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Common Ground: Income Inequality Causes, Consequences, Response

The Common Ground speaker series resumed on Nov. 15 with a focus on income inequality in the United States. Christina Romer, a professor of economics at University of California, Berkeley, and former chair of the Council of Economic Advisers under the Obama administration, engaged in a dialogue with Greg Mankiw, a Harvard University professor of economics and former chair of the Council of Economic Advisers under President George W. Bush. Hamilton professor of economics and former economist for the Federal Reserve Board of Governors Ann Owen moderated.

Owen opened the conversation by presenting facts about income inequality in the United States and by posing the question: Does income inequality matter?

Christina Romer
Christina Romer, former chair of the Council of Economic Advisers under the Obama administration. Photo: Zack Stanek

Romer led the discussion, positing sweeping consequences of income inequality. “Rising income inequality is harming people; it’s harming our society and democracy, and our economy so it’s absolutely … a problem that needs to be addressed,” she said.

Owen then asked why income inequality is rising, to which Mankiw replied, “The single best explanation for rising inequality … is the race between education and technology. Technology tends to be a force that increases inequality, and the reason is that technology tends to develop new ways to replace unskilled workers and increase the demand for skilled workers. And education is the opposite side of this tug-of-war; education is turning those unskilled workers into skilled workers and that’s reducing inequality.”

Romer spoke to the purpose of the dialogue, saying, “It’s great that this is called ‘Common Ground’ because there is a lot of common ground … I would say this race between education and technology is one of the sources [of inequality], that … technological change does tend to help workers with more skills, at least as valued by the market, and that education tends to counteract that.”

Rising income inequality is harming people; it’s harming our society and democracy, and our economy so it’s absolutely … a problem that needs to be addressed.

Romer further posed an additional cause of income inequality. “The one class of explanations that I have become more convinced matters is what … vaguely goes under the name ‘power.’ In any economic relationship there are going to be some gains; I have a sense that the gains are not being evenly shared as much as they were in the past, and there are various ways that happens.”

Greg Mankiw
Greg Mankiw, former chair of the Council of Economic Advisers under President George W. Bush. Photo: Zack Stanek

Both Mankiw and Romer agreed that, while increasing access to education is a good thing for income inequality, figuring out how to do it is the hard part.

Owen pivoted the conversation by asking how policymakers should think about income inequality. To this Mankiw responded that the Federal Reserve should not be involved in inequality. “I think monetary policy is a very blunt tool, and they have a mandate that is basically full employment with price stability … and I think it’s hard enough achieving that. If they had to expand their mandate to include things like inequality … you’re giving them more than they are capable of handling.”

Romer agreed with this and added, “The place where the Fed needs to think about this is … seeing how far we can go to get the unemployment rate down; I think that could be a reasonable thing to expect the Fed to do to deal with unemployment and the inequality that results from it.”

The conversation then transitioned to the Biden administration’s proposed Build Back Better bill. Romer expressed her support for the bill’s benefits to children, such as the child tax credit. Mankiw pushed back slightly, arguing that the bill is trying, without proper funding, to build a robust social safety net on top of the underfunded social safety nets already in place, such as social security.

UC Berkeley Economics Professor Christina Romer, Hamilton Economics Professor Ann Owen, and Harvard Economics Professor Greg Mankiw finding Common Ground.
Students asked the economists questions during the Common Ground event in Wellin Hall.

However, Mankiw went on to express his support for certain parts of the bill. “Traditionally Americans want to distinguish between the deserving poor and the underserving poor,” he said. “The deserving poor, well you’re old … you’re disabled, okay well we understand why you’re poor, we’ll help you, but we don’t want to help somebody who just doesn’t want to work. Whereas I think an income tax idea … is basically saying we’re going to provide everyone with a minimum level of income for any reason … and that has some appeal to me.”

Owen began to close the discussion by asking how the benefits of an increasingly technological economy should be shared. Mankiw said that technological unemployment will not be a problem because “in the future there will be a bunch of jobs that we can’t even imagine today.” Romer was not as confident, acknowledging the benefits of technology while keeping in mind that the rewards will continue going to the top of the income distribution.

Before taking student questions, the economists discussed the blind spots within economics. Mankiw admitted that economists should pull more from the social sciences, looking at the lived experiences of individuals facing income inequality.

Romer added, “I think sometimes we can be a little too clinical … I like your focus of saying we need to actually take seriously what people’s lives are like and these things are not just esoteric debates. It’s really about whether you have healthcare, whether you have enough money to feed your children, those things are just hugely important, and so I think that we need to not kind of reduce it to diagrams or things like that.”

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