Harvard University's Greg Mankiw discusses economic inequality at the 26th annual Hutchinson Lecture in Economics at the University of Delaware.

Understanding income inequality

Greg Mankiw presents Hutchinson Lecture on causes, cures for rise in economic inequality


10:40 a.m., May 6, 2016--During this political year, many Americans have been surprised by surges in popularity of “outsider” candidates like Bernie Sanders and Donald Trump. In a recent talk at the University of Delaware, Greg Mankiw of Harvard University suggested that this sea change in American politics has a simple root cause. 

Sanders and Trump, Mankiw said, “are both talking about something wrong in the economy.” 

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“That Donald Trump says ‘Make America great again’ suggests of course that it’s not great now; it’s not working for the typical person. Bernie Sanders talks about a political system and economy that’s been rigged by Wall Street; he talks about the millionaire and billionaire class rigging it for themselves,” he said. 

“What they want to do is shake things up,” Mankiw continued. “I think the reason they’ve risen so much in popularity is there’s a sense among a lot of Americans that things aren’t quite right in the economy. And I think they’re actually kind of right about that: That there’s something real going on in the economy that is leading to the discomfort that these two people are tapping into.”

This is how Mankiw began his presentation of the 26th annual Hutchinson Lecture in Economics at the University of Delaware. 

Mankiw, Harvard’s Robert M. Beren Professor of Economics, presented “The Rise in Economic Inequality: Causes and Cures” to a crowd of UD community members so large that extra chairs had to be brought in for the presentation. 

After setting the political stage for his discussion, Mankiw outlined a number of illustrative facts on the current state of inequality and growth in America. 

Income growth

“We’re in a period right now of particularly slow growth in average incomes,” he said, explaining that America’s average growth in GDP over the previous 10 years was the worst the country has seen since World War II.

“On top of this meager growth in average incomes, we’ve had rising inequality,” he continued. From the World War II-era to 1973, growth was similar in all income quintiles, but the trend has since changed drastically.

“The period up to 1973 was a period where everybody was getting richer, but in particular the bottom was getting richer a little faster. So we were in a period of becoming more equal as a society,” Mankiw said. 

“After 1973, here you see a very, very different pattern… During this period, from ’73 to the present, we’re experiencing increasing inequality.”

Further, as has been popularized by movements like Occupy Wall Street, Mankiw discussed trends in the percentage of income going to the top 1 percent of the financial distribution.

He describes the trend from 1913 to today as a U-shape. A high proportion of income went to the 1 percent at the beginning of the 20th century, then started to fall between the ‘20s and ‘70s. 

“Then, sometime in the mid 1970s it started rising again,” Mankiw said. “Now we have income inequality more or less the same level that we had in the Great Gatsby era.” 

The share of income going to the top 1 percent, he said, has roughly doubled, jumping from about 10 percent to 20 percent of total income. Meanwhile, households making more than $423,000 per year – the 1 percent of the 1 percent, Mankiw calls them – have seen their share of total income quadruple from 1 percent to 4 to 5 percent.

Mankiw stresses that this is not a phenomenon that has occurred in only the past few years, saying that the main increase in the share of the 1 percent occurred largely in the 1990s. The difference now, he explained, is that this inequality now corresponds with slower growth, leading to a more troubling financial landscape.

Mankiw then analyzed different hypotheses for these problems.

“Why have we been experiencing meager growth and rising inequality? Why do we have these disturbing trends that have led to this political dynamic that we’re seeing play out on the national stage right now?” he asked.

On the subject of slow growth, Mankiw said that he doesn’t know for sure and contended that economists should be less afraid to admit what they don’t know. 

He did, however, discuss the theories of American economist Bob Gordon, who theorizes that the pace of technological progress has slowed.

 “His story is simply that technological process is just not that impressive these days,” Mankiw said. “You may be saying, ‘What do you mean? I have a smart phone! I can play Angry Birds! I can tweet!’ But it’s not the life-changing technological progress that previous generations saw.” 

Mankiw compared the drastic lifestyle changes that took place for the typical American from 1900 to 1960, from indoor plumbing to electricity, and suggested that life-changing innovations have come at a slower pace since then. 

Income inequality

On the subject of income inequality, Mankiw said that there are likely many explanations that contribute.

He said that the most important of these comes from his colleagues Claudia Goldin and Lawrence Katz, who argue that technology and education serve as opposing forces driving the wages of skilled and unskilled workers.

Mankiw said that technology tends to increase inequality, because technology is often used by skilled workers while replacing unskilled workers. Meanwhile, he continued, education serves as a force that turns unskilled workers into skilled workers, increasing demand for unskilled workers and raising their wages.

While education was “winning the race” in the early part of the 20th century, Mankiw said, growth in number of years of education per person has slowed. “Since then, technology has been winning the race,” he said.

Mankiw also addressed other root causes of inequality, like globalization, which leads to the importing of goods produced by unskilled workers and so drives down the value of unskilled labor. He also discussed technology’s ability to turn some people, like actors and musicians, into “superstars” who make millions.

Mankiw discussed possible solutions for the problem of income inequality. The best answer, he contended, is to promote education among American citizens.

“One way of increasing overall economic growth is to try and Increase educational attainment… And trying to increase educational attainment is also a way to combat inequality,” he said. “So if you’re worried about slow growth and rising inequality, trying to foster greater educational attainment is the number one thing to do.”

Mankiw explained that high school graduates make only 10 percent more now than they did in 1963, while that number is at 40 and 70 percent for those with undergraduate and graduate degrees, respectively. 

“Education is paying off more than it has in the past, as the wage differential has grown over time,” Mankiw said. “So it’s good that you’re in college, but think about grad school, too.”

About the Hutchinson Lecture in Economics

The Department of Economics in UD’s Alfred Lerner College of Business and Economics established the Hutchinson Lecture in Economics in 1990 to honor the distinguished academic career of the late Harry D. Hutchinson. 

Hutchinson received his doctorate in economics from the University of Michigan and taught in the economics department from 1959 until his retirement in 1989. His career was defined by excellence in teaching and scholarship, especially in macroeconomics. Hutchinson’s very successful textbook, Money, Banking and The U.S. Economy, was the foundation for many students’ introduction to financial institutions. 

Each year a distinguished scholar and policy-maker in the area of macroeconomics or monetary policy is invited to UD to present the Hutchinson Lecture on a topic of current interest in banking and/or finance.

Article by Sunny Rosen

Photos by Duane Perry

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