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Income and Wealth Inequality: Crash Course Economics #17

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    Jacob: Welcome to Crash Course Economics,
    I'm Jacob Clifford...
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    Adriene: ...and I'm Adriene Hill. The world
    is full of inequality. There's racial inequality,
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    gender inequality, health, education, political
    inequality, and of course, economic inequality.
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    Some people are rich, and some people are
    poor, and it can seem pretty impossible to fix.
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    Jacob: Well, maybe not.
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    [Theme Music]
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    Jacob: So there are two main types of economic
    inequality: wealth inequality and income inequality.
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    Wealth is accumulated assets, minus liabilities
    so it's the value of stuff like savings, pensions,
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    real estate, and stocks. When we talk about
    wealth inequality, we're basically talking
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    about how assets are distributed. Income is
    the new earnings that are constantly being
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    added to that pile of wealth. So when we talk
    about income inequality, we're talking about
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    how that new stuff is getting distributed. Point is,
    they're not the same. Let's go to the Thought Bubble.
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    Adriene: Let's look at both types of inequality
    at the global level. Global wealth today is
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    estimated at about 260 trillion dollars, and
    is not distributed equally. One study shows
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    that North America and Europe, while they
    have less than 20% of the world's population,
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    have 67% of the world's wealth. China, which
    has more people than North America and Europe
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    combined, has only about 8% of the wealth.
    India and Africa together make up almost 30%
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    of the population, but only share about 2%
    of the world's wealth. We're teaching economics,
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    so we can focus on income inequality. These
    ten people represent everyone on the planet,
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    and they're lined up according to income.
    Poorest over here and richest over here. This
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    group represents the poorest 20%, this is
    the second poorest 20%, the middle 20%, and
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    so on. If we distributed a hundred dollars
    based on current income trends, this group
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    would get about 83 of those dollars, the next
    richest would get 10 dollars, the middle gets
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    four, the second poorest group would get two dollars
    and the poorest 20% of humans would get one dollar.
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    Branko Milanovic, an economist that specializes
    in inequality, explained all this by describing
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    an "economic big bang" - "At first, countries'
    incomes were all bunched together, but with
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    the Industrial Revolution the differences
    exploded. It pushed some countries forward
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    onto the path to higher incomes while others
    stayed where they had been for millennia."
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    According to Milanovic, in 1820, the richest
    countries in the world - Great Britain and
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    the Netherlands - were only three times richer
    than the poorest, like India and China. Today,
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    the gap between the richest and poorest nations is like
    100:1. The gaps are getting bigger and bigger.
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    Thanks, Thought Bubble. The Industrial Revolution
    created a lot of inequality between countries but today
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    globalization and international trade are accelerating it.
    Most economists agree that globalization has
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    helped the world's poorest people, but it's
    also helped the rich a lot more. Harvard economist
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    Richard Freeman noted, "The triumph of globalization
    and market capitalism has improved living
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    standards for billions while concentrating
    billions among the few." So, it's kind of
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    a mixed bag. The very poor are doing a little better, but
    the very rich are now a lot richer than everybody else.
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    There are other reasons inequality is growing.
    Economists point to something called "skill-biased
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    technological change." The jobs created in
    modernized economies are more technology-based,
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    generally requiring new skills. Workers that
    have the education and skills to do those
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    jobs thrive, while others are left behind.
    So, in a way, technology's become a complement
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    for skilled workers but a replacement for
    many unskilled workers. The end result is
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    an ever widening gap between not just the
    poor and the rich, but also the poor and the
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    working class. As economies develop and as
    manufacturing jobs move overseas, low skill
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    low pay and high skill high pay work are the
    only jobs left. People with few skills fall
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    behind in terms of income. In the last thirty
    years in the US, the number of college-educated
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    people living in poverty has doubled from
    3% to 6%, which is bad! And then consider
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    that during the same period of time, the number
    of people living in poverty with a high school
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    degree has risen from 6% to a whopping 22%.
    Over the last fifty years, the salary of college
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    graduates has continued to grow while, after
    adjusting for inflation, high school graduates'
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    incomes have actually dropped. It's a good
    reason to stay in school!
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    There are other reasons the income gap is
    widening. The reduced influence of unions,
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    tax policies that favor the wealthy, and the
    fact that somehow it's okay for CEOs to make
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    salaries many, many times greater than those
    of their employees. Also, race and gender
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    and other forms of inequality can exacerbate
    income equality.
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    Jacob: Let's dive into the data for the United
    States. We'll start by mentioning Max Lorenz,
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    who created a graph to show income inequality.
    Along the bottom we have the percent of households
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    from 0-100% and along the side we have the
    percent share of income. By the way, we're
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    using households rather than just looking
    at individuals because many households have
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    two income earners. So this straight line
    right here represents perfect income equality.
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    So every household earns the same income.
    And while perfect income equality might look
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    nice on the surface, it's not really the goal.
    When different jobs have different incomes,
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    people have incentive to become a doctor or
    an entrepreneur or a YouTube star - you know,
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    the jobs society really values. So this graph, called
    the Lorenz curve, helps visualize the depth of inequality.
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    Now, for 2010, the US Census Bureau found
    that the poorest 20% of Americans made 3.3%
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    of the income. And the richest 20% made over
    50% of the income. So that's pretty unequal
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    but has it always been like this? Well, in
    1970, the bottom group earned 4.1% of the
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    income and the top earned 43.3%. By 1990,
    things were even less equal so the 2010 numbers
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    are just a continuation of the trend. And
    it isn't just the poorest group that's losing
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    ground. Over those 40 years, each of the bottom
    groups or 80% households earned smaller and
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    smaller shares of the total income.
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    Now, from the Lorenz curve we can calculate
    the most commonly used measure of income equality
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    - the GINI Index. Now without jumping into
    too much of the math, it's basically the size
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    of the gap between the equal distribution
    of income and the actual distribution. Now,
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    0 represents complete equality and 100 represents
    complete inequality. Now, you might be surprised
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    to learn the US doesn't have the highest income
    inequality, but it does have the highest among
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    Western industrialized nations. The UK has
    the highest in the EU.
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    Adriene: The debate over income equality isn't
    about whether it exists. It obviously does.
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    The fight is over whether it's a problem and
    what should be done about it. Let's start
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    with those who don't think it's a big deal.
    They tell you that the data suggests that
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    the rich are getting richer and the poor are
    getting poorer, but that might not be the
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    case. Instead, it could be that all the groups
    are making more money but the rich's share
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    is just growing faster. Like, let's say you
    own an apple tree and we pick 10 apples. You
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    keep 6 and give me 4. A week later we pick
    20 apples, you take 15 and give me 5. So my
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    share of the total went down from 40% to 25%
    but each of us still got more apples. So it's
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    true that people in the lowest income bracket have
    earned a little more money in the last 40 years, but in
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    the last 20 years, that average income has been falling.
    Meanwhile, the rich have continually gotten richer.
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    So, what's the richest guy on earth have to
    say about it? Bill Gates said, "Yes, some
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    level of inequality is built in to capitalism.
    It's inherent to the system. The question
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    is, what level of inequality is acceptable?
    And when does inequality start doing more
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    harm than good?" There's a growing group of
    economists who believe income inequality in
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    the US today is doing more harm. They argue
    that greater income inequality is associated
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    with a lot of problems. They point to studies
    that show countries with more inequality have
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    more violence, drug abuse and incarcerations.
    Income inequality also dilutes political equality,
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    since the rich have a disproportionate say
    in what policies move forward, and the rich
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    have an incentive to promote policies that
    benefit the rich.
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    So, how do we address this inequality? There's
    not a lot of agreement on this. Some argue
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    that education is the key to reducing the
    gap. Basically, workers with more and better
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    education tend to have the skills that earn
    higher income. Some economists push for an
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    increased minimum wage, which we're going
    to talk about in another episode. There's
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    even an argument that access to affordable,
    high quality childcare would go a long way.
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    And some think governments should do more
    to provide a social safety net, focus on getting
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    more people to work and adjust the tax code
    to redistribute income.
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    Jacob: Some economists call for the government
    to increase income taxes and capital gains
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    taxes on the rich. Income taxes in the US
    are already somewhat progressive, which means
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    that there are tax brackets that require the
    rich to pay a higher percent of income. Right
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    now, it peaks at around 40% but some economists
    call for increases up to 50 or 60%. One idea
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    is to fix loopholes that the rich use to avoid
    paying taxes. Other economists argue that taxing
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    the rich won't be as effective as reducing regulation
    and bureaucratic red tape. It's unclear which path
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    we're going to take but extreme income inequality
    at the national and global level needs to be addressed.
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    Motivation to improve income inequality may come
    from a genuine desire to help people and level the
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    playing field, or the fear of Hunger Games-style social
    upheaval. But either way, the issue can't be ignored.
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    Adriene: Even Adam Smith, the most classical
    of classical economists, said, "No society
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    can surely be flourishing and happy of which
    the far greater part of the members are poor
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    and miserable." Thanks for watching, we'll
    see you next week.
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    Jacob: Thanks for watching Crash Course Economics.
    It was made with the help of all of these
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    nice people. You can help keep Crash Course
    free for everyone forever by supporting the
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    show at Patreon. Patreon is a voluntary subscription
    service where you can support the show with
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    monthly contributions. We'd like to thank
    our High Chancellor of Learning, Dr. Brett
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    Henderson and our Headmaster of Learning,
    Linnea Boyev, and Crash Course Vice Principal
  • 9:59 - 10:03
    Cathy and Kim Philip. Thanks for watching,
    DFTBA.
Title:
Income and Wealth Inequality: Crash Course Economics #17
Description:

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Video Language:
English
Team:
Crash Course
Duration:
10:16

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