Insights on income (1996) | THINK TANK

Insights on income (1996) | THINK TANK

Ben Wattenberg: Hello, I’m Ben Wattenberg. We hear that the rich are getting richer,
the poor are getting poorer, and the middle class is stuck in the mud. Is it true? And what could be done about it even if it
were? In this election year, these questions have
sent politicians and professors on the warpath. Joining us to sort through the conflict and
the consensus are Gary Burtless, senior fellow at the Brookings Institution; James Heckman
of the University of Chicago; Timothy Smeeding, director of Maxwell’s Center for Policy
Research at Syracuse University; and Ken Deavers, chief economist at the Employment Policy Foundation. The topic before this house: insights on income. This week on “Think Tank.” Today politicians from both sides of the aisle
are competing over who can best improve the economic lot of the poor and the middle class. Bob Dole: (From videotape.) Yes, these are the best of times for many
who work on Wall Street. But the facts leave no doubt that they are
also the worst of times for many who live and work on Main Street. Bill Clinton: (From videotape.) Middle class values, strong families and faith,
safe streets, secure futures. These things are very much threatened today,
threatened by 20 years of stagnant income, of harder work by good Americans for the same
or lower pay, of increasing inequality of incomes and increasing insecurity in jobs
and retirement and health care. Ben Wattenberg: Sounds serious, but is there
a real problem or is this just the stuff election years are made of? Let’s look at the numbers. We hear that the richest 5 percent have seen
their share of national income grow by a third since 1973, while the poorest Americans have
lost a third. We shall see about that. Further, the case is made that since the early
1970s, wages have leveled off and probably dropped. But hold on. That’s just cash wages. Total compensation, which counts benefits
like health insurance and pensions, has gone up. And now look at this. Consumer spending is going way up, which means
that there is more going on than meets the eye. The good news is we have four eminent economists
who claim to understand what these data mean. The bad news is that they don’t agree. Gentlemen, thank you for joining us. What I want to do is take two specific topics,
income trends and income inequality trends. And I want to talk first about income inequality
and start with you, Tim Smeeding, and then let’s go around the room. Is income inequality increasing? Timothy Smeeding: Yes, income inequality has
increased in the United States over the past 20 years, although less in expansions, like
the current one, than in recessions. Ben Wattenberg: Gary Burtless. Gary Burtless: It is; and I think it’s a
matter of social concern because the growing inequality is a combination of an increased
income at the top and shrinking incomes at the bottom. And it’s the shrinking incomes at the bottom
that I think are the biggest source of concern. Ben Wattenberg: All right. Jim Heckman. James Heckman: Certainly income inequality
has increased, but I think the real question is, what is wage inequality doing and also
what is consumption inequality doing? They’re very different measures, and I think
they have very different lessons for discussion. Ben Wattenberg: All right. Ken Deavers, is income inequality increasing? Ken Deavers: Yeah. I don’t think there’s any disagreement
among the panelists on this panel over that. I think the real issue is what’s happening
at the bottom, that to the extent incomes are falling for people at the bottom, that’s
an issue that we ought to pay some attention to. Ben Wattenberg: But I mean, Gary Burtless
said that income for poor people is diminishing. My understanding is that your view is that
it is not diminishing, but that the incomes of wealthy people are growing faster than
the incomes of poor people so that poor people absolutely are doing a little bit better,
although relatively the income inequality, the gap, is widening. Is that your view? Ken Deavers: Well, not exactly. What I would say is that sort of what we’ve
seen is an increase in income absolutely for people at the top; a decline in the middle
class, which is what sort of is wrapped up in this debate as well. Ben Wattenberg: But not in the shares. Go ahead. Ken Deavers: That’s right. There is a decline in the middle class share
of total income, if you define it, for example, around median incomes. Ben Wattenberg: Right. Ken Deavers: But most of the people who left
the middle class defined that way moved into higher income, not into lower income. And so the issue sort of is, sort of, why
are we having this sort of spreading out? Why are we having a hollowing out in the income
distribution? Is it because most people are becoming poorer? Timothy Smeeding: About two-thirds of the
shrinkage in the middle class, at least through the ’80s, was people getting richer, but
the other third is something of concern. Depending on exactly the years and the measure
of income, somewhere between 25 and 35 percent of Americans have lower real incomes now than
they had 15 years ago. Ben Wattenberg: All right, I want to put one
other chart on, and this deals with income mobility. And it talks about two years, 1975 and 1990,
and it shows that the people who were poor in 1975, in the poorest quintile, 5 percent
have remained in the poorest quintile, 15 percent have moved to the second quintile,
21 percent to the third quintile, 30 percent to the fourth, and 29 to the fifth, which
would seem to tell us that there is a great deal of income mobility, and when we are talking
about the poor in the United States, we are not talking about the same people year after
year or decade over decade. Comments? Timothy Smeeding: I think that this is an
important issue; mobility is certainly important in America. And one of the consequences that you would
normally ask is, is inequality increasing and is mobility also increasing, in which
case we might tolerate a higher level of inequality. But this study I think is flawed. Ben Wattenberg: This is by the University
of Michigan. Timothy Smeeding: The data’s from the University
of Michigan. The study was from the Federal Reserve Bank
of Dallas. There have been at least three other studies
that have used this data more appropriately, I believe, and which have found that there
has really been no change in mobility out of the bottom quintile through the ’70s
as compared to the ’80s. Ben Wattenberg: But there could be no change
and yet it could adhere to a traditional American curve of substantial upward movement. In other words, it doesn’t change that slope,
but — James Heckman: But the other studies do show
mobility. Timothy Smeeding: Absolutely, absolutely. James Heckman: I mean, they do show mobility,
but not at this rapid a rate. Timothy Smeeding: What this — the average
income of the bottom 20 percent here is $1,500 in 1975, so it’s no surprise — Ken Deavers: It’s mainly people who weren’t
in the workplace. Timothy Smeeding: Right. It’s paper boys and people who weren’t
in the workplace. Ken Deavers: College students. Timothy Smeeding: College students. And 15 years later, they’re making $25,000. Ben Wattenberg: You mentioned that even the
other studies — that all studies show that there is an appreciable amount of upward income
mobility. These magnitudes may be wrong, but can anybody
here give us a sense of what the appropriate magnitudes are? Gary Burtless: If you’re looking at people
in their 20s and you say, what is the chance that over the next 10 or 20 years they will
see their incomes rise, the chances are better than two to one that they will see their incomes
rise. Timothy Smeeding: Right, absolutely. Ben Wattenberg: You mean their quintiles rise,
that they will go — that they will move up — Timothy Smeeding: And their incomes, too. Ken Deavers: That’ll put them in another
quintile. Gary Burtless: Their absolute incomes will
rise. James Heckman: As people age, they acquire
work experience, and so forth, and their incomes rise. That pattern still remains. Timothy Smeeding: The difference is that the
mobility hasn’t changed in the past 20 years, while inequality has increased. James Heckman: And you’re starting from
a lower point, and so basically, even with the same transition process, you know, the
destination is going to be at a different level than it was 20 years ago. Ben Wattenberg: OK, all right. I want to put up two other charts quickly
to try to understand some of the reasons why this income inequality exists. You see here that from 1970 to 1994, the percentage
of female-headed households has more than doubled, from 12 percent to 25 percent. On the next chart, we see the family income
differential between female-parent households and married-parent households. The female-headed household is earning about
$17,000 a year. The married household is earning about $43,000
a year. Now, question. Is a large part of this inequality driven
by the substantial rise in the number of female-headed households? Timothy Smeeding: Yes, without a doubt. But we need to be careful here. Though divorce is rampant in our society,
it’s grown over the last 20 years in all social classes — Ben Wattenberg: And out-of-wedlock births. Timothy Smeeding: And out-of-wedlock births,
although out-of-wedlock births are a lesser percentage of the numbers that you saw there
than you might otherwise think. Over half of those single mothers who you
saw there work, OK. In other words, it’s — don’t get the
picture in your mind that it’s a teenage girl who hasn’t finished high school who
had a baby that we’re looking at. We’re looking mainly at divorced people. Ben Wattenberg: Well, but those one-third
of the out-of-wedlock birth mothers would more dramatically pull down that lower quintile
than the divorced woman who keeps on working. Ken Deavers: Actually, there are three interesting
characteristics about that lowest quintile. One is the rise of female — single-female-headed
families. Second is a decline in work effort among people
who are in that quintile. There are now about 40 percent of the households
in that quintile who report no work by any member of the quintile during the previous
year. And the third piece is, in a workforce which
is paying higher and higher wages to good skills and high educations, that’s where
we have a large concentration of people who still have less than a high school education. So those things together pull that quintile
somewhat back, although it’s not the principal cause. I mean, sort of growing wage inequality and
particularly falling wages for working males is another significant part of what’s going
on. Gary Burtless: Yeah, one thing you have to
recognize about these family trends is that the growth in the number of single-parent
families, the growth in out-of-wedlock childbearing really got going in the late 1950s. And from the late ’50s through the mid-1970s,
this trend proceeded, and yet income in the United States grew more equal, it didn’t
grow more unequal. So there were other factors that were strongly
driving incomes closer together over that period. Since 1973, the factors have been widening
incomes, and then you really get to see the influence of a growing number of low-income,
one-parent families on the distribution. That trend is creating a lot of one-earner
households trying to support kids, and those folks have never had a very good standard
of living. Ben Wattenberg: But that would — if we turn
now to causation of this spreading apart of income, that would lead to a social causation
rather than an economic causation. You can’t say that foreign trade has increased
divorce, I don’t think, can you? James Heckman: Oh, you could say part of it
is the decline in the real wages of males especially. And when you think about a marriage market
economy — I mean, think about a marriage market. Although I agree with Gary that it’s not
the whole story by any means, but part of this rise in female-headed households is due
in part to the declining real wages of the low-skilled males who would be partners to
some of these individuals. And so I think you can’t really isolate
these two factors as cleanly as you’re trying to do. Timothy Smeeding: And the fact that the marriage
market is also producing more assortive mating by education and skill class. Ben Wattenberg: Is producing what? Timothy Smeeding: More assortive mating. Ben Wattenberg: What does that mean? Timothy Smeeding: Well, that means that you
marry someone of your same socioeconomic class with the same goals, interests. James Heckman: And the correlation being the
husband’s and wife’s education has risen over the last 20 years. Timothy Smeeding: And the correlation between
their incomes. So two MBAs, two lawyers versus two bricklayers,
or a bricklayer and a short-order cook. Ben Wattenberg: And that’s called assortive
— Timothy Smeeding: Assortive mating, that’s
right. Ben Wattenberg: — mating. Sounds racy. (Cross talk.) Ben Wattenberg: Hey, this is a family hour
show. (Laughter.) Timothy Smeeding: In an economy where most
adults work, putting two good jobs together — this were the DINKs, the double income,
no kids — and you put two good incomes together with two good sets of benefits, two good degrees,
good packages of skills, those people will move — those are the people who are moving
from the middle up to the top. You put one mother there who’s been divorced,
let’s say, only has a high school degree, who had no real experience or not much experience
before that, and you don’t pay her child support or childcare, you’ve got somebody
who’s in a really tough situation. And this isn’t just true in the United States,
this is true throughout Europe, too. Ken Deavers: Part of the issue, and it gets
back to some of Gary’s work, of what’s been driving — what’s happening to low
wages sort of really comes down to sort of three or four issues. It is — probably skill-biased technology
is a significant part of it. Ben Wattenberg: What does that mean, skill-biased
technology? Ken Deavers: Technologies which are paying
high rates of return to people who have very high skills. Ben Wattenberg: High rates of return means
high wages? Ken Deavers: High wages. Ben Wattenberg: High wages, OK. Ken Deavers: High wages, high income, OK. Timothy Smeeding: Substituting capital for
labor. Ben Wattenberg: Pardon me? Timothy Smeeding: Substituting capital for
labor. ATMs. Ken Deavers: Yeah, people who work with more
and more capital equipment are — Ben Wattenberg: Right. Hold it. Substituting capital for labor — automatic
teller machines. Timothy Smeeding: Instead of bank tellers,
yes. For instance, automatic phone operating machines
and automatic phone answering versus operators. Ben Wattenberg: So the technology is driving
out the semi-skilled worker. Timothy Smeeding: Right. The bank tellers of the 1980s and 1990s were
the blacksmiths of the 1880s and the 1890s. Technology is driving away low-skill labor,
replacing it with something that’s cheaper, more productive, and more durable. Ben Wattenberg: Let us move now from this
idea of income inequality to what is happening to income trends generally in the United States. We put a chart up there. It shows that wages have diminished somewhat
from 1960 to 1994, compensation has gone up substantially, and consumption has gone up
super substantially. Ken, why don’t you explain each of those
three things just as quickly as you can, and then let’s see what we agree and disagree
about. Ken Deavers: I mean, what the wage line looks
at is cash wages. Ben Wattenberg: Cash wages. Ken Deavers: And cash wages, the real value
of cash wages has certainly gone down since sometime in probably the early ’70s, and
a downward drift fairly constant. If you include sort of noncash payment parts
of compensation, which have gone from roughly 20 percent of the total compensation of workers
to over 40 percent — Ben Wattenberg: And that includes? Ken Deavers: Pensions and health care are
probably the two biggest pieces of it. Ben Wattenberg: Now, just explain to us what
consumption means and then let’s — Ken Deavers: OK. Consumption is a measure, essentially, of
what people buy, both goods and services. And this is a measure of consumption per capita,
per person. It’s continued to rise rapidly. One of the reasons it’s continued to rise
rapidly is because of three things that have to do with women: increasing participation
by women in the workforce, more hours by women in the workforce, and better pay for women. James Heckman: There has been some study done
on how vast or how little consumption inequality has actually increased. The evidence is that consumption is much less
unequally distributed than income. Ken Deavers: Than income. James Heckman: I think we would agree with
that. And we’d also say there is some disagreement
in the profession about whether or not inequality has been increasing dramatically or decreasing,
how we measure — Ken Deavers: In consumption? James Heckman: In consumption. Ben Wattenberg: We noneconomists hear — and
there are many Americans who are not economists. Timothy Smeeding: Really? (Laughter.) We didn’t know that. Ben Wattenberg: They are all street-corner
economists, but we hear talk about liberal economists and conservative economists. Would it be fair to say that one of the dividing
lines between liberal economists and conservative economists are that conservative economists
think things in recent years have been getting better and liberal economists think they have
either been getting worse, stayed the same, or not getting better nearly as much as conservative
economists think? Gary Burtless: There is a divide like that,
but I think the most important distinction is probably what they think we should do about
the trends. Ben Wattenberg: Well, we’re going to talk
about that next. James Heckman: I think most economists would
agree that the wages offered in the labor market to low-skilled individuals have declined,
and the recent cohorts, whether they’re conservative or liberal. Ben Wattenberg: Now, in terms of this liberal-conservative
divide about whether things are getting better substantially or minimally or not at all,
where would you four gentlemen position yourself? Timothy Smeeding: I’d rather be nondogmatic,
which is what at least one major newspaper claimed that I was. Ben Wattenberg: Do you believe what you read
in the press? (Laughter.) That’s like believing economists. I mean — right. Timothy Smeeding: Sometimes I just try and
call them as I see them, as Yogi would say. Ben Wattenberg: Oh, my goodness. Timothy Smeeding: And sometimes I think — Ben Wattenberg: All right, let me ask another
question. How would people in your trade characterize
you? Timothy Smeeding: Nondogmatic. Ben Wattenberg: Nondogmatic. How about you, Gary Burtless. Gary Burtless: Well, I think, on average,
the economy in the United States is improving and it has improved over the last 20 years. I do think the distributional changes have
been such that probably for Americans in the bottom third of the distribution, things have
tended to get worse, and the further down you go, the closer you get to the very bottom
of the income distribution, the faster they’ve gotten worse, in absolute levels measured
in terms of income, wages, or consumption. Timothy Smeeding: That’s true. Ben Wattenberg: OK, Jim. James Heckman: I think that there is a marked
divergence between these different measures, and I think when we say things have gotten
worse, they’ve gotten really bad in terms of earnings and not so bad in terms of consumption. But I agree, depending on the series, there’s
some marked downward — some downward decline. But it’s not dramatic; it’s not as precipitous
as — Timothy Smeeding: Well, any sort of a decline
or even the magic-ness of zero change when the rest of the economy around you is growing
and people are doing much better — Ken Deavers: Appears to be a serious problem. Timothy Smeeding: Yes, it is. Ben Wattenberg: You are in the declinist or
the ascendant — Ken Deavers: Well, I mean, I guess I’m slightly
more optimistic than Gary is. I mean, I think that overall the economy has
gotten better for more than two-thirds of the people in the economy. Ben Wattenberg: OK, now, we have to move on
to our final topic, which is, what do we do about it? There is this apparent problem of income inequality,
and there is a division of opinion on how ascendant the general level of income is. Jim Heckman, I know you have attempted to
assay and assess the various programs. What works? What doesn’t work? Does anything work? James Heckman: Well, I think the administration
and Gary Burtless — Ben Wattenberg: The Clinton administration? James Heckman: The Clinton administration,
and Gary Burtless in some of his writings, and many people have espoused the idea that
we could actually use job-training programs and substantial changes in education to provide
an immediate remedy to the problem, at least the declining wages of the unskilled worker. Ben Wattenberg: Can we? James Heckman: We can, but at great cost,
I think. And I think everyone would agree that the
costs are substantial, even the cost to the government, if take aside private costs of
that activity. The logic is very simple. The price has gone down, but if we increase
— Ben Wattenberg: The price of what? James Heckman: The price of the unskilled
labor, but if we embody more skill in that individual, that individual moves out of that
category — that’s the theory — and that individual can escape the fate of the declining
group. And there’s a second kicker which might
kick in, which is that in fact if you remove unskilled workers, you might make them scarcer
in the labor market and raise their incomes on that basis. Ben Wattenberg: Do you think any programs
that we now know of work? James Heckman: Work in an immediate short-term
sense, no, I don’t think so. I think it’s very costly. Ben Wattenberg: Oh, I see. OK, I hope you would disagree. James Heckman: I think it’s very, very costly. But I think in terms of long-term educational
responses, if we decided to have sort of a super Manhattan Project, then of course, I
think we could send America to the schools, we could change the college graduation rate. But those are very, very costly programs we’re
talking about. And I don’t think the political will is
there; I don’t think in an era of tight budgets. Ben Wattenberg: Gary, does something work
other than this Manhattan Project idea? Gary Burtless: I don’t think that the kinds
of training and education programs that Jim described do provide any kind of an immediate
response to this problem. Ben Wattenberg: You do not think? Gary Burtless: No, no. They’re not an immediate — they’re not
immediately going to change the income distribution in a way that favors people with limited skills
or favors people with low incomes. Any effects they have are going to be cumulative. Anything you do about the schooling of people
who are currently 12 to 18 years old is not going to have a major influence on the income
distribution for 10 or 15 years. So it’s folly to think that making these
changes right now is going to have an effect within the next five or 10 years on the income
distribution. Nonetheless, I think it’s worth doing. Ben Wattenberg: All right, let Jim in here
because he has — Timothy Smeeding: I think the earned income
tax credit is an absolutely marvelous response, America’s gift to the world of social welfare
policy. America doesn’t make many gifts as far as
Europeans and others, but — Ben Wattenberg: Earned income tax credit,
EITC? Timothy Smeeding: Yes, exactly. Ben Wattenberg: Explain it. Timothy Smeeding: That means that if you go
out and you work a full year full time and you don’t make enough money to support your
family, the government subsidizes those wages through a tax refund. Ken Deavers: It seems to me one of the questions
is sort of in terms of what we now do with labor force train programs, skill upgrading. The really problematic issue isn’t the 12-
to 18-year-olds. It’s the people who are 25 to 35 who are
in the workforce who had dropped out of high school, who had terrible educations, and whether
or not any intervention strategies for them are going to pay off either in the short term
or even sort of in their longer-term working careers. I mean, I think the real issue isn’t sort
of kids still in school, where we could make the investment and where if we had the will,
it would clearly pay 10 or 15 years out. The real question is sort of, what about those
folks who are — have lost out, are already in the workplace and who have terrible educations? Ben Wattenberg: OK, all right. Let me just go around the room one more time
and ask for a very, very terse, double-barreled answer about income trends and income inequality. Which way are they going? Timothy Smeeding: Income inequality will remain
high. I think we ought to compensate the losers,
particularly those who behave in socially desirable ways, such as working. Ben Wattenberg: And income trends will? Timothy Smeeding: Income trends will continue
to grow, we hope. Ben Wattenberg: Gary Burtless. Gary Burtless: Overall, incomes are improving,
but they’re falling down for people at the bottom of our distribution. I think we should do something about it, and
in the long term that does mean making investments in improving their education, but in the short
run, I think improving the minimum wage, giving child health insurance to the kids of working-age
families. Ben Wattenberg: Tax credit for children? Gary Burtless: I do think it would be good
to tilt the tax system more in favor of families that have youngsters, that’s true, and I
think that there are other things that we can immediately do to help the older folks
who cannot be helped by education. Ben Wattenberg: OK. Jim Heckman. James Heckman: I would agree that the wages
of unskilled individuals have declined, but I also would like to make a point that we
have a short-run problem and a long-run problem. In the short run, there are large groups of
unskilled individuals who are very difficult to train and move out by any kind of job training
strategy. In the long run, skill advancements, investments
in the young and investments in people who are worthy of the investment, for whom the
investment does pay off, I think is a very strong strategy. Ben Wattenberg: All right, Ken Deavers, whither
America on inequality and income? Ken Deavers: I mean, I think income trends
are pretty strong overall for the economy. We do have in fact a large group that are
being left behind. I think the earned income tax credit as a
device that makes work pay, that supports socially desirable behavior, is something
we ought to all be in favor of. And I think that investments in human capital,
particularly in school youth. Ben Wattenberg: OK, thank you, Ken Deavers,
Tim Smeeding, Jim Heckman, and Gary Burtless. And thank you. Please send your comments or questions to
New River Media, 1150 17th Street, NW, Washington, DC, 20036. We can also be reached via email at [email protected]
or on the World Wide Web at www.thinktank.com. For “Think Tank,” I’m Ben Wattenberg. Announcer: This has been a production of BJW
Inc., in association with New River Media, which are solely responsible for its content.

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