1. INEQUALITY & DEVELOPMENT Lawrence Summers EC1400, ITF225 12 th November 2015

2. Rise of the super-rich Source: data from US Census Bureau and World Top Incomes Database Most of the rise in US inequality over recent decades has been at the level of the top 1%

3. Rise of the super-rich Source: data from US Census Bureau and World Top Incomes Database What it look like if the income distribution had stayed the same as it was in 1979? the top 1 percent would have had about $1 trillion less and the bottom 80 percent would have had at least $700 billion more or, if you work it out per household: HOW MUCH RICHER WOULD HOUSEHOLDS BE IF THE INCOME DISTRIBUTION WAS SAME AS 1979?

4. Rising non-employment among men 1960: 83% of men worked full time 6% of men did not work at all % of Men aged 25-64 not working the entire year 2009: 66% of men worked full time 18% of men did not work at all Source: Greenstone and Looney 2011

5. Income inequality persists across generations Education Children whose father did not graduate high school are 8x more likely not to graduate high school (Soltas) One-year old infants have similar cognitive abilities across incomes. Four-year olds in the highest income quintile score twice as highly on literacy tests as those in the lowest income quintile. (Waldfogel and Washbrook)  Employment opportunities Half of all jobs are found through family, friends or acquaintances (Loury)  Income/Wealth 50% in variation of wealth can be explained by variation in parents’ wealth (McGintis and Bowles)

6. Source: Chetty et al 2014 Mean Child Income Rank Parent Income Rank Rank-Rank Slope (U.S) = 0.341 Mean Child Percentile Rank vs. Parent Percentile Rank Income inequality persists across generations Complete social mobility Rank-Rank Slope (Denmark) = 0.180 With complete social immobility, Rank-Rank Slope =1

7. Degree of mobility has not changed over time – but effects of mobility have Chance of moving from bottom to top fifth of income distribution no lower for children entering labor market today than in the 1970s But because income distribution has become more unequal, consequences of the “birth lottery” – the parents to whom a child is born – are larger today than in the past Source: Chetty et al 2014

8. Mobility is strongly affected by race

9. Low social mobility and high income inequality are correlated

10. Is education the answer? When might better education be the answer to rising income inequality? Skill-biased technological change: higher-skilled workers benefit, lower-skilled workers lose. Globalization: scarce factor loses (lower-skilled labor in developed countries)

11. Is education the answer? Simulation: what would happen if one out of every ten men aged 25–64 who did not have a bachelor’s degree were to instantly obtain one? Year% of men with bachelor’s degree Bottom-half inequality (50/25 earnings ratio) Overall inequality (Gini coefficient) 197923%2.60.43 201332%5.60.57 Source: Summers, Kearney and Hershbein 2015

12. Is education the answer? Simulation: what would happen if one out of every ten men aged 25–64 who did not have a bachelor’s degree were to instantly obtain one? Inequality in bottom half of income distribution falls But little effect on aggregate inequality, which has mostly been driven by top incomes. Year% of men with bachelor’s degree Bottom-half inequality (50/25 earnings ratio) Overall inequality (Gini coefficient) 197923%2.60.43 201332%5.60.57 2013 counterfactual39%4.30.55 Source: Summers, Kearney and Hershbein 2015

13. What about raising taxes? Simulation: what would happen if US top tax rate was raised to 50% and the proceeds were redistributed to the bottom 20% of households? Source: Gale, Kearney and Orszag 2015 Gini coefficient Before-tax income0.610 After-tax income: current law0.574

14. What about raising taxes? Simulation: what would happen if US top tax rate was raised to 50% and the proceeds were redistributed to the bottom 20% of households? Source: Gale, Kearney and Orszag 2015 Gini coefficient Before-tax income0.610 After-tax income: current law0.574 After-tax income: top rate to 50%0.560 “This analysis, coupled with the previous one, in turn leaves us with the open and important question: if neither a substantial expansion in education nor a big increase in the top marginal tax rate would significantly affect measured income inequality, what would? ”

15. Policy implications: globalization matters for institutions that redistribute income Unions bargaining: What matters for unions’ power to bargain is how elastic is demand for labor – depends on firms’ alternatives for workers. Globalization could reduce union power: If they demand higher wages, firms could go abroad or firms could be less competitive. State has role in redistributing income and providing benefits for those who are poor and insurance for all (old age, unemployment) Tax and Transfer Redistribution: In a world where capital is immobile, you can tax it; capital has nowhere else to go. So you can tax profits, But in a world where firms can move, or they can shift where they report their profits, much harder to tax them. Welfare state, gives benefits. If people can enter freely, they get benefits without having paid. Not a coincidence that now less migration than in early period.

16. Tax shares do not reflect profit shares. Though corporate taxes fairly constant share of GDP More profits earned abroad and lower rates paid at home

17. Types of inequality, explanations – and solutions? GlobalizationTechnological change Institutions & politics Wage disparities Redistribution?EducationUnionization, increasing worker bargaining power Rise of 1% Redistribution? Improving corporate governance, raising tax rates, reducing money in politics Capital vs. labor Global capital tax? Shared ownership ?Unionization, increasing worker bargaining power, shared ownership