1 00:00:00,380 --> 00:00:02,880 Jacob: Welcome to Crash Course Economics, I'm Jacob Clifford... 2 00:00:02,880 --> 00:00:07,840 Adriene: ...and I'm Adriene Hill. The world is full of inequality. There's racial inequality, 3 00:00:07,840 --> 00:00:14,040 gender inequality, health, education, political inequality, and of course, economic inequality. 4 00:00:14,040 --> 00:00:18,760 Some people are rich, and some people are poor, and it can seem pretty impossible to fix. 5 00:00:18,760 --> 00:00:20,020 Jacob: Well, maybe not. 6 00:00:20,020 --> 00:00:28,880 [Theme Music] 7 00:00:28,880 --> 00:00:34,760 Jacob: So there are two main types of economic inequality: wealth inequality and income inequality. 8 00:00:34,760 --> 00:00:39,260 Wealth is accumulated assets, minus liabilities so it's the value of stuff like savings, pensions, 9 00:00:39,260 --> 00:00:43,440 real estate, and stocks. When we talk about wealth inequality, we're basically talking 10 00:00:43,440 --> 00:00:47,329 about how assets are distributed. Income is the new earnings that are constantly being 11 00:00:47,329 --> 00:00:51,280 added to that pile of wealth. So when we talk about income inequality, we're talking about 12 00:00:51,280 --> 00:00:55,760 how that new stuff is getting distributed. Point is, they're not the same. Let's go to the Thought Bubble. 13 00:00:55,760 --> 00:01:00,220 Adriene: Let's look at both types of inequality at the global level. Global wealth today is 14 00:01:00,230 --> 00:01:06,560 estimated at about 260 trillion dollars, and is not distributed equally. One study shows 15 00:01:06,560 --> 00:01:11,389 that North America and Europe, while they have less than 20% of the world's population, 16 00:01:11,389 --> 00:01:17,130 have 67% of the world's wealth. China, which has more people than North America and Europe 17 00:01:17,130 --> 00:01:23,549 combined, has only about 8% of the wealth. India and Africa together make up almost 30% 18 00:01:23,549 --> 00:01:29,310 of the population, but only share about 2% of the world's wealth. We're teaching economics, 19 00:01:29,310 --> 00:01:34,100 so we can focus on income inequality. These ten people represent everyone on the planet, 20 00:01:34,100 --> 00:01:38,689 and they're lined up according to income. Poorest over here and richest over here. This 21 00:01:38,689 --> 00:01:44,090 group represents the poorest 20%, this is the second poorest 20%, the middle 20%, and 22 00:01:44,090 --> 00:01:50,090 so on. If we distributed a hundred dollars based on current income trends, this group 23 00:01:50,090 --> 00:01:55,710 would get about 83 of those dollars, the next richest would get 10 dollars, the middle gets 24 00:01:55,710 --> 00:02:01,800 four, the second poorest group would get two dollars and the poorest 20% of humans would get one dollar. 25 00:02:01,810 --> 00:02:07,399 Branko Milanovic, an economist that specializes in inequality, explained all this by describing 26 00:02:07,399 --> 00:02:12,689 an "economic big bang" - "At first, countries' incomes were all bunched together, but with 27 00:02:12,689 --> 00:02:17,670 the Industrial Revolution the differences exploded. It pushed some countries forward 28 00:02:17,670 --> 00:02:22,629 onto the path to higher incomes while others stayed where they had been for millennia." 29 00:02:22,629 --> 00:02:27,319 According to Milanovic, in 1820, the richest countries in the world - Great Britain and 30 00:02:27,319 --> 00:02:33,110 the Netherlands - were only three times richer than the poorest, like India and China. Today, 31 00:02:33,110 --> 00:02:39,740 the gap between the richest and poorest nations is like 100:1. The gaps are getting bigger and bigger. 32 00:02:39,740 --> 00:02:46,560 Thanks, Thought Bubble. The Industrial Revolution created a lot of inequality between countries but today 33 00:02:46,560 --> 00:02:52,439 globalization and international trade are accelerating it. Most economists agree that globalization has 34 00:02:52,439 --> 00:02:58,530 helped the world's poorest people, but it's also helped the rich a lot more. Harvard economist 35 00:02:58,530 --> 00:03:04,579 Richard Freeman noted, "The triumph of globalization and market capitalism has improved living 36 00:03:04,579 --> 00:03:10,599 standards for billions while concentrating billions among the few." So, it's kind of 37 00:03:10,600 --> 00:03:17,560 a mixed bag. The very poor are doing a little better, but the very rich are now a lot richer than everybody else. 38 00:03:17,560 --> 00:03:21,680 There are other reasons inequality is growing. Economists point to something called "skill-biased 39 00:03:21,689 --> 00:03:27,280 technological change." The jobs created in modernized economies are more technology-based, 40 00:03:27,280 --> 00:03:31,430 generally requiring new skills. Workers that have the education and skills to do those 41 00:03:31,430 --> 00:03:36,489 jobs thrive, while others are left behind. So, in a way, technology's become a complement 42 00:03:36,489 --> 00:03:41,859 for skilled workers but a replacement for many unskilled workers. The end result is 43 00:03:41,859 --> 00:03:46,310 an ever widening gap between not just the poor and the rich, but also the poor and the 44 00:03:46,310 --> 00:03:51,530 working class. As economies develop and as manufacturing jobs move overseas, low skill 45 00:03:51,530 --> 00:03:57,840 low pay and high skill high pay work are the only jobs left. People with few skills fall 46 00:03:57,840 --> 00:04:03,079 behind in terms of income. In the last thirty years in the US, the number of college-educated 47 00:04:03,079 --> 00:04:09,109 people living in poverty has doubled from 3% to 6%, which is bad! And then consider 48 00:04:09,109 --> 00:04:14,060 that during the same period of time, the number of people living in poverty with a high school 49 00:04:14,060 --> 00:04:21,540 degree has risen from 6% to a whopping 22%. Over the last fifty years, the salary of college 50 00:04:21,540 --> 00:04:26,810 graduates has continued to grow while, after adjusting for inflation, high school graduates' 51 00:04:26,810 --> 00:04:30,590 incomes have actually dropped. It's a good reason to stay in school! 52 00:04:30,590 --> 00:04:35,470 There are other reasons the income gap is widening. The reduced influence of unions, 53 00:04:35,470 --> 00:04:39,820 tax policies that favor the wealthy, and the fact that somehow it's okay for CEOs to make 54 00:04:39,820 --> 00:04:45,060 salaries many, many times greater than those of their employees. Also, race and gender 55 00:04:45,060 --> 00:04:48,690 and other forms of inequality can exacerbate income equality. 56 00:04:48,690 --> 00:04:52,970 Jacob: Let's dive into the data for the United States. We'll start by mentioning Max Lorenz, 57 00:04:52,970 --> 00:04:57,350 who created a graph to show income inequality. Along the bottom we have the percent of households 58 00:04:57,350 --> 00:05:01,830 from 0-100% and along the side we have the percent share of income. By the way, we're 59 00:05:01,830 --> 00:05:05,390 using households rather than just looking at individuals because many households have 60 00:05:05,390 --> 00:05:10,580 two income earners. So this straight line right here represents perfect income equality. 61 00:05:10,580 --> 00:05:14,540 So every household earns the same income. And while perfect income equality might look 62 00:05:14,540 --> 00:05:19,340 nice on the surface, it's not really the goal. When different jobs have different incomes, 63 00:05:19,340 --> 00:05:23,210 people have incentive to become a doctor or an entrepreneur or a YouTube star - you know, 64 00:05:23,210 --> 00:05:28,410 the jobs society really values. So this graph, called the Lorenz curve, helps visualize the depth of inequality. 65 00:05:28,410 --> 00:05:34,180 Now, for 2010, the US Census Bureau found that the poorest 20% of Americans made 3.3% 66 00:05:34,180 --> 00:05:39,260 of the income. And the richest 20% made over 50% of the income. So that's pretty unequal 67 00:05:39,260 --> 00:05:43,460 but has it always been like this? Well, in 1970, the bottom group earned 4.1% of the 68 00:05:43,460 --> 00:05:49,900 income and the top earned 43.3%. By 1990, things were even less equal so the 2010 numbers 69 00:05:49,910 --> 00:05:53,380 are just a continuation of the trend. And it isn't just the poorest group that's losing 70 00:05:53,380 --> 00:05:58,550 ground. Over those 40 years, each of the bottom groups or 80% households earned smaller and 71 00:05:58,550 --> 00:06:00,190 smaller shares of the total income. 72 00:06:00,190 --> 00:06:04,200 Now, from the Lorenz curve we can calculate the most commonly used measure of income equality 73 00:06:04,200 --> 00:06:09,020 - the GINI Index. Now without jumping into too much of the math, it's basically the size 74 00:06:09,020 --> 00:06:12,660 of the gap between the equal distribution of income and the actual distribution. Now, 75 00:06:12,660 --> 00:06:17,960 0 represents complete equality and 100 represents complete inequality. Now, you might be surprised 76 00:06:17,970 --> 00:06:22,240 to learn the US doesn't have the highest income inequality, but it does have the highest among 77 00:06:22,240 --> 00:06:25,490 Western industrialized nations. The UK has the highest in the EU. 78 00:06:25,490 --> 00:06:30,550 Adriene: The debate over income equality isn't about whether it exists. It obviously does. 79 00:06:30,550 --> 00:06:34,580 The fight is over whether it's a problem and what should be done about it. Let's start 80 00:06:34,580 --> 00:06:38,580 with those who don't think it's a big deal. They tell you that the data suggests that 81 00:06:38,580 --> 00:06:41,940 the rich are getting richer and the poor are getting poorer, but that might not be the 82 00:06:41,940 --> 00:06:46,140 case. Instead, it could be that all the groups are making more money but the rich's share 83 00:06:46,140 --> 00:06:50,910 is just growing faster. Like, let's say you own an apple tree and we pick 10 apples. You 84 00:06:50,910 --> 00:06:57,930 keep 6 and give me 4. A week later we pick 20 apples, you take 15 and give me 5. So my 85 00:06:57,930 --> 00:07:05,200 share of the total went down from 40% to 25% but each of us still got more apples. So it's 86 00:07:05,200 --> 00:07:10,920 true that people in the lowest income bracket have earned a little more money in the last 40 years, but in 87 00:07:10,920 --> 00:07:18,080 the last 20 years, that average income has been falling. Meanwhile, the rich have continually gotten richer. 88 00:07:18,090 --> 00:07:23,240 So, what's the richest guy on earth have to say about it? Bill Gates said, "Yes, some 89 00:07:23,240 --> 00:07:28,740 level of inequality is built in to capitalism. It's inherent to the system. The question 90 00:07:28,740 --> 00:07:34,140 is, what level of inequality is acceptable? And when does inequality start doing more 91 00:07:34,150 --> 00:07:39,050 harm than good?" There's a growing group of economists who believe income inequality in 92 00:07:39,050 --> 00:07:45,300 the US today is doing more harm. They argue that greater income inequality is associated 93 00:07:45,300 --> 00:07:49,560 with a lot of problems. They point to studies that show countries with more inequality have 94 00:07:49,560 --> 00:07:56,300 more violence, drug abuse and incarcerations. Income inequality also dilutes political equality, 95 00:07:56,300 --> 00:08:01,110 since the rich have a disproportionate say in what policies move forward, and the rich 96 00:08:01,110 --> 00:08:04,490 have an incentive to promote policies that benefit the rich. 97 00:08:04,490 --> 00:08:08,780 So, how do we address this inequality? There's not a lot of agreement on this. Some argue 98 00:08:08,780 --> 00:08:13,780 that education is the key to reducing the gap. Basically, workers with more and better 99 00:08:13,780 --> 00:08:18,150 education tend to have the skills that earn higher income. Some economists push for an 100 00:08:18,150 --> 00:08:21,750 increased minimum wage, which we're going to talk about in another episode. There's 101 00:08:21,750 --> 00:08:27,050 even an argument that access to affordable, high quality childcare would go a long way. 102 00:08:27,050 --> 00:08:31,740 And some think governments should do more to provide a social safety net, focus on getting 103 00:08:31,740 --> 00:08:35,950 more people to work and adjust the tax code to redistribute income. 104 00:08:35,950 --> 00:08:39,810 Jacob: Some economists call for the government to increase income taxes and capital gains 105 00:08:39,810 --> 00:08:44,320 taxes on the rich. Income taxes in the US are already somewhat progressive, which means 106 00:08:44,320 --> 00:08:48,560 that there are tax brackets that require the rich to pay a higher percent of income. Right 107 00:08:48,560 --> 00:08:54,090 now, it peaks at around 40% but some economists call for increases up to 50 or 60%. One idea 108 00:08:54,090 --> 00:08:59,380 is to fix loopholes that the rich use to avoid paying taxes. Other economists argue that taxing 109 00:08:59,380 --> 00:09:04,440 the rich won't be as effective as reducing regulation and bureaucratic red tape. It's unclear which path 110 00:09:04,440 --> 00:09:09,860 we're going to take but extreme income inequality at the national and global level needs to be addressed. 111 00:09:09,860 --> 00:09:15,100 Motivation to improve income inequality may come from a genuine desire to help people and level the 112 00:09:15,100 --> 00:09:21,300 playing field, or the fear of Hunger Games-style social upheaval. But either way, the issue can't be ignored. 113 00:09:21,300 --> 00:09:27,160 Adriene: Even Adam Smith, the most classical of classical economists, said, "No society 114 00:09:27,160 --> 00:09:33,030 can surely be flourishing and happy of which the far greater part of the members are poor 115 00:09:33,030 --> 00:09:37,280 and miserable." Thanks for watching, we'll see you next week. 116 00:09:37,280 --> 00:09:40,610 Jacob: Thanks for watching Crash Course Economics. It was made with the help of all of these 117 00:09:40,610 --> 00:09:45,360 nice people. You can help keep Crash Course free for everyone forever by supporting the 118 00:09:45,360 --> 00:09:50,430 show at Patreon. Patreon is a voluntary subscription service where you can support the show with 119 00:09:50,430 --> 00:09:53,900 monthly contributions. We'd like to thank our High Chancellor of Learning, Dr. Brett 120 00:09:53,900 --> 00:09:59,180 Henderson and our Headmaster of Learning, Linnea Boyev, and Crash Course Vice Principal 121 00:09:59,180 --> 00:10:02,600 Cathy and Kim Philip. Thanks for watching, DFTBA.