But in the 1950s and 1960s you have, first of all the growth of the public sector. You have the extension of social welfare programs in the Great Society. You have the Treaty of Detroit--the strong presence of collective bargaining institutions which gave organized labor an increasing claim on resources as time went by. And then you also have the growth of private sector credit. But no one of these phenomena is dominant in this period. Whereas after 1980, basically labor has been neutralized-- Russ: Organized labor. Guest: Organized labor has been neutralized so there's no further increase in collective bargaining settlements. And the welfare state--it's not taken apart, but it doesn't grow except in a few isolated episodes. Russ: Health care being the obvious example. Guest: Well, the Medicare Part D under George W. Bush, for example. But fundamentally the institutional structure isn't expanding after that. And so the locus of growth really shifts to that which is driven by the financial sector. You can see that very clearly in the data.
38:32Russ: So let's try to talk about that a little bit and then let's talk about what policy issues are related to it. My sympathy with your viewpoint, which is, as you admit in the book, not a mainstream view--but it seems very consistent with the data, at least the way you gather it and work with it. The part that I'm sympathetic with is in our profession of academic economist, the rewards to being an academic economist have gone up quite a bit since I've been a practicing economist, which is roughly 1980. And I think you pretty much follow the same pattern as I do in terms of timing--that's about when your career started. Guest: That's about right, yes. Russ: And I like to think I am a lot more productive than I was, and I am more productive. But it's hard to understand why my skills are in such demand relative to what they would have been in a different world. Another way to take that out of the picture is to look at starting salaries in academic economics, and they've grown dramatically over the last 30 years, 40 years; and it's hard to argue that that's because economists are so much more productive. If anything, I think we are more dangerous. We are in high demand academic life; we are part of an education system that likes--people like to major in economics. So when I look at my own situation I'm trying to figure out how much is due to the fact that we subsidize education in a whole bunch of different ways, versus how much of it is due to the fact that we subsidize finance, a field that competes with academic economics for people to work in, on Wall Street. What are your thoughts on that? Guest: Well, this gets to another, a very interesting domain of American sociology, doesn't it? I think the second explanation, that economists are competing and having their salaries pulled up by the business schools, which are having their salaries pulled up by their connection to the financial sector, is certainly an important piece of the picture. Because there is also the fact that--and having lived through this transition it's very visible to me--that in the 1950s and 1960s the young population of the country had an enormous sense of security and confidence about its future. Which permitted people to have a great deal of diversity of aspirations. That changed in the 1970s and 1980s. Insecurity went up dramatically, as unemployment became a real threat. And that drove many people into much more economically competitive career paths. And so you see this in the rise of economics departments and business schools in colleges and universities; people will go into them because they feel, maybe rightly, maybe wrongly, it's a practical way to get yourself a career that makes money. Russ: So, should we do something about this? This sensitivity of incomes and compensation to the credit cycle, to monetary policy? What can be done, if anything? What should be done? Guest: I'm inclined to favor stabilizing institutions and social insurance. Particularly when you are moving into a period of stress, the important thing is to maintain decent floors. And decent and stably secure futures for people, which means covering them from the most extreme risks. And I think that the important of this in our present political debate really focuses on Social Security, Medicare, Medicaid, which have been institutions which have come to define American working class, middle class life by providing basically an inalienable floor that will keep you on of extreme poverty, and has successfully done that for senior citizens and also for dependents and survivors; and providing a couple of layers of protection against medical bankruptcy and against old-age-related bankruptcy, which is what Medicaid basically achieves for the middle class. Protecting those programs from what are essentially predatory attacks, efforts to restrict and limit them so that other players can cherry pick from the insurable population and make a little extra money is an extraordinarily important political task in my view. And I would add to that: I'm very much in favor of a strong minimum wage, which should be substantially higher than it is now. And the reason for that is that it helps to set a standard for the performance of the labor market. Which I think is something that we observe very clearly, particularly in the part of the country I happen to live in, is really undermined by allowing a low wage standard to prevail for workers at the low end of the scale. What you get is a market which becomes very insecure, relatively unsafe, very hard to monitor and protect [?] safety and health standards and causes a lot of other problems that would basically be greatly reduced if you had a much stronger minimum wage.
44:36Russ: Well, let's talk about those two pieces--the safety net and the minimum wage. On the safety net side, do you think means testing Social Security and Medicare, which I think would easily make them solvent for the foreseeable future--are you against that or in favor of it? Guest: I am very much against it. Solvency for a government program cannot be distinguished from the solvency of the government itself. Russ: True. Guest: So I think treating Social Security and Medicare as though they were some kind of private funds is not a reasonable approach. Russ: Well, at their current levels, they're going to be hard to keep the promises that have been made. Guest: Well, only if you insist upon--well, first of all, that's debatable. But secondly, if you accept the pessimistic projections, it's only if you insist that you match the payout to the Federal Insurance Contributions Act (FICA) revenues for a very, very long period into the future. And I'm inclined to first of all say it's not necessary to do that, as an economic matter, certainly; and secondly, even if you think it's the right thing to do politically, it's a problem that can be dealt with down the road. It doesn't have to--treating those projections as though they were some kind of dire situation at the present is a clear mistake. Russ: You don't think there's a demographic problem with Social Security? Guest: Oh, no. I've been in the Census since 1960, when I was 8 years old. As has every other baby boomer, including you. The demographics have not--the demographics actually have become more favorable since they were addressed in the 1983 Social Security changes, because you've had more immigrants than were expected at that time. Russ: It's true. Guest: So, those are not the issue. Russ: Why are you against--let's go back to the fundamental question. Guest: Means testing is a very complicated problem, particularly for elderly people, because their 'means', their qualifying means, change all the time; and would be adjusted to accommodate whatever the means-test standard is. So first of all it's a cumbersome and unpleasant system which would give people kind of variable access to Social Security and Medicare. But secondly, we have a means test in the system. We have a perfectly good one. It's called the income tax. And if you want people to pay into the government in relation to their means, that's what a progressive income tax achieves. There's absolutely no need to layer onto that some kind of means test for whether you have to pay the cost of a catastrophic health incident, traffic accident or a heart attack or something of that nature. Russ: But I don't need a retirement safety net; and I'm happy to have paid for my grandmother when I was younger. Guest: Ah. You are, however, a person of great philanthropic and charitable instincts, and our fellow citizens should not be expected to rise to that standard. Because many of them don't. Russ: But, you've also made it harder for people to take care of themselves in their old age by taking more money from them than you otherwise-- Guest: No. No. You've got to remember that I study inequality. Diversity is the essence of any population. And what we have out there amongst the elderly are a great many people who don't have children who would take care of them, because they don't have children at all or have children who can't take care of them for one reason or another. The main one being that even with all the best will of the world, those children have children of their own who are a higher priority. Russ: Well, I'm talking about--I disagree with that for a different reason, because I think private charity would be a very good thing. But let's put that to the side-- Guest: We had private charity, we relied on private charity, up until the creation of the Social Security system in the 1930s, and the reality was that most old people didn't live very long. And I'm enough of an economist to believe that when you pay people to do something, they'll do more of it. And what Social Security does is to pay them to stay alive. And they are quite happy to take the money and live longer. Which to my mind is an excellent thing. Russ: I don't see the causation there. I don't see the causation quite as effectively as you do. Guest: Send people a check, they eat. This keeps them alive. Russ: I don't think people died from lack of resources in 1930, even old people. Guest: Oh sure they did. Lots of old people suffered privation, right up until the 1970s. Russ: Perhaps. But we're a richer country than we were then. I don't see that. But I had a different point I was making, which is that you are taking money away from young people when they could be saving it. It's a nontrivial amount. And the Social Security system has been doing that for 70-something years, and that's made it more likely they'd need a safety net. Guest: Well, again, just extending the argument I just made, there are two kinds of working people: people who have parents that they would otherwise support, and people who don't. Russ: I'm talking about people supporting themselves. Guest: No, but hear me out. I'm in the second group. My parents have passed on. They were never a burden on me, but if they never had been, they were no longer the case. But I still pay the payroll tax, which means I'm paying in to support-- Russ: other people's parents-- Guest: the whole population, everybody else's parents. Which lowers the burden on everybody. It's a very reasonable system. Russ: Well, it raises the burden on you. Because you have less money for your own retirement. Guest: Well, but it lowers the burden on people who would otherwise have a significant burden. So it seems to me that it's a very fair system. Which is why it's so popular. Russ: I don't think its fully understood. It might be popular even if it were understood. I'm willing to accept that. Guest: People do understand it, and that's why they like it. Russ: What percentage of the U.S. workforce thinks that their Social Security "contributions" that come out of their paycheck every week are put aside for them? I think it's a nontrivial number. I'm sorry, I could be wrong. Guest: That's a polling question. Russ: It's a rhetorical question. Guest: It's a polling question; I'm not a pollster.
51:07Russ: Let's move on to your second piece of your safety net, which is the minimum wage. So you want a higher minimum wage. How much higher? Do you have a rough idea? Guest: $12 is my number. On that I'm drawing by the estimable conservative publisher of the American Conservative magazine, Ron Unz. Russ: Lucky you. Now, is there any cost to that increase? You talked about what you thought the benefits were. Do you think there would be any changes in employment for low skilled workers? Guest: Oh, yes. Now the whole point is to help change the structure of the labor market at the low end. And so yes. For example, if you think about what happens inside households, there would be some teenagers, presently working at the minimum wage, who would leave that labor market, in part because their parents would be making more money if their parents are also low-end workers. So, you'd get change, reorganization. The real issue, which is the point of contention here, is whether this would mean a higher rate of unemployment for low end workers. And we have now quite a lot of evidence that, perhaps somewhat counterintuitively to supply-and-demand-trained economists, that refutes that idea. A very important experiment has been carried out since 1999 in the United Kingdom, where they didn't have a minimum wage and they introduced one; and it has disappeared from political discussion in the United Kingdom because not even the most skeptical Tories think that it has caused unemployment there. It hasn't. Russ: Well, I actually don't think unemployment is the right issue. I think it's employment. And I think it's the difficulty it causes for people with low skills to get the experience and the first step into the labor market. I find it strange that people who--and you may not be in this group--obviously point out the eagerness with which businesses substitute capital for labor and foreign workers for American workers somehow think that's not going to happen if we artificially raise the wage. So, I don't accept that empirical evidence. There's a lot of evidence on the other side. And I would suggest-- Guest: Let me just come back at you on the second part of that. There are two things that would go on. One is that businesses would experience increases in some of their costs on the wage side. But they would also experience customers with more money coming through the door. And my view, as a matter of employment theory, is that businesses hire more workers when they need them. If they have more business and they are expanding, then they'll hire more people. Then they will pay the minimum wage. On the question of bringing in foreigners-- Russ: Not bringing in foreigners. Moving factories overseas, all the things that have happened-- Guest: Well, that's a tradeable goods issue. Most manufacturing is so far above the minimum wage it's not going to be affected by this. Russ: No, I'm not suggesting it would be-- Guest: We're looking at the overwhelming number of jobs which are service jobs, basically non-traded sector, non-moveable. And the question is: What would be the effect of a higher minimum wage on the incentive to bring low-wage immigrants into the market? The answer to that is that if you have a job which is paid decently enough so that a documented worker, a citizen or permanent worker, will take it, then you have no incentive to bring in an undocumented immigrant to hold that job. Because you couldn't pay that person a cut-rate wage. And that is the reason why this is attractive to a certain type of, I think, very thoughtful conservative, who are very concerned about maintaining the American labor market for American workers. That in fact it would discourage the use of brokers and shady labor contractors to bring in people to fill jobs at cut-rate wages. And they're right about that. I think it would have that effect. Russ: Yeah, but you missed my point. My point is that, we see from lots of evidence that businesses are willing and able to change the mix of labor to capital when capital gets relatively attractive and when overseas workers get relatively attractive. That's part of the reason that people move factories overseas. Guest: But again, you are coming back to the factory issue. Russ: It has nothing to do with the factory issue. It has to do with how firms behave. Firms are sensitive to wage rates. Guest: That's right. I'm going to give you a different theory of how firms incorporate new technology. If this were a more technical discussion I'd give you the references on it. But fundamentally what firms do is they apply the establishment wage rate to the best technology, which may well be a labor-saving technology. But they will save money on adopting that technology whether they are paying a relatively high or a relatively low wage to the workers that they have. There is, I think, no good reason to think that there is kind of a flexible frontier of the textbook variety between what we'll call 'capital' and 'labor'. There's a high-level theoretical discussion around that which I'm sure you are aware of. But I would take the position that in fact a wage rate is not an important determinant of whether firms move to a more advanced technology, because in fact they'll make money by moving to that technology even if they are paying a relatively low wage. Russ: We'll agree to disagree on that. Guest: Yeah.
57:04Russ: We're going to move on to a last topic. Maybe we can find something we can agree on a little more easily, and that's the relationship between the government and the financial sector. We started off talking about how the financial sector has driven a good chunk of inequality, both spacially and sectorally. How much of that do you think is due to the privileges that sector has accrued, and what would you want to do about those? Guest: Well, a great deal of it is due to privileges asserted and conceded to the financial sector. Deregulation in the 1990s, desupervision in the 2000s--which permitted a great many practices that would have been suppressed in an earlier period. And should have been suppressed. Practices that were frankly financial fraud, and which have been given a legal impunity which they did not enjoy in the 1990s. In the aftermath of the Savings and Loan debacle, first under Reagan in the late 1980s and then under the first Bush, the government prosecuted a whole spectrum of financial criminals and sent a thousand of them to Federal prison, in some cases extended periods of time. Nothing like that has happened in the wake of the far more severe fraudulent practices which came to dominate the financial sector in the 2000s. And so one of the great, one of the most cataclysmic failures, of the Federal government--and I'm speaking of the present Administration--especially has been its unwillingness to come to grips with the problem of the basic integrity of financial practices. And the problem there is--it's a market problem. If people don't believe their financial institutions are trustworthy, they are not going to extent, permit them to have resources over and above what is insured by the Federal Deposit Insurance Corporation (FDIC). They are going to be extremely careful; they are going to be staying much more liquid, in much safer assets than they would otherwise be willing to do. Russ: Well, I'm sorry to say we fixed that by extending the FDIC, beyond the letter of the law; and by bailing out institutions that weren't covered by the FDIC. Guest: The FDIC was the best-performing of the agencies in the crisis. Russ: Agreed. Guest: And I think Sheila Bair's book is really an excellent account of the role that it played. If you have deposit insurance accompanied by adequate, effective, enforcement, to my mind that's okay. It's where you have the bailout of an institution and of shareholders and of people who have capital which was at risk and deliberately put at risk, who were beneficiaries of fraudulent practices, that's where you run into, I think, the deeper problem. Russ: Well, especially the creditors of those institutions, who were made whole, weren't required to take a haircut. The FDIC was one of the only institutions that did require it, and it did in maybe one important case; but most of the time the creditors were spared. Which I think has been a terrible mistake. Guest: We can agree with that. The shareholders of insolvent banks should take the loss. And then you start again with assets that retain their value. Russ: Let's close and talk about economics as a discipline. You think economists have learned anything from this Crisis? And what should they have learned? I think I know the answer to the first part. Guest: I'm waiting for evidence. What I would have liked to see was an opening up of economics departments to a genuinely wide-ranging discussion of these issues. But so far as I'm aware, the first appointment to a so-called 'top department' of someone who was a true dissident from a prevailing orthodoxies has not yet occurred. The first one, so far as I am aware. Nobody has been brought in from the cold as a result of this. And that is--it just tells you how far the management of economics is from being a true marketplace of ideas.

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