Income and Wealth Inequality: Crash Course Economics #17

Jacob: Welcome to Crash Course Economics,
I'm Jacob Clifford...

Adriene: ...and I'm Adriene Hill. The world
is full of inequality. There's racial inequality,

gender inequality, health, education, political
inequality, and of course, economic inequality.

Some people are rich, and some people are
poor, and it can seem pretty impossible to fix.

Jacob: Well, maybe not.

[Theme Music]

Jacob: So there are two main types of economic
inequality: wealth inequality and income inequality.

Wealth is accumulated assets, minus liabilities
so it's the value of stuff like savings, pensions,

real estate, and stocks. When we talk about
wealth inequality, we're basically talking

about how assets are distributed. Income is
the new earnings that are constantly being

added to that pile of wealth. So when we talk
about income inequality, we're talking about

how that new stuff is getting distributed. Point is,
they're not the same. Let's go to the Thought Bubble.

Adriene: Let's look at both types of inequality
at the global level. Global wealth today is

estimated at about 260 trillion dollars, and
is not distributed equally. One study shows

that North America and Europe, while they
have less than 20% of the world's population,

have 67% of the world's wealth. China, which
has more people than North America and Europe

combined, has only about 8% of the wealth.
India and Africa together make up almost 30%

of the population, but only share about 2%
of the world's wealth. We're teaching economics,

so we can focus on income inequality. These
ten people represent everyone on the planet,

and they're lined up according to income.
Poorest over here and richest over here. This

group represents the poorest 20%, this is
the second poorest 20%, the middle 20%, and

so on. If we distributed a hundred dollars
based on current income trends, this group

would get about 83 of those dollars, the next
richest would get 10 dollars, the middle gets

four, the second poorest group would get two dollars
and the poorest 20% of humans would get one dollar.

Branko Milanovic, an economist that specializes
in inequality, explained all this by describing

an "economic big bang" - "At first, countries'
incomes were all bunched together, but with

the Industrial Revolution the differences
exploded. It pushed some countries forward

onto the path to higher incomes while others
stayed where they had been for millennia."

According to Milanovic, in 1820, the richest
countries in the world - Great Britain and

the Netherlands - were only three times richer
than the poorest, like India and China. Today,

the gap between the richest and poorest nations is like
100:1. The gaps are getting bigger and bigger.

Thanks, Thought Bubble. The Industrial Revolution
created a lot of inequality between countries but today

globalization and international trade are accelerating it.
Most economists agree that globalization has

helped the world's poorest people, but it's
also helped the rich a lot more. Harvard economist

Richard Freeman noted, "The triumph of globalization
and market capitalism has improved living

standards for billions while concentrating
billions among the few." So, it's kind of

a mixed bag. The very poor are doing a little better, but
the very rich are now a lot richer than everybody else.

There are other reasons inequality is growing.
Economists point to something called "skill-biased

technological change." The jobs created in
modernized economies are more technology-based,

generally requiring new skills. Workers that
have the education and skills to do those

jobs thrive, while others are left behind.
So, in a way, technology's become a complement

for skilled workers but a replacement for
many unskilled workers. The end result is

an ever widening gap between not just the
poor and the rich, but also the poor and the

working class. As economies develop and as
manufacturing jobs move overseas, low skill

low pay and high skill high pay work are the
only jobs left. People with few skills fall

behind in terms of income. In the last thirty
years in the US, the number of college-educated

people living in poverty has doubled from
3% to 6%, which is bad! And then consider

that during the same period of time, the number
of people living in poverty with a high school

degree has risen from 6% to a whopping 22%.
Over the last fifty years, the salary of college

graduates has continued to grow while, after
adjusting for inflation, high school graduates'

incomes have actually dropped. It's a good
reason to stay in school!

There are other reasons the income gap is
widening. The reduced influence of unions,

tax policies that favor the wealthy, and the
fact that somehow it's okay for CEOs to make

salaries many, many times greater than those
of their employees. Also, race and gender

and other forms of inequality can exacerbate
income equality.

Jacob: Let's dive into the data for the United
States. We'll start by mentioning Max Lorenz,

who created a graph to show income inequality.
Along the bottom we have the percent of households

from 0-100% and along the side we have the
percent share of income. By the way, we're

using households rather than just looking
at individuals because many households have

two income earners. So this straight line
right here represents perfect income equality.

So every household earns the same income.
And while perfect income equality might look

nice on the surface, it's not really the goal.
When different jobs have different incomes,

people have incentive to become a doctor or
an entrepreneur or a YouTube star - you know,

the jobs society really values. So this graph, called
the Lorenz curve, helps visualize the depth of inequality.

Now, for 2010, the US Census Bureau found
that the poorest 20% of Americans made 3.3%

of the income. And the richest 20% made over
50% of the income. So that's pretty unequal

but has it always been like this? Well, in
1970, the bottom group earned 4.1% of the

income and the top earned 43.3%. By 1990,
things were even less equal so the 2010 numbers

are just a continuation of the trend. And
it isn't just the poorest group that's losing

ground. Over those 40 years, each of the bottom
groups or 80% households earned smaller and

smaller shares of the total income.

Now, from the Lorenz curve we can calculate
the most commonly used measure of income equality

- the GINI Index. Now without jumping into
too much of the math, it's basically the size

of the gap between the equal distribution
of income and the actual distribution. Now,

0 represents complete equality and 100 represents
complete inequality. Now, you might be surprised

to learn the US doesn't have the highest income
inequality, but it does have the highest among

Western industrialized nations. The UK has
the highest in the EU.

Adriene: The debate over income equality isn't
about whether it exists. It obviously does.

The fight is over whether it's a problem and
what should be done about it. Let's start

with those who don't think it's a big deal.
They tell you that the data suggests that

the rich are getting richer and the poor are
getting poorer, but that might not be the

case. Instead, it could be that all the groups
are making more money but the rich's share

is just growing faster. Like, let's say you
own an apple tree and we pick 10 apples. You

keep 6 and give me 4. A week later we pick
20 apples, you take 15 and give me 5. So my

share of the total went down from 40% to 25%
but each of us still got more apples. So it's

true that people in the lowest income bracket have
earned a little more money in the last 40 years, but in

the last 20 years, that average income has been falling.
Meanwhile, the rich have continually gotten richer.

So, what's the richest guy on earth have to
say about it? Bill Gates said, "Yes, some

level of inequality is built in to capitalism.
It's inherent to the system. The question

is, what level of inequality is acceptable?
And when does inequality start doing more

harm than good?" There's a growing group of
economists who believe income inequality in

the US today is doing more harm. They argue
that greater income inequality is associated

with a lot of problems. They point to studies
that show countries with more inequality have

more violence, drug abuse and incarcerations.
Income inequality also dilutes political equality,

since the rich have a disproportionate say
in what policies move forward, and the rich

have an incentive to promote policies that
benefit the rich.

So, how do we address this inequality? There's
not a lot of agreement on this. Some argue

that education is the key to reducing the
gap. Basically, workers with more and better

education tend to have the skills that earn
higher income. Some economists push for an

increased minimum wage, which we're going
to talk about in another episode. There's

even an argument that access to affordable,
high quality childcare would go a long way.

And some think governments should do more
to provide a social safety net, focus on getting

more people to work and adjust the tax code
to redistribute income.

Jacob: Some economists call for the government
to increase income taxes and capital gains

taxes on the rich. Income taxes in the US
are already somewhat progressive, which means

that there are tax brackets that require the
rich to pay a higher percent of income. Right

now, it peaks at around 40% but some economists
call for increases up to 50 or 60%. One idea

is to fix loopholes that the rich use to avoid
paying taxes. Other economists argue that taxing

the rich won't be as effective as reducing regulation
and bureaucratic red tape. It's unclear which path

we're going to take but extreme income inequality
at the national and global level needs to be addressed.

Motivation to improve income inequality may come
from a genuine desire to help people and level the

playing field, or the fear of Hunger Games-style social
upheaval. But either way, the issue can't be ignored.

Adriene: Even Adam Smith, the most classical
of classical economists, said, "No society

can surely be flourishing and happy of which
the far greater part of the members are poor

and miserable." Thanks for watching, we'll
see you next week.

Jacob: Thanks for watching Crash Course Economics.
It was made with the help of all of these

nice people. You can help keep Crash Course
free for everyone forever by supporting the

show at Patreon. Patreon is a voluntary subscription
service where you can support the show with

monthly contributions. We'd like to thank
our High Chancellor of Learning, Dr. Brett

Henderson and our Headmaster of Learning,
Linnea Boyev, and Crash Course Vice Principal

Cathy and Kim Philip. Thanks for watching,
DFTBA.