Inequality - Understanding the Gap between Rich and Poor

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to Think like an Economist. So here's something really interesting.
Did you know that America's billionaires got a lot richer
during the COVID pandemic. I mean, for example, Amazon's founder
and CEO Jeff Bezos has made about two hundred and
fifty million dollars a day in twenty twenty.
And yet over this period, more than fifty million Americans
have had to file for unemployment benefits.
So Jeff Bezos has become one of the richest people
of all time during this pandemic. Whow Lots of other
families are struggling. But this isn't just about the pandemic.
Inequality is our topic today on Think Like an Economist
with me Betsy Stevenson.
And with me Justin Wolfers, and we're here to teach
you the super tools of economics so you can make
better decisions, Nestra and Tebercoli fowers with us.
Yeah, so you know, this is a topic a lot
of us really care about, and personally, I've been trying
to not order things from Amazon. But then I think
one person is going to make a lot of difference.
But then if a lot of us don't order things
from Amazon, maybe that will make a difference. And then
I'm thinking, maybe it's better to just focus on giving
people a really fair shot at doing well in life.
Maybe we should be focusing on everyone having the same
amount of income, maybe.
As hold on. Those are a lot of ideas and
they each have very different implications for what we might
want to do. A lot of us want a fair
and more just society, but what does that mean exactly?
In this episode, we're going to get specific and it'll
help you better decide what policies you want to support
and how you think about politics. It will also help
you decide where to put your attention and energy, whether
that's in spending time helping a cause or in contributing
money to one instead.
Okay, so sometimes when people talk about inequality, they mean
income inequality and income is the amount of money you
receive in a certain period of time, like over a year.
In twenty nineteen, in the United States, the poorest one
fifth of households had an average income of only fifteen
thousand dollars. The richest one fifth of households had an
average income of over a quarter of a million dollars,
meaning that for every dollar one of the poor households got,
the richest households got sixteen dollars.
In fact, last year, the richest fifth took home more
than half of all income in the US, compared to
the poorest fifth, which only had three percent. Income inequality
is rising in the United States, and it's also rising
in other countries as well.
Yeah, and I think there's something else we need to
clear up, and that's that income and wealth are not
the same thing because we tend to use them interchangeably.
That's right. So sometimes people are talking about wealth inequality.
Wealth isn't just your paycheck or the money you receive
per year that be your income. Your wealth is the
value of all that you own, and so it includes
assets like houses and cars that you own, savings or
investment accounts. Income is a flow. It represents how things
change in a year. So beesos wealth is now over
two hundred billion dollars, and that reflects income of around
seventy five billion dollars in twenty twenty through his appreciated assets.
That's why inequality is even more extreme if we look
at wealth inequality. Wealth tends to grow over time, and
typically that growth isn't taxed, making it easier for wealth
to accumulate. Wealth gets passed down from one generation to
the next.
Wealth differences are also particularly extreme if we look by rice.
For example, in the US, the typical white family has
eight times the wealth of the typical Black family and
five times the wealth of the typical Hispanic family.
Wealth is shaped by inheritance or gifts from family members,
savings choices, home ownership opportunities, and access to tax shelters.
Your wealth is obviously shaped by the income you have,
and sometimes people have wealth because they are older and
they've been prudent about saving for retirement. And sometimes they
have wealth because of their family circumstances.
For example, around one in three white families have received
inheritance compared to about one in ten black families.
We've looked at income inequality and wealth inequality. What else
should we consider.
A lot of people worry about inequality of opportunity. Inequality
is also about the chances you get in life. I mean,
I know that my children will have a pret good
shot at life for reasons other than how much money
their parents make. No, we're well educated, and we have
the means to expose our children to a wide range
of things that we know boost kids development and help
build their earnings power as adults. They're kids who are
born with the same capabilities as mine, but they just
don't have the same advantages my kids have. And of
course there are also factors like race and class that
impact the advantages or disadvantages that kids face in life.
Study show that around half the economic advantage your parents
have or don't have gets passed down to you, So
if you grow up in a family that's low income,
it's more likely that you'll end up low income too.
Low income kids are unlikely to move up the distribution,
and high income kids are unlikely to move far down.
This is related to an important concept we call intergenerational mobility,
which is about how much your economic status depends on
that of your parents. Higher intergenerational mobility means that people
have a chance to do regardless of their parents' circumstances.
This might lead the resulting inequality to seem fairer, as
people from both rich and poor families had a chance
to do well or poorly.
There's also a racial dimension to intergenerational mobility. Black Americans
are more likely to move down the economic ladder and
thus likely to move up the economic ladder compared to
white children. Only two point five percent of Black children
born in the bottom fifth of the income distribution will
make it to the top fifth.
White children born in the bottom fifth are four times
as likely to move to the top of the distribution
as Black children, but they also don't have an equal shot.
The problem is that white kids born to parents in
the top fifth of the distribution are likely to stay
in the top fifth of the distribution. The same thing
isn't true for black children.
Often, when we talk about making a more equal society,
we mean redistributing income so it's more equally spread out
amongst everyone in society.
We have a few ways of doing this. One is
by providing a social safety need. So that's when the
government helps those facing difficult times with direct cash payments
or in kind benefits like food or housing, or services
like healthcare.
In the US, The government raises money for all of
these things through taxes, and you know, taxes help make
things more equal because those who earn more also pay
more in tax and therefore contribute more to the goods
and services all Americans benefit from. Our tax system is
also progressive, which means that the share of your income
you pay in tax goes up the higher is your income,
So you not only pay more when you earn more,
but you pay a greater share.
So these are ways we redistribute income. Now, not to
get too philosophical about things, but how important is this?
I mean, how much does money matter?
Well?
Studies show that are well being rises with income. And
here's the catch. Each extra dollar of income increases our
well being by a little less than the previous dollar.
But even when you're really rich, more income leads to
higher well being. We can think about this as the
extra benefit we get from an extra dollar, and this falls.
This extra benefit falls with each extra dollar we get.
Economists often use the word utility for well being. It's
just a fancy word that means the same thing as
well being or benefit, and economists have found that your
marginal utility or marginal wellbeing declines with each additional dollar
you get.
In fact, Betsy and I have studied this, and we've
found that your wellbeing increases by the same amount when
you get a ten percent increase in income, no matter
how Richua. But a ten percent increase in income for
someone earning fifty thousand dollars is only five thousand dollars,
and for someone earning a billion dollars a year, it's
one hundred million dollars.
This is a really important point for redistribution because ten
percent of someone like Jeff Bezos's income is a lot
of money. And if we take ten percent of Basis's income,
we only have to find one family out there whose
income that we increase by ten percent with his money
in order to leave us just as well off. And
if we can increase the incomes of more than one family,
we're gonna make the world a better place. Think about
a single mom who's struggling to get by earning ten
thousand dollars a year, and what it would mean to
her if she got an extra thousand dollars, you know,
being able to buy more food for her kids and
have just a slightly more steady existence. And in fact,
if we were taking ten percent of Jeff Bezos's income
this year, we could give one thousand dollars to millions
and millions of family. Is increasing societal wellbeing for millions
and millions of people.
The important thing is diminishing marginal benefit or diminishing marginal
utility from income. That means that when we redistribute from
folks who have a lot but don't much benefit from
extra money to those who don't have much money and
would get a lot of benefit, has the potential to
raise total wellbeing in society.
So now we've covered the basics. At the start of
the episode, you were both saying that when we're talking
about reducing inequality, it's important that we're clear about exactly
what it is that we care about. I guess ultimately
a lot of us care about fairness.
Well, this is where things really get a bit philosophical.
What do we mean by fairness? Each of us might
have different moral intuitions about what's fair and how these
impact the methods we need to use to reduce inequality.
Many people believe that fairness means that we need more
equal outcomes.
You mean that people should earn roughly the same amount
of money if.
Not exactly the same, they're not too different. There are
some interesting experiments which show how much people believe in
equality of outcomes. For instance, Naz, say someone came to
me and they said, justin, I'm going to give you
one hundred dollars as long as you can be fair
to Naz and get Naz to agree. Naz, I'm going
to be a bit of a jerk right now.
Okay, I'm going to offer you.
One dollar and I'll keep the other ninety nine. Will
both be better off? Do you want to accept the deal?
No?
No, because it feels unfair. Right, And the thing is,
though you're worse off.
Wait, so Nas, what if he offers you five dollars
would you take no? Ten?
No?
No? What about forty dollars?
Maybe? Yeah, maybe I'll consider it now.
So you were willing to walk away from five dollars
from ten dollars because you thought it was unfair. You
would have been better off in a financial sense taking
a deal, but you believed so much inequality you weren't
willing to go there. You're actually willing to give something
up in order to see a fairer world.
In contrast to this, one of the other key beliefs
about fairness is related to equality of opportunity. This is
about giving people a level playing field so they have
a similar chance at doing well in life.
Yeah, and earlier you said that you're aware that your
children have certain advantages that others don't.
Yes, I can't undo the advantages that my children have,
but I can advocate for other kids to have a
more equal chance at having a good future. That's why
I talk a lot about investing in early childhood education,
and it's something that I really push for and I'm
really passionate about.
Also, notice that what Betsy advocates for is a longer
term solution to redistributing income. If we just give people
more money today, which is what you'll support. If you
believe in equality of outcomes, well, that's great for today.
But if there's a quality of opportunity, then all children
get a better education from a younger age. Then they're
developing important skills early on, and this gives them more
of a chance to do well in the future, and
it reduces inequality Tomorrow, they'll have less reason to rely
on others helping them is they'll have more skills to succeed.
Give a man of fish and he'll eat today. Teach
a man of fish and you'll feed him for a lifetime. Anyway,
we're talking about fairness, and I think for a lot
of us, fairness is also related to whether someone deserves
what they have or where they are in life.
Yes, and this definition of fairness can vary between people
and even between different countries too. Some may say that
Jeff Bezos deserves his wealth more than the Queen of
England deserves hers. After all, Jeff built a business from
scratch and worked hard to grow it into an empire,
whereas a monarch is born into a powerful family and
automatically inherits enormous wealth and power from the previous generation
without having done any work towards this wealth.
Our feelings about the rich can depend on whether most
of them have worked hard for their money, or if
they've had their fortunes just handed to them. If we
have a lot of self made billionaires, then people usually
more likely to look up to the rich, or at
least to be less harsh on them.
I definitely think the way people make their money can
be significant, but fairness can also be about non monetary
factors as well. Betsy, you touched on class and race earlier.
Yeah, I mean, it's a reality that in a lot
of countries, wealthy people have a lot more influence in
society and in politics. They're likely to be well connected
to other wealthy people too. This gives them a lot
of influence over politicians and people in positions of power,
and they can use this large influence to further their
own interests.
It's a fact that there are certain groups who hold
more power. And this is not just about money, but
also about race, gender, religion, and even where you're from.
So basically, what we consider to be fair really depends
on who we are and on our values.
Yes, and this should influence who you decide to vote
for or policies you may support and advocate for. It
also affects the decisions you might make as a manager
as you think about how to treat your workers in
a way that meets your definition of fairness. And it
might affect the decisions you make within a family. Should
decide how to spend family scarce resources. If you're into
a quality of outcome, you want income to be redistributed
fairly equally amongst almost everyone. If you believe in equality
of opportunity, you want more investment, which can help people
increase their skills and talents so they can pick themselves
up and thrive in the long run on their own terms.
You know, we've also talked about privilege, whether that's related
to being part of a group that has more power,
for example, or being born to educated parents who can
help you reach your potential by guiding you through life,
or by having an inheritance to serve as your own
personal safety net. You may advocate for different policies altogether
if you believe that social justice is the key to
greater income equality in the long run.
So, Betsy Justin, this is a huge topic. How would
we sum it up?
Well, one thing that bothers people about the inequality between
Bezos and his workers is that as workers work hard too,
and yet they get so little.
Yeah, and I also worry about the people who own
small stools who are being driven out of business.
These are all concerns about inequality and outcomes. If there's
more equality of opportunity and more economic mobility than the workers'
kids and Bezos's kids that have the same shot at
success in life.
There are a lot of different ways to think about inequality,
but ultimately I think which notion of inequality appeals most
to you is a function of how you think about
fairness or just society.
So what can we do over the next few days
to really start thinking about all this and our values
around it.
If I could give some homework to our listeners, it's
to spend some time thinking about each of these different
ethical ideas, and don't just do this alone. Talk with friends,
talk with families, and really debite the issues because they matter.
And when you see something that you think is unfair,
ask yourself, what is it about it that feels unfair
to you to try to better understand your own notions
of fairness.
That sounds fair enough, bet.
Hey, Nas, thanks for talking inequality with us today.
Thanks so much for teaching all these important ideas and concepts.
I'm going to go away and I'm going to do
some really heavy thinking.
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