Capitalism Under Fire: American Enterprise Institute

AEI interviewed University of Chicago economist Steven Kaplan about income inequality and the perception of unfairness in American’s economy. Below is a portion of the interview.

JP: I want to start off with a quote from presidential candidate Bernie Sanders. He gave a big speech recently on democratic socialism and what it means. And here’s just a few sentences of what he said.

Democratic socialism means that in a democratic, civilized society the wealthiest people and the largest corporations must pay their fair share of taxes. Yes, innovation, entrepreneurship, and business success should be rewarded. But greed for the sake of greed is not something that public policy should support. It’s not acceptable that in a rigged economy in the last two years, the wealthiest 15 Americans saw their wealth increase by $170 billion, more wealth than is owned by the bottom 130 million Americans.
But let’s not forget what Pope Francis has stated. We have created new idols. The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal.

So from your research, what do we really know about income inequality and what’s driving it in the United States today?

SK: There is, I think, some truth in what he’s saying and then some real problems in what he’s saying. So here is my view of what’s happened in the last really 30–35 years. We’ve had a huge amount of technological change. And that has coincided with globalization. And they’re related. Technology allows you to do a lot of things overseas that you couldn’t do before. And so the combination of technological change and globalization has put pressure on the middle class and particularly the less skilled in the developed countries. So it’s the U.S. and Western Europe.

And I think there’s some anxiety and clearly anger about that happening. And at the same time, the people at the top have done very well in the United States. So that’s, I think, the problem that Bernie Sanders has stated. Now what he doesn’t state, and I think is extremely important to recognize is that the world is hugely better off — hugely. And Angus Deaton, who recently won the Nobel Prize in economics and is, you know, archconservative, wrote a book called “The Great Escape.” And that book starts by saying, and I quote, “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.”

So the system and capitalism in particular, around the world, has been spectacularly successful over the last 30 or 35 years. The number of people who are living above the poverty level — actually, take the number of people living below the poverty level — has declined in absolute terms and has declined hugely in relative terms.

The world is so much better off. And I think for Sanders and politicians to say that that’s terrible is really just morally abhorrent. … So now the question is, okay, we have this — so it’s great. Around the world, I would not give this up. This has been spectacular. Now, you do have the issue of what do you do in the United States and Western Europe, where you have had — it has been uneven in how the benefits have been distributed.

Folks on the left, they don’t much talk about the role of capitalism bringing hundreds of millions of people in Asia out of really deep, extreme poverty. They focus really more on the U.S. story and they’ll even concede that there’s been economic growth. But they also that it really hasn’t helped the vast majority of the middle class for 30 or 40 years. They talk about stagnant wages. If the median person, the average person, they’re not getting richer, what’s the point of it?

So the median person in the world is much better off. Let’s be clear. So now, let’s go to the median person in the US and try to figure out what to do about him or her.

So first of all, the after-tax numbers are much better than the pre-tax numbers. And this is also, you know, kind of ignored to some extent, is that if you look at — I think these are Congressional Budget Office numbers or they’re not the IRS numbers that are pre-tax that get a lot of play — the increase in inequality, when you include taxes and transfers, is not as high as it is pre-tax. And that’s because there is a safety net. There are transfers.

But even that said, let’s say there has been an increase. Now the question is what do you do about it. And the real issue is you do have this headwind of technological change and globalization. And so now the question is, what do you do about it?

And one set of proposals which I think Bernie Sanders and Hillary Clinton and the Democrats in general push [is] to raise the minimum wage. And that’s precisely the wrong thing to do here because if you’ve got a headwind of technology and globalization, which is making it harder to hire people and it makes jobs more difficult to create, raising the minimum wage exacerbates that. It’s exactly the wrong thing to do.

If you want to encourage job creation, I think job creation is the most important thing. And I know your boss at AEI, Arthur Brooks, is very articulate on this, the way you encourage jobs is, you know, have an Earned Income Tax Credit or something of that nature, rather than raising the minimum wage. Because raising the minimum wage, you just put more headwinds into job creation.

I would say the same thing about mandated leaves, which is also a big campaign plank among the Democrats. Because, again, that makes jobs more expensive. It makes employment more expensive. And what are companies going to do in response to making jobs more expensive? Well, let’s apply more technology. Let’s try to find jobs in places where the costs are lower. So that is — you know — it is a real conundrum what to do with technology and globalization, but the answer is to make it easier to hire, rather than harder.

At the same time, where I think the Republicans sometimes are not quite so sensitive is [that] you do need to have safety net. If you think this is going on, you really want to make sure you have a solid safety net, so that people do not, you know, go too far down.

Read the rest of the interview here

to perhaps answer their own question, AEI posed some graphs on income earns in America:

They wrote:

“Perhaps the stagnation and decline in US household income that gets so much media and political attention isn’t necessarily the result of the usual negative factors that get cited so frequently: stagnating wages, reduced economic and employment opportunities for the average, middle-class American, the increased share of rising income or wealth going to the top X%, the hollowing out of the middle class, the claims that the middle class is shrinking/losing ground/disappearing/declining, etc. Rather, perhaps there’s a less-nefarious, demographic-driven reason that household incomes have been stagnating/declining in recent years — the increase in the share of US households with no earners, which is largely driven by the aging US population and the increasing number of retired workers, and to a lesser extent by the increasing number and share of disabled workers. Finally, there’s been nearly a six percentage point decline in the share of US households with two or more earners since 1999, which could be another demographic change that has contributed to a decline in median household income.”

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