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Insights on Income

Think Tank Transcripts:Insights on Income

ANNOUNCER: 'Think Tank' is made possible by Amgen, recipient ofthe Presidential National Medal of Technology. Amgen, helping cancerpatients through cellular and molecular biology, improving livestoday and bringing hope for tomorrow.

Additional funding is provided by the John M. Olin Foundation, theRandolph Foundation and the Lynde and Harry Bradley Foundation.

MR. WATTENBERG: Hello, I'm Ben Wattenberg. We hear that the richare getting richer, the poor are getting poorer and the middle classis stuck in the mud. Is it true? And what could be done about it evenif it were? In this election year, these questions have sentpoliticians and professors on the warpath.

Joining us to sort through the conflict and the consensus are:Gary Burtless, senior fellow at the Brookings Institution; JamesHeckman of the University of Chicago; Timothy Smeeding, director ofMaxwell's Center for Policy Research at Syracuse University; and KenDeavers, chief economist at the Employment Policy Foundation.

The topic before this house: Insights on income. This week on'Think Tank.'

Today politicians from both sides of the aisle are competing overwho can best improve the economic lot of the poor and the middleclass.

SEN. BOB DOLE (R-KS): (From videotape.) Yes, these are the best oftimes for many who work on Wall Street. But the facts leave no doubtthat they are also the worst of times for many who live and work onMain Street.

PRESIDENT CLINTON: (From videotape.) Middle class values, strongfamilies and faith, safe streets, secure futures. These things arevery much threatened today, threatened by 20 years of stagnantincome, of harder work by good Americans for the same or lower pay,of increasing inequality of incomes and increasing insecurity in jobsand retirement and health care.

MR. WATTENBERG: Sounds serious, but is there a real problem or isthis just the stuff election years are made of? Let's look at thenumbers.

We hear that the richest 5 percent have seen their share ofnational income grow by a third since 1973, while the poorestAmericans have lost a third. We shall see about that.

Further, the case is made that since the early 1970s, wages haveleveled off and probably dropped. But hold on. That's just cashwages. Total compensation, which counts benefits like healthinsurance and pensions, has gone up.

And now look at this. Consumer spending is going way up, whichmeans that there is more going on than meets the eye. The good newsis we have four eminent economists who claim to understand what thesedata mean. The bad news is that they don't agree.

Gentlemen, thank you for joining us. What I want to do is take twospecific topics, income trends and income inequality trends. And Iwant to talk first about income inequality and start with you, TimSmeeding, and then let's go around the room. Is income inequalityincreasing?

MR. SMEEDING: Yes, income inequality has increased in the UnitedStates over the past 20 years, although less in expansions, like thecurrent one, than in recessions.

MR. WATTENBERG: Gary Burtless.

MR. BURTLESS: It is, and I think it's a matter of social concernbecause the growing inequality is a combination of an increasedincome at the top and shrinking incomes at the bottom. And it's theshrinking incomes at the bottom that I think are the biggest sourceof concern.

MR. WATTENBERG: All right. Jim Heckman.

MR. HECKMAN: Certainly income inequality has increased, but Ithink the real question is, what is wage inequality doing and alsowhat is consumption inequality doing? They're very different measuresand I think they have very different lessons for discussion.

MR. WATTENBERG: All right. Ken Deavers, is income inequalityincreasing?

MR. DEAVERS: Yeah. I don't think there's any disagreement amongthe panelists on this panel over that. I think the real issue iswhat's happening at the bottom, that to the extent incomes arefalling for people at the bottom, that's an issue that we ought topay some attention to.

MR. WATTENBERG: But I mean, Gary Burtless said that income forpoor people is diminishing. My understanding is that your view isthat it is not diminishing, but that the incomes of wealthy peopleare growing faster than the incomes of poor people so that poorpeople absolutely are doing a little bit better, although relativelythe income inequality, the gap, is widening. Is that your view?

MR. DEAVERS: Well, not exactly. What I would say is that sort ofwhat we've seen is an increase in income absolutely for people at thetop; a decline in the middle class, which is what sort of is wrappedup in this debate as well.

MR. WATTENBERG: But not in the shares. Go ahead.

MR. DEAVERS: That's right. There is a decline in the middle classshare of total income, if you define it, for example, around medianincomes.

MR. WATTENBERG: Right.

MR. DEAVERS: But most of the people who left the middle classdefined that way moved into higher income, not into lower income. Andso the issue sort of is, sort of, why are we having this sort ofspreading out? Why are we having a hollowing out in the incomedistribution? Is it because most people are becoming poorer?

MR. SMEEDING: About two-thirds of the shrinkage in the middleclass, at least through the '80s, was people getting richer, but theother third is something of concern. Depending on exactly the yearsand the measure of income, somewhere between 25 and 35 percent ofAmericans have lower real incomes now than they had 15 years ago.

MR. WATTENBERG: All right, I want to put one other chart on, andthis deals with income mobility. And it talks about two years, 1975and 1990, and it shows that the people who were poor in 1975, in thepoorest quintile, 5 percent have remained in the poorest quintile, 15percent have moved to the second quintile, 21 percent to the thirdquintile, 30 percent to the fourth, and 29 to the fifth, which wouldseem to tell us that there is a great deal of income mobility andwhen we are talking about the poor in the United States, we are nottalking about the same people year after year or decade over decade.Comments?

MR. SMEEDING: I think that this is an important issue; mobility iscertainly important in America. And one of the consequences that youwould normally ask is, is inequality increasing and is mobility alsoincreasing, in which case we might tolerate a higher level ofinequality. But this study I think is flawed.

MR. WATTENBERG: This is by the University of Michigan.

MR. SMEEDING: The data's from the University of Michigan. Thestudy was from the Federal Reserve Bank of Dallas. There have been atleast three other studies that have used this data moreappropriately, I believe, and which have found that there has reallybeen no change in mobility out of the bottom quintile through the'70s as compared to the '80s.

MR. WATTENBERG: But there could be no change and yet it couldadhere to a traditional American curve of substantial upwardmovement. In other words, it doesn't change that slope, but --

MR. HECKMAN: But the other studies do show mobility.

MR. SMEEDING: Absolutely, absolutely.

MR. HECKMAN: I mean, they do show mobility, but not at this rapida rate.

MR. SMEEDING: What this -- the average income of the bottom 20percent here is $1500 in 1975, so it's no surprise --

MR. DEAVERS: It's mainly people who weren't in the workplace.

MR. SMEEDING: Right. It's paper boys and people who weren't in theworkplace.

MR. DEAVERS: College students.

MR. SMEEDING: College students. And 15 years later, they're making$25,000.

MR. WATTENBERG: You mentioned that even the other studies -- thatall studies show that there is an appreciable amount of upward incomemobility. These magnitudes may be wrong, but can anybody here give usa sense of what the appropriate magnitudes are?

MR. BURTLESS: If you're looking at people in their 20s and yousay, what is the chance that over the next 10 or 20 years they willsee their incomes rise, the chances are better than 2 to 1 that theywill see their incomes rise.

MR. SMEEDING: Right, absolutely.

MR. WATTENBERG: You mean their quintiles rise, that they will go-- that they will move up --

MR. SMEEDING: And their incomes, too.

MR. DEAVERS: That'll put them in another quintile.

MR. BURTLESS: Their absolute incomes will rise.

MR. HECKMAN: As people age, they acquire work experience, and soforth, and their incomes rise. That pattern still remains.

MR. SMEEDING: The difference is that the mobility hasn't changedin the past 20 years while inequality has increased.

MR. HECKMAN: And you're starting from a lower point, and sobasically, even with the same transition process, you know, thedestination is going to be at a different level than it was 20 yearsago.

MR. WATTENBERG: Okay, all right. I want to put up two other chartsquickly to try to understand some of the reasons why this incomeinequality exists. You see here that from 1970 to 1994, thepercentage of female-headed households has more than doubled, from 12percent to 25 percent. On the next chart, we see the family incomedifferential between female-parent households and married-parenthouseholds. The female-headed household is earning about $17,000 ayear. The married household is earning about $43,000 a year.

Now, question. Is a large part of this inequality driven by thesubstantial rise in the number of female-headed households?

MR. SMEEDING: Yes, without a doubt. But we need to be carefulhere. Though divorce is rampant in our society, it's grown over thelast 20 years in all social classes --

MR. WATTENBERG: And out-of-wedlock births.

MR. SMEEDING: And out-of-wedlock births, although out-of-wedlockbirths are a lesser percentage of the numbers that you saw there thanyou might otherwise think. Over half of those single mothers who yousaw there work, okay. In other words, it's -- don't get the picturein your mind that it's a teenage girl who hasn't finished high schoolwho had a baby that we're looking at. We're looking mainly atdivorced people.

MR. WATTENBERG: Well, but those one-third of the out-of-wedlockbirth mothers would more dramatically pull down that lower quintilethan the divorced woman who keeps on working.

MR. DEAVERS: Actually, there are three interesting characteristicsabout that lowest quintile. One is the rise of female --single-female-headed families. Second is a decline in work effortamong people who are in that quintile. There are now about 40 percentof the households in that quintile who report no work by any memberof the quintile during the previous year.

And the third piece is, in a work force which is paying higher andhigher wages to good skills and high educations, that's where we havea large concentration of people who still have less than a highschool education. So those things together pull that quintilesomewhat back, although it's not the principal cause. I mean, sort ofgrowing wage inequality and particularly falling wages for workingmales is another significant part of what's going on.

MR. BURTLESS: Yeah, one thing you have to recognize about thesefamily trends is that the growth in the number of single-parentfamilies, the growth in out-of-wedlock childbearing really got goingin the late 1950s. And from the late '50s through the mid 1970s, thistrend proceeded, and yet income in the United States grew more equal,it didn't grow more unequal. So there were other factors that werestrongly driving incomes closer together over that period. Since1973, the factors have been widening incomes, and then you really getto see the influence of a growing number of low-income, one-parentfamilies on the distribution. That trend is creating a lot ofone-earner households trying to support kids, and those folks havenever had a very good standard of living.

MR. WATTENBERG: But that would -- if we turn now to causation ofthis spreading apart of income, that would lead to a social causationrather than an economic causation. You can't say that foreign tradehas increased divorce, I don't think, can you?

MR. HECKMAN: Oh, you could say part of it is the decline in thereal wages of males especially. And when you think about a marriagemarket economy -- I mean, think about a marriage market. Although Iagree with Gary that it's not the whole story by any means, but partof this rise in female-headed households is due in part to thedeclining real wages of the low-skilled males who would be partnersto some of these individuals. And so I think you can't really isolatethese two factors as cleanly as you're trying to do.

MR. SMEEDING: And the fact that the marriage market is alsoproducing more assortive mating by education and skill class.

MR. WATTENBERG: Is producing what?

MR. SMEEDING: More assortive mating.

MR. WATTENBERG: What does that mean?

MR. SMEEDING: Well, that means that you marry someone of your samesocioeconomic class with the same goals, interests.

MR. HECKMAN: And the correlation being the husband's and wife'seducation has risen over the last 20 years.

MR. SMEEDING: And the correlation between their incomes. So twoMBAs, two lawyers versus two bricklayers, or a bricklayer and ashort-order cook.

MR. WATTENBERG: And that's called assortive --

MR. SMEEDING: Assortive mating, that's right.

MR. WATTENBERG: -- mating. Sounds racy.

(Cross talk.)

MR. WATTENBERG: Hey, this is a family hour show. (Laughter.)

MR. SMEEDING: In an economy where most adults work, putting twogood jobs together -- this were the DINKs, the double income, no kids-- and you put two good incomes together with two good sets ofbenefits, two good degrees, good packages of skills, those peoplewill move -- those are the people who are moving from the middle upto the top.

You put one mother there who's been divorced, let's say, only hasa high school degree, who had no real experience or not muchexperience before that, and you don't pay her child support or childcare, you've got somebody who's in a really tough situation. And thisisn't just true in the United States, this is true throughout Europe,too.

MR. DEAVERS: Part of the issue, and it gets back to some of Gary'swork, of what's been driving -- what's happening to low wages sort ofreally comes down to sort of three or four issues. It is -- probablyskill-biased technology is a significant part of it.

MR. WATTENBERG: What does that mean, skill-biased technology?

MR. DEAVERS: Technologies which are paying high rates of return topeople who have very high skills.

MR. WATTENBERG: High rates of return means high wages?

MR. DEAVERS: High wages.

MR. WATTENBERG: High wages, okay.

MR. DEAVERS: High wages, high income, okay.

MR. SMEEDING: Substituting capital for labor.

MR. WATTENBERG: Pardon me?

MR. SMEEDING: Substituting capital for labor. ATMs.

MR. DEAVERS: Yeah, people who work with more and more capitalequipment are --

MR. WATTENBERG: Right. Hold it. Substituting capital for labor --automatic teller machines.

MR. SMEEDING: Instead of bank tellers, yes. For instance,automatic phone operating machines and automatic phone answeringversus operators.

MR. WATTENBERG: So the technology is driving out the semi-skilledworker.

MR. SMEEDING: Right. The bank tellers of the 1980s and 1990s werethe blacksmiths of the 1880s and the 1890s. Technology is drivingaway low-skill labor, replacing it with something that's cheaper,more productive and more durable.

MR. WATTENBERG: Let us move now from this idea of incomeinequality to what is happening to income trends generally in theUnited States. We put a chart up there. It shows that wages havediminished somewhat from 1960 to 1994, compensation has gone upsubstantially and consumption has gone up super-substantially. Ken,why don't you explain each of those three things just as quickly asyou can, and then let's see what we agree and disagree about.

MR. DEAVERS: I mean, what the wage line looks at is cash wages.

MR. WATTENBERG: Cash wages.

MR. DEAVERS: And cash wages, the real value of cash wages hascertainly gone down since sometime in probably the early '70s, and adownward drift fairly constant.

If you include sort of non-cash payment parts of compensation,which have gone from roughly 20 percent of the total compensation ofworkers to over 40 percent --

MR. WATTENBERG: And that includes?

MR. DEAVERS: Pensions and health care are probably the two biggestpieces of it.

MR. WATTENBERG: Now, just explain to us what consumption means andthen let's --

MR. DEAVERS: Okay. Consumption is a measure, essentially, of whatpeople buy, both goods and services. And this is a measure ofconsumption per capita, per person. It's continued to rise rapidly.One of the reasons it's continued to rise rapidly is because of threethings that have to do with women: increasing participation by womenin the work force, more hours by women in the work force and betterpay for women.

MR. HECKMAN: There has been some study done on how vast or howlittle consumption inequality has actually increased. The evidence isthat consumption is much less unequally distributed than income.

MR. DEAVERS: Than income.

MR. HECKMAN: I think we would agree with that. And we'd also saythere is some disagreement in the profession about whether or notinequality has been increasing dramatically or decreasing, how wemeasure --

MR. DEAVERS: In consumption?

MR. HECKMAN: In consumption.

MR. WATTENBERG: We non-economists hear -- and there are manyAmericans who are not economists.

MR. SMEEDING: Really? (Laughter.) We didn't know that.

MR. WATTENBERG: They are all street-corner economists, but we heartalk about liberal economists and conservative economists. Would itbe fair to say that one of the dividing lines between liberaleconomists and conservative economists are that conservativeeconomists think things in recent years have been getting better, andliberal economists think they have either been getting worse, stayedthe same or not getting better nearly as much as conservativeeconomists think?

MR. BURTLESS: There is a divide like that, but I think the mostimportant distinction is probably what they think we should do aboutthe trends.

MR. WATTENBERG: Well, we're going to talk about that next.

MR. HECKMAN: I think most economists would agree that the wagesoffered in the labor market to low-skilled individuals have declined,and the recent cohorts, whether they're conservative or liberal.

MR. WATTENBERG: Now, in terms of this liberal-conservative divideabout whether things are getting better substantially or minimally ornot at all, where would you four gentlemen position yourself?

MR. SMEEDING: I'd rather be non-dogmatic, which is what at leastone major newspaper claimed that I was.

MR. WATTENBERG: Do you believe what you read in the press?(Laughter.) That's like believing economists. I mean -- right.

MR. SMEEDING: Sometimes I just try and call them as I see them, asYogi would say.

MR. WATTENBERG: Oh, my goodness.

MR. SMEEDING: And sometimes I think --

MR. WATTENBERG: All right, let me ask another question. How wouldpeople in your trade characterize you?

MR. SMEEDING: Non-dogmatic.

MR. WATTENBERG: Non-dogmatic. How about you, Gary Burtless.

MR. BURTLESS: Well, I think, on average, the economy in the UnitedStates is improving and it has improved over the last 20 years. I dothink the distributional changes have been such that probably forAmericans in the bottom third of the distribution, things have tendedto get worse, and the further down you go, the closer you get to thevery bottom of the income distribution, the faster they've gottenworse, in absolute levels measured in terms of income, wages orconsumption.

MR. SMEEDING: That's true.

MR. WATTENBERG: Okay, Jim.

MR. HECKMAN: I think that there is a marked divergence betweenthese different measures, and I think when we say things have gottenworse, they've gotten really bad in terms of earnings and not so badin terms of consumption. But I agree, depending on the series,there's some marked downward --some downward decline. But it's notdramatic, it's not as precipitous as --

MR. SMEEDING: Well, any sort of a decline or even the magicness ofzero change when the rest of the economy around you is growing andpeople are doing much better --

MR. DEAVERS: Appears to be a serious problem.

MR. SMEEDING: Yes, it is.

MR. WATTENBERG: You are in the declinist or the ascendant --

MR. DEAVERS: Well, I mean, I guess I'm slightly more optimisticthan Gary is. I mean, I think that overall the economy has gottenbetter for more than two-thirds of the people in the economy.

MR. WATTENBERG: Okay, now, we have to move on to our final topic,which is, what do we do about it? There is this apparent problem ofincome inequality, and there is a division of opinion on howascendant the general level of income is. Jim Heckman, I know youhave attempted to assay and assess the various programs. What works?What doesn't work? Does anything work?

MR. HECKMAN: Well, I think the administration, and Gary Burtless--

MR. WATTENBERG: The Clinton administration?

MR. HECKMAN: The Clinton administration, and Gary Burtless in someof his writings and many people have espoused the idea that we couldactually use job training programs and substantial changes ineducation to provide an immediate remedy to the problem, at least thedeclining wages of the unskilled worker.

MR. WATTENBERG: Can we?

MR. HECKMAN: We can, but at great cost, I think. And I thinkeveryone would agree that the costs are substantial, even the cost tothe government, if take aside private costs of that activity.

The logic is very simple. The price has gone down, but if weincrease -- MR. WATTENBERG: The price of what?

MR. HECKMAN: The price of the unskilled labor, but if we embodymore skill in that individual, that individual moves out of thatcategory -- that's the theory -- and that individual can escape thefate of the declining group.

And there's a second kicker which might kick in, which is that infact if you remove unskilled workers, you might make them scarcer inthe labor market and raise their incomes on that basis.

MR. WATTENBERG: Do you think any programs that we now know ofwork?

MR. HECKMAN: Work in an immediate short-term sense, no, I don'tthink so. I think it's very costly.

MR. WATTENBERG: Oh, I see. Okay, I hope you would disagree.

MR. HECKMAN: I think it's very, very costly. But I think in termsof long-term educational responses, if we decided to have sort of asuper Manhattan Project, then of course, I think we could sendAmerica to the schools, we could change the college graduation rate.But those are very, very costly programs we're talking about. And Idon't think the political will is there, I don't think in an era oftight budgets.

MR. WATTENBERG: Gary, does something work other than thisManhattan Project idea?

MR. BURTLESS: I don't think that the kinds of training andeducation programs that Jim described do provide any kind of animmediate response to this problem.

MR. WATTENBERG: You do not think?

MR. BURTLESS: No, no. They're not an immediate -- they're notimmediately going to change the income distribution in a way thatfavors people with limited skills or favors people with low incomes.Any effects they have are going to be cumulative. Anything you doabout the schooling of people who are currently 12 to 18 years old isnot going to have a major influence on the income distribution for 10or 15 years.

So it's folly to think that making these changes right now isgoing to have an effect within the next 5 or 10 years on the incomedistribution. Nonetheless, I think it's worth doing.

MR. WATTENBERG: All right, let Jim in here because he has -- MR.SMEEDING: I think the earned income tax credit is an absolutelymarvelous response, America's gift to the world of social welfarepolicy. America doesn't make many gifts as far as Europeans andothers, but --

MR. WATTENBERG: Earned income tax credit, EITC?

MR. SMEEDING: Yes, exactly.

MR. WATTENBERG: Explain it.

MR. SMEEDING: That means that if you go out and you work a fullyear full-time and you don't make enough money to support yourfamily, the government subsidizes those wages through a tax refund.

MR. DEAVERS: It seems to me one of the questions is sort of interms of what we now do with labor force train programs, skillupgrading. The really problematic issue isn't the 12-to 18-year-olds.It's the people who are 25 to 35 who are in the work force who had --dropped out of high school, who had terrible educations, and whetheror not any intervention strategies for them as going to pay offeither in the short term or even sort of in their longer-term workingcareers.

I mean, I think the real issue isn't sort of kids still in school,where we could make the investment and where if we had the will, itwould clearly pay 10 or 15 years out. The real question is sort of,what about those folks who are -- have lost out, are already in theworkplace and who have terrible educations?

MR. WATTENBERG: Okay, all right. Let me just go around the roomone more time and ask for a very, very terse, double-barreled answerabout income trends and income inequality. Which way are they going?

MR. SMEEDING: Income inequality will remain high. I think we oughtto compensate the losers, particularly those who behave in sociallydesirable ways, such as working.

MR. WATTENBERG: And income trends will?

MR. SMEEDING: Income trends will continue to grow, we hope.

MR. WATTENBERG: Gary Burtless.

MR. BURTLESS: Overall, incomes are improving, but they're fallingdown for people at the bottom of our distribution. I think we shoulddo something about it, and in the long term that does mean makinginvestments in improving their education, but in the short run, Ithink improving the minimum wage, giving child health insurance tothe kids of working age families.

MR. WATTENBERG: Tax credit for children? MR. BURTLESS: I do thinkit would be good to tilt the tax system more in favor of familiesthat have youngsters, that's true, and I think that there are otherthings that we can immediately do to help the older folks who cannotbe helped by education.

MR. WATTENBERG: Okay. Jim Heckman.

MR. HECKMAN: I would agree that the wages of unskilled individualshave declined, but I also would like to make a point that we have ashort-run problem and a long-run problem. In the short run, there arelarge groups of unskilled individuals who are very difficult to trainand move out by any kind of job training strategy. In the long run,skill advancements, investments in the young and investments inpeople who are worthy of the investment, for whom the investment doespay off, I think is a very strong strategy.

MR. WATTENBERG: All right, Ken Deavers, whither America oninequality and income?

MR. DEAVERS: I mean, I think income trends are pretty strongoverall for the economy. We do have in fact a large group that arebeing left behind. I think the earned income tax credit as a devicethat makes work pay, that supports socially desirable behavior, issomething we ought to all be in favor of. And I think thatinvestments in human capital, particularly in school youth.

MR. WATTENBERG: Okay, thank you, Ken Deavers, Tim Smeeding, JimHeckman, and Gary Burtless.

And thank you. Please send your comments or questions to: NewRiver Media, 1150 17th Street, NW, Washington, DC 20036. We can alsobe reached via e-mail at thinktv@aol.com or on the World Wide Web atwww.thinktank.com.

For 'Think Tank,' I'm Ben Wattenberg.

ANNOUNCER: This has been a production of BJW, Incorporated, inassociation with New River Media, which are solely responsible forits content.

'Think Tank' is made possible by Amgen, recipient of thePresidential National Medal of Technology. Amgen, helping cancerpatients through cellular and molecular biology, improving livestoday and bringing hope for tomorrow.

Additional funding is provided by the John M. Olin Foundation, theRandolph Foundation and the Lynde and Harry Bradley Foundation.

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