0:00:00.380,0:00:02.880 Jacob: Welcome to Crash Course Economics,[br]I'm Jacob Clifford... 0:00:02.880,0:00:07.840 Adriene: ...and I'm Adriene Hill. The world[br]is full of inequality. There's racial inequality, 0:00:07.840,0:00:14.040 gender inequality, health, education, political[br]inequality, and of course, economic inequality. 0:00:14.040,0:00:18.760 Some people are rich, and some people are[br]poor, and it can seem pretty impossible to fix. 0:00:18.760,0:00:20.020 Jacob: Well, maybe not. 0:00:20.020,0:00:28.880 [Theme Music] 0:00:28.880,0:00:34.760 Jacob: So there are two main types of economic[br]inequality: wealth inequality and income inequality. 0:00:34.760,0:00:39.260 Wealth is accumulated assets, minus liabilities[br]so it's the value of stuff like savings, pensions, 0:00:39.260,0:00:43.440 real estate, and stocks. When we talk about[br]wealth inequality, we're basically talking 0:00:43.440,0:00:47.329 about how assets are distributed. Income is[br]the new earnings that are constantly being 0:00:47.329,0:00:51.280 added to that pile of wealth. So when we talk[br]about income inequality, we're talking about 0:00:51.280,0:00:55.760 how that new stuff is getting distributed. Point is,[br]they're not the same. Let's go to the Thought Bubble. 0:00:55.760,0:01:00.220 Adriene: Let's look at both types of inequality[br]at the global level. Global wealth today is 0:01:00.230,0:01:06.560 estimated at about 260 trillion dollars, and[br]is not distributed equally. One study shows 0:01:06.560,0:01:11.389 that North America and Europe, while they[br]have less than 20% of the world's population, 0:01:11.389,0:01:17.130 have 67% of the world's wealth. China, which[br]has more people than North America and Europe 0:01:17.130,0:01:23.549 combined, has only about 8% of the wealth.[br]India and Africa together make up almost 30% 0:01:23.549,0:01:29.310 of the population, but only share about 2%[br]of the world's wealth. We're teaching economics, 0:01:29.310,0:01:34.100 so we can focus on income inequality. These[br]ten people represent everyone on the planet, 0:01:34.100,0:01:38.689 and they're lined up according to income.[br]Poorest over here and richest over here. This 0:01:38.689,0:01:44.090 group represents the poorest 20%, this is[br]the second poorest 20%, the middle 20%, and 0:01:44.090,0:01:50.090 so on. If we distributed a hundred dollars[br]based on current income trends, this group 0:01:50.090,0:01:55.710 would get about 83 of those dollars, the next[br]richest would get 10 dollars, the middle gets 0:01:55.710,0:02:01.800 four, the second poorest group would get two dollars[br]and the poorest 20% of humans would get one dollar. 0:02:01.810,0:02:07.399 Branko Milanovic, an economist that specializes[br]in inequality, explained all this by describing 0:02:07.399,0:02:12.689 an "economic big bang" - "At first, countries'[br]incomes were all bunched together, but with 0:02:12.689,0:02:17.670 the Industrial Revolution the differences[br]exploded. It pushed some countries forward 0:02:17.670,0:02:22.629 onto the path to higher incomes while others[br]stayed where they had been for millennia." 0:02:22.629,0:02:27.319 According to Milanovic, in 1820, the richest[br]countries in the world - Great Britain and 0:02:27.319,0:02:33.110 the Netherlands - were only three times richer[br]than the poorest, like India and China. Today, 0:02:33.110,0:02:39.740 the gap between the richest and poorest nations is like[br]100:1. The gaps are getting bigger and bigger. 0:02:39.740,0:02:46.560 Thanks, Thought Bubble. The Industrial Revolution[br]created a lot of inequality between countries but today 0:02:46.560,0:02:52.439 globalization and international trade are accelerating it.[br]Most economists agree that globalization has 0:02:52.439,0:02:58.530 helped the world's poorest people, but it's[br]also helped the rich a lot more. Harvard economist 0:02:58.530,0:03:04.579 Richard Freeman noted, "The triumph of globalization[br]and market capitalism has improved living 0:03:04.579,0:03:10.599 standards for billions while concentrating[br]billions among the few." So, it's kind of 0:03:10.600,0:03:17.560 a mixed bag. The very poor are doing a little better, but[br]the very rich are now a lot richer than everybody else. 0:03:17.560,0:03:21.680 There are other reasons inequality is growing.[br]Economists point to something called "skill-biased 0:03:21.689,0:03:27.280 technological change." The jobs created in[br]modernized economies are more technology-based, 0:03:27.280,0:03:31.430 generally requiring new skills. Workers that[br]have the education and skills to do those 0:03:31.430,0:03:36.489 jobs thrive, while others are left behind.[br]So, in a way, technology's become a complement 0:03:36.489,0:03:41.859 for skilled workers but a replacement for[br]many unskilled workers. The end result is 0:03:41.859,0:03:46.310 an ever widening gap between not just the[br]poor and the rich, but also the poor and the 0:03:46.310,0:03:51.530 working class. As economies develop and as[br]manufacturing jobs move overseas, low skill 0:03:51.530,0:03:57.840 low pay and high skill high pay work are the[br]only jobs left. People with few skills fall 0:03:57.840,0:04:03.079 behind in terms of income. In the last thirty[br]years in the US, the number of college-educated 0:04:03.079,0:04:09.109 people living in poverty has doubled from[br]3% to 6%, which is bad! And then consider 0:04:09.109,0:04:14.060 that during the same period of time, the number[br]of people living in poverty with a high school 0:04:14.060,0:04:21.540 degree has risen from 6% to a whopping 22%.[br]Over the last fifty years, the salary of college 0:04:21.540,0:04:26.810 graduates has continued to grow while, after[br]adjusting for inflation, high school graduates' 0:04:26.810,0:04:30.590 incomes have actually dropped. It's a good[br]reason to stay in school! 0:04:30.590,0:04:35.470 There are other reasons the income gap is[br]widening. The reduced influence of unions, 0:04:35.470,0:04:39.820 tax policies that favor the wealthy, and the[br]fact that somehow it's okay for CEOs to make 0:04:39.820,0:04:45.060 salaries many, many times greater than those[br]of their employees. Also, race and gender 0:04:45.060,0:04:48.690 and other forms of inequality can exacerbate[br]income equality. 0:04:48.690,0:04:52.970 Jacob: Let's dive into the data for the United[br]States. We'll start by mentioning Max Lorenz, 0:04:52.970,0:04:57.350 who created a graph to show income inequality.[br]Along the bottom we have the percent of households 0:04:57.350,0:05:01.830 from 0-100% and along the side we have the[br]percent share of income. By the way, we're 0:05:01.830,0:05:05.390 using households rather than just looking[br]at individuals because many households have 0:05:05.390,0:05:10.580 two income earners. So this straight line[br]right here represents perfect income equality. 0:05:10.580,0:05:14.540 So every household earns the same income.[br]And while perfect income equality might look 0:05:14.540,0:05:19.340 nice on the surface, it's not really the goal.[br]When different jobs have different incomes, 0:05:19.340,0:05:23.210 people have incentive to become a doctor or[br]an entrepreneur or a YouTube star - you know, 0:05:23.210,0:05:28.410 the jobs society really values. So this graph, called[br]the Lorenz curve, helps visualize the depth of inequality. 0:05:28.410,0:05:34.180 Now, for 2010, the US Census Bureau found[br]that the poorest 20% of Americans made 3.3% 0:05:34.180,0:05:39.260 of the income. And the richest 20% made over[br]50% of the income. So that's pretty unequal 0:05:39.260,0:05:43.460 but has it always been like this? Well, in[br]1970, the bottom group earned 4.1% of the 0:05:43.460,0:05:49.900 income and the top earned 43.3%. By 1990,[br]things were even less equal so the 2010 numbers 0:05:49.910,0:05:53.380 are just a continuation of the trend. And[br]it isn't just the poorest group that's losing 0:05:53.380,0:05:58.550 ground. Over those 40 years, each of the bottom[br]groups or 80% households earned smaller and 0:05:58.550,0:06:00.190 smaller shares of the total income. 0:06:00.190,0:06:04.200 Now, from the Lorenz curve we can calculate[br]the most commonly used measure of income equality 0:06:04.200,0:06:09.020 - the GINI Index. Now without jumping into[br]too much of the math, it's basically the size 0:06:09.020,0:06:12.660 of the gap between the equal distribution[br]of income and the actual distribution. Now, 0:06:12.660,0:06:17.960 0 represents complete equality and 100 represents[br]complete inequality. Now, you might be surprised 0:06:17.970,0:06:22.240 to learn the US doesn't have the highest income[br]inequality, but it does have the highest among 0:06:22.240,0:06:25.490 Western industrialized nations. The UK has[br]the highest in the EU. 0:06:25.490,0:06:30.550 Adriene: The debate over income equality isn't[br]about whether it exists. It obviously does. 0:06:30.550,0:06:34.580 The fight is over whether it's a problem and[br]what should be done about it. Let's start 0:06:34.580,0:06:38.580 with those who don't think it's a big deal.[br]They tell you that the data suggests that 0:06:38.580,0:06:41.940 the rich are getting richer and the poor are[br]getting poorer, but that might not be the 0:06:41.940,0:06:46.140 case. Instead, it could be that all the groups[br]are making more money but the rich's share 0:06:46.140,0:06:50.910 is just growing faster. Like, let's say you[br]own an apple tree and we pick 10 apples. You 0:06:50.910,0:06:57.930 keep 6 and give me 4. A week later we pick[br]20 apples, you take 15 and give me 5. So my 0:06:57.930,0:07:05.200 share of the total went down from 40% to 25%[br]but each of us still got more apples. So it's 0:07:05.200,0:07:10.920 true that people in the lowest income bracket have[br]earned a little more money in the last 40 years, but in 0:07:10.920,0:07:18.080 the last 20 years, that average income has been falling.[br]Meanwhile, the rich have continually gotten richer. 0:07:18.090,0:07:23.240 So, what's the richest guy on earth have to[br]say about it? Bill Gates said, "Yes, some 0:07:23.240,0:07:28.740 level of inequality is built in to capitalism.[br]It's inherent to the system. The question 0:07:28.740,0:07:34.140 is, what level of inequality is acceptable?[br]And when does inequality start doing more 0:07:34.150,0:07:39.050 harm than good?" There's a growing group of[br]economists who believe income inequality in 0:07:39.050,0:07:45.300 the US today is doing more harm. They argue[br]that greater income inequality is associated 0:07:45.300,0:07:49.560 with a lot of problems. They point to studies[br]that show countries with more inequality have 0:07:49.560,0:07:56.300 more violence, drug abuse and incarcerations.[br]Income inequality also dilutes political equality, 0:07:56.300,0:08:01.110 since the rich have a disproportionate say[br]in what policies move forward, and the rich 0:08:01.110,0:08:04.490 have an incentive to promote policies that[br]benefit the rich. 0:08:04.490,0:08:08.780 So, how do we address this inequality? There's[br]not a lot of agreement on this. Some argue 0:08:08.780,0:08:13.780 that education is the key to reducing the[br]gap. Basically, workers with more and better 0:08:13.780,0:08:18.150 education tend to have the skills that earn[br]higher income. Some economists push for an 0:08:18.150,0:08:21.750 increased minimum wage, which we're going[br]to talk about in another episode. There's 0:08:21.750,0:08:27.050 even an argument that access to affordable,[br]high quality childcare would go a long way. 0:08:27.050,0:08:31.740 And some think governments should do more[br]to provide a social safety net, focus on getting 0:08:31.740,0:08:35.950 more people to work and adjust the tax code[br]to redistribute income. 0:08:35.950,0:08:39.810 Jacob: Some economists call for the government[br]to increase income taxes and capital gains 0:08:39.810,0:08:44.320 taxes on the rich. Income taxes in the US[br]are already somewhat progressive, which means 0:08:44.320,0:08:48.560 that there are tax brackets that require the[br]rich to pay a higher percent of income. Right 0:08:48.560,0:08:54.090 now, it peaks at around 40% but some economists[br]call for increases up to 50 or 60%. One idea 0:08:54.090,0:08:59.380 is to fix loopholes that the rich use to avoid[br]paying taxes. Other economists argue that taxing 0:08:59.380,0:09:04.440 the rich won't be as effective as reducing regulation[br]and bureaucratic red tape. It's unclear which path 0:09:04.440,0:09:09.860 we're going to take but extreme income inequality[br]at the national and global level needs to be addressed. 0:09:09.860,0:09:15.100 Motivation to improve income inequality may come[br]from a genuine desire to help people and level the 0:09:15.100,0:09:21.300 playing field, or the fear of Hunger Games-style social[br]upheaval. But either way, the issue can't be ignored. 0:09:21.300,0:09:27.160 Adriene: Even Adam Smith, the most classical[br]of classical economists, said, "No society 0:09:27.160,0:09:33.030 can surely be flourishing and happy of which[br]the far greater part of the members are poor 0:09:33.030,0:09:37.280 and miserable." Thanks for watching, we'll[br]see you next week. 0:09:37.280,0:09:40.610 Jacob: Thanks for watching Crash Course Economics.[br]It was made with the help of all of these 0:09:40.610,0:09:45.360 nice people. You can help keep Crash Course[br]free for everyone forever by supporting the 0:09:45.360,0:09:50.430 show at Patreon. Patreon is a voluntary subscription[br]service where you can support the show with 0:09:50.430,0:09:53.900 monthly contributions. We'd like to thank[br]our High Chancellor of Learning, Dr. Brett 0:09:53.900,0:09:59.180 Henderson and our Headmaster of Learning,[br]Linnea Boyev, and Crash Course Vice Principal 0:09:59.180,0:10:02.600 Cathy and Kim Philip. Thanks for watching,[br]DFTBA.