Bruce Madariaga – Economic Inequality

Bruce Madariaga – Economic Inequality


[ Music ]>>Good afternoon. It’s really great to
see so many of you here. My name is Dr. Denise Dewhurst,
I’m a professor of psychology and department chair
for anthropology, economics education,
philosophy, and psychology here at the Germantown campus. This afternoon it is
my great pleasure — I know everybody says that, but
it really is my great pleasure, — to introduce our speaker
Professor Bruce Madariaga. Many of you already know
Professor Madariaga’s story, but always I think
it’s worth repeating. Professor Madariaga never
went to high school. He had dropped out after
junior high, bored, disinterested, and unmotivated. To use his words, a community
college in Delaware saved him. He went on to earn four college
degrees, the last of which is from Harvard University. His first career was
as a senior economist for the United States
federal government. Luckily for us, he always had
this idea of a second career, and his second career was
that he wanted to go back and become a community
college professor. He started teaching
for us part-time, and in 2001 we were
fortunate enough to have him join our
full time faculty. In the time since, he has
more than doubled the size of our economics program here
at the Germantown campus. He has helped strengthen
the discipline of economics college-wide. He’s written a book,
“Economics For Life,” which is in its third for
fourth printing. It is a standard adoption in
classrooms, high school level, community college level,
four-year university level, all over the United
States and also in Canada. Currently, he is a national
science foundation economics teaching facilitator. What does that mean? It means in that
role he goes all over the country
helping people learn how to do a better job
teaching economics. Making it understandable. It’s such an important
discipline in today’s world for
us to really get. It won’t surprise
you when I tell you that earlier this year he
received the Montgomery College outstanding faculty award. I think now you understand why
I feel so privileged to have him as a colleague and very
luckily to have him as a friend. Professor Bruce Madariaga. [ Applause ]>>Professor Bruce Madariaga:
Thank you very much, Denise. Welcome, and thank
you all for coming. I have some important
facts about our world to share with you today. But I have to warn you,
they’re not all happy facts. Before I get to these
facts I’d like to ask you to open your imaginations. Imagine for me two worlds. I’ll call the first world
the fisherman’s world. In the fisherman’s world people
make a living catching fish and selling their fish. Some fishermen are more
successful than others primarily because they stay out there, they work harder,
they catch more fish. But in the fisherman’s world
maybe the most successful fisherman catches
twice as much fish as the least successful
fisherman, makes twice as much money. Now imagine for me
World Number Two. World Number Two I’ll call
the gold prospector’s world. In the gold prospector’s
world people make a living by finding gold. And those that stay out there
longer have a higher chance of striking gold, finding gold. But the primary determinant
of success in the gold prospector’s
world is luck. Some people find gold
and become very wealthy. But most, they search
and search, find little, and struggle. So I have two questions for you. Two questions for you to ponder
over the next 40 minutes. First question is which
world do you think is more like our world? The second question is which
world — fisherman’s world, gold prospector’s world — which
world would you prefer to live in so think about
that, and I’ll share with you some facts
about our world. First some good news. New world record. We now have thousands
of billionaires. That’s a good thing, it’s good that people succeed
at such high levels. Now you know, we all hear
these words, millions and billions and trillions. It’s hard to put such huge
numbers in perspective. Let me take a shot. Based on my back of the envelope
calculations, Bill Gates and Warren Buffet, their net
wealth is over $70 billion each. So Bill could come
to Montgomery County, and he could start
buying houses. By my calculations, he
could buy a house every hour for the next twenty years and
still have money left over. Would have bought about half
the houses in Montgomery county. A billion is a big number. That’s a good thing. It’s good that people can
succeed at such levels. Now let me share another
fact about our world. [ Background noise ]>>How can this be, in a world
with thousands of billionaires? Now I ask my students,
I say well, why don’t we see this
every day in the news? Isn’t it of the utmost
importance? And they pick up
on it right away. They say Professor M,
that’s not even news. It happens every day. Yeah. They’re right about that. Kind of like, you know, if a
plane crashes we hear about it. We have auto accidents every
single day, many more people die from auto accidents, but
we don’t hear about that. That’s not news. Then my students say, Professor
M, that doesn’t happen here. It happens far away. And people don’t care as
much if it happens far away. And I think they’re
right about that too. But I never quite
understood why. Why should we care
about somebody more because of where they live? Do we care — should we care
more about somebody who lives on this side of the
Mexican/Texas border versus somebody on this side,
does it really make sense. If you live in Germantown do you
care more about Germantownians than Gaithersburgians? They’re not dumb. My students say, Professor
M, they say, that’s a bummer. That’s depressing. That’s not going to
sell on the news. And I think they’re
right about that too. So obviously we have wide
inequality in our world. But inequality in and of itself
isn’t necessarily unjust or bad. For example, consider
these three worlds. World Number One we could call
the socialist economy world, right? Where everybody makes
the same income level. World Number Two we could call
the successful capitalist world, where there’s inequality, but even the worst
off earns more money than in the socialist world. Which world is more just? Well, there’s no
scientific answer to what’s just and
what’s unjust. Philosophers have been
wrestling with that forever. One philosopher John Rawls,
he used the following test. He said, suppose that we were
all under a veil ignorance, that we didn’t know if we’d
be a lucky winner or lucky — unlucky loser if we
entered World Number Two. Given that, which world
would people enter into, World Number One or World Number
Two, not knowing if you’re going to be a winner or a loser
in World Number Two. I’d be willing to guess
that the vast majority of you would enter
World Number Two, even though there’s higher
inequality in World Number Two. Be that the case, using
Professor Rawls’ criteria, World Number Two would be more
just than World Number One, even though it has
more inequality. Consider World Number Three,
let’s compare World Number One with World Number Three. World Number Three, there’s
even greater inequality. And there may be
greater poverty also. But under a veil of ignorance, not knowing whether you’d be a
lucky winner or unlucky loser in World Number Three, some
of you may still choose — maybe not all of you — but
some of you may still choose to enter World Number Three
versus World Number One. Therefore, we can now
conclude that inequality or even poverty is
necessarily unjust. But what about the level
of inequality in poverty that exists in our world today? That’s what I want
to explore with you. Let’s first start with America. Income and wealth an
equality in America. New American record, now the
highest income 1% earns almost 20% of all income in
the United States. That’s a new record. Income inequality has been
steadily increasing in America over the last four decades. Income inequality is one thing, weather inequality
is something else. You know the difference? Income is what you earn in
a year, wealth is the value of all of your assets. Wealth inequality may be a
better measure of inequality. And the story with
wealth inequality is much more shocking. What I’d like to show you is a
visualization of a serious — results of a serious
academic study.>>There’s a chart
I saw recently that I can’t get out of my head. A Harvard business professor
and economist asked more than five thousand Americans
how they thought wealth was distributed in the
United States. This is what they said
they thought it was. Dividing the country into five
rough groups of the top, bottom, and middle three 20% groups, they asked people how
they thought the wealth in this country was divided. Then he asked them what
they thought was the ideal distribution. And 92%, that’s at least
nine out of ten of them, said it should be
more like this. In other words, more equitable
than they think it is. Now that fact is
telling, admittedly, the notion that most
Americans know that the system is
already skewed unfairly. But what’s most interesting to me is the reality
compared to our perception. The ideal is as far removed
from our perception of reality as the actual distribution is from what we think
exists in this country. So ignore the ideal
for a moment. Here’s what we think
it is again. And here is the actual
distribution. Shockingly skewed. Not only do the bottom 20% and
the next 20%, the bottom 40% of Americans barely
have any of the wealth. I mean, it’s hard to even
see them on the chart. But the top 1% has more of
the country’s wealth than nine out of ten Americans believe
the entire top 20% should have. Mind-blowing. But let’s look at
it another way, because I find this
chart kind of difficult to wrap my head around. Instead, let’s reduce
the 311 million Americans to just a representative
100 people. Make it simple. Here they are, teachers,
coaches, fire fighters, construction workers,
engineers, doctors, lawyers, some investment bankers, a
CEO, maybe a celebrity or two. Now let’s line them up
according to their wealth. Poorest people on the left,
wealthiest on the right, just a steady row of folks
based on their network. We’ll color code
them as before based on which 20% quintile
they fall into. Now let’s reduce the total
wealth of the United States, which was roughly
$54 trillion in 2009 to this symbolic pile of cash. And let’s distribute it
among our 100 Americans. Well, here’s socialism. All of the wealth of the
country distributed equally. We all know that won’t work, we
need to encourage people to work and work hard to achieve
that good old American dream and keep our country
moving forward. So here’s that ideal we
asked everyone about. Something like this curve. This isn’t too bad. We’ve got some incentive as
the wealthiest folks are now about ten to twenty times better
off than the poorest Americans. But hey, even the poor
folks aren’t actually poor, since the poverty line has
stayed almost entirely off the chart. We have a super-healthy middle
class with a smooth transition into wealth, and
yes, Republicans and democrats alike
chose this curve. Nine out of ten people, 92%, said this was a nice
ideal distribution of America’s wealth. But let’s move on. This is what people think
America’s wealth distribution actually looks like. Not as equitable, clearly. But for me, even this
still looks pretty great. Yes, the poorest 20
to 30% are starting to suffer quite a lot
compared to the ideal, and the middle class is
certainly struggling more than they were. While the rich and wealthy
are making roughly 100 times that of the poorest
Americans and about ten times that of the still-healthy
middle class. Sadly, this isn’t even
close to the reality. Here is the actual distribution
of wealth in America. The poorest Americans
don’t even register. They’re down to pocket change. And the middle class is barely
distinguishable from the poor. In fact, even the rich
between the top 10 and 20 percentile are worse off. Only the top 10% are better off. And how much better off? So much better off
that the top 2 to 5% are actually off
the chart at this scale. And the top 1%, this
guy, well his stack of money stretches ten times
higher than we can show. Here’s his stack of cash
restacked all by itself. This is the top 1% we’ve
been hearing so much about. So much green in his
pockets that I have to give him a whole
new column of his own because he won’t
fit on my chart. 1% of America has 40% of
all the nation’s wealth. The bottom 80%, 8 out
of every 10 people or 80 out of these 100, only
has 7% between them. And this has only gotten worse
in the last 20 to 30 years. While the richest 1% take
home almost a quarter of the national income today,
in 1976 they took home only 9%. Meaning their share of
income has nearly tripled in the last 30 years. The top 1% own half
the country’s stocks, bonds, and mutual funds. The bottom 50% of Americans
own only half a percent of these investments. Which means they
aren’t investing. They’re just scraping by. I’m sure many of these wealthy
people have worked very hard for their money. But do you really believe that the CEO is working
380 times harder than his average employee? Not his lowest paid
employee, not the janitor, but the average earner
in his company. The average worker needs
to work more than a month to earn what the CEO
makes in one hour. We certainly don’t have to
go all the way to socialism to find something that is fair
for hard working Americans. We don’t even have
to achieve what most of us consider might be ideal. All we have to do is wake up
and realize that the reality in this country is not at
all what we think it is.>>The wealthiest 400
Americans have as much wealth as the least wealthy
150 million Americans. Fisherman’s world, gold
prospector’s world. The message from
this video is clear. Wealth inequality is way higher than people think
it is in America. It’s way, way, way higher than
people want it to be in America. And it’s getting worse. But everyone can be
wealthy in America, right? This is the land of opportunity. All it takes is hard work,
applying one’s talents, and we can all be wealthy. It’s not that simple. There have been various
studies of economic mobility in the United States, and
they all pretty much say similar things. This summary from the
Brookings Institute, very top notch think tank, is that a child’s economic
prospects are pretty are very much taught, the economic
status of their parents. The chances of a child born into
a wealthy family of making it into the top 5% income
bracket is 22%. A child born in poverty,
the chances are just 1%. Fisherman’s world,
gold prospectors world. Well, that’s a picture
of inequality in America. Let’s turn our attention
a little bit to poverty and inequality globally. There’s about 7 billion
people on our planet today. Still, about 2.4 billion,
that’s about a third of the world’s population,
live on $2 or less of material goods and services. It’s hard to imagine. This stat blows my mind, the wealthiest three
individuals have as much wealth as the worst 600 million. Fisherman’s world, gold
prospector’s world. Let’s see where wealth and
poverty exist in our world. This map is a map
of GDP per capita, that’s essentially
income per person, okay? So the dark blue areas,
no surprises here, are the wealthy countries
of the world, North America, western Europe, Australia,
Japan, some oil-rich Middle
Eastern countries. Least wealthy are the red areas. Mostly Africa, some in Asia. Now we all know that poverty
reduces quality of life. I want to show you how
poverty not just quality of life, but life itself. Longevity of life. The next slide is life
expectancy world-wide. Countries in the
green, dark green, have the longest
life expectancies. Notice the US is not
in the top category. Countries in the red
especially the dark red, have the shortest
life expectancies. Note that more than
half of the countries in Africa have life expectancies
still today of under 50 years. Now just to kind of visually
show you the relationship between income and life
expectancy, let me just kind of flip these back and
forth a little bit. pretty high correlation. Not perfectly correlated,
but pretty clear that those countries with low
income also have the lowest life expectancies. Poverty matters and
matters a lot. Quality of life and
to life itself. Independent of poverty,
inequality can matter too. In the last twenty years there’s
been an explosion of research on the topic of happiness. What makes people happy? Psychology literature
and economics literature, one of the focuses
of this literature is that the relationship between
income and wealth and happiness; does money buy happiness. Well, the jury is still out
a bit on this literature, but the literature
strongly suggests that money can buy happiness, at least until people get
their basic needs met. Money is very good
at buying the things that get people’s
basic needs met. But beyond that amount, beyond that moment
additional money seems to generate very
little extra happiness. There seems to be
diminishing returns to money in producing happiness. Well, that has some profound
public policy consequences. It means that we shouldn’t
necessarily be trying to maximize wealth,
because we really want to maximize happiness, and
they’re not the same thing. So a utilitarian,
utilitarian is — holds the moral framework that
what is best, what act is best or what policy is
best is the one that creates the most happiness. A utilitarian would judge,
then, that policies that would in effect redistribute
from the wealthy to the poor would be just because it would increase
overall well-being. Assuming that incentives
to work are not destroyed. So inequality matters,
even beyond poverty to people’s well being. Okay, so at this point
I am willing to bet that at least some of you
believe that our world is more like a gold prospector’s world
than a fisherman’s world. And I’m willing to
bet that some of you who believe the world is more like a gold prospector’s
world would prefer the world to be more like a
fisherman’s world. Be that the case, the next
question would be how do we make that happen? What can be done? Well, what could public
policy and governments do? Well, first thing they can
do is make matters worse. Especially corrupt governments. And of course corruption is
rampant around the world, many of the most poorest
countries in the world are poor because they’re led by
dictators more interested in maintaining power than
helping their people. Even more wide-spread is
bureaucratic corruption. In many places of the world it’s
very hard to start a business because one has to bribe
government officials to get the necessary
permits and licenses. It can take many,
many, many, many months and cost a lot of money. As a consequence,
businesses don’t get started. Here in the US the level of
corruption is not as great, but we have our own
forms of corruption. Wealthy individuals,
corporations, can use their wealth
within the political system to get added influence and very
possibly to become more wealthy. We’re not going to
fix this problem without some serious
campaign financial reform. I don’t see that
happening any time soon. Even well-meaning governments
and government policy can at times do more harm than good. There are many examples
of this, one example is when governments try to
keep prices low in order to allow low income people to
be able to purchase products like price caps on gasoline
or rent, or medicines. Sounds good, but we have to think past the initial
effects of such policies. Inevitably, they
lead to shortages and do more harm than good. Even minimum wage laws,
policy that’s very popular in this country, and I
bet in this room as well, have important adverse,
unintended consequences. Some of you may have heard that Montgomery County Council
has proposed increasing the minimum wage from its
current federal level, 7.25, up to 11.50 an hour. Clearly well-meaning. PG county is planning
the same thing. Good idea? Well, maybe. But one has to consider
the intended consequences. Businesses will adjust to this. They may hire less workers,
they may get technologies to replace workers,
they may hire $12 — a couple $12 an hour workers to replace three
$8 an hour workers. They may cut worker
benefits, they may close down, they may move to Virginia. So it could cause unemployment
of the people you’re trying to help, or maybe
they’ll raise prices, which may mean high prices
or low income consumers. And even considering all that, does the minimum wage
target poverty very well? Some people who get the minimum
wage are teenagers looking for job experience, and they may
live in middle class families. So we have to be wise. One policy that economists
often recommend to help low income workers is
expanding the earned income tax credit. It’s a subsidy for
low income workers. It targets poverty,
it’s based on income, and has actually been shown to promote more employment,
not less. So we have to think
things through. But we can’t strange capitalism
and our market system. Capitalism is a great
wealth generator. Just has this side
effect of inequality. Consider some of the successes. Here in America, today, we have
ten times the value of goods and services to each
person today than the average person had
110 years ago in this country. So it has worked for us. Consider China. 30 years ago the extreme
poverty rate in China was 85%. Just 30 years ago. Today it’s under 15%. This is the greatest economic
miracle this planet has ever seen in a 30 year period. Part of the reason
why it occurred is because of movement
towards capitalism, where they converted communal
land to private property, expanded international trade
, made some other reforms. They brought 600 million
people out of extreme poverty. That’s twice the
number of people that live in this country. So we don’t want to
strangle capitalism. By the way, inequality is
on the rise in China today. So are there public policies
we can use in America to reduce inequality without
getting too much in the way of work incentives
and our market system? Yeah, there are many. And don’t have time to
get into a lot of them, i just want to mention a couple. Certainly, investments that help
people, provide opportunities for people, help
them help themselves, which would help them
and help the community as well are warranted. Investments in education
are certainly — fall into that category. There are others. We can use our tax system to
promote a more equitable America without destroying
work incentives. There are ways. Consider capital gains tax,
some of you may have heard of Warren Buffet, he used to go around all the time
saying my tax rate is lower than my secretary’s. And it was, probably still is. How can that be? Well, it’s because his
secretary, just like you and I, we pay our income taxes based on our salaries,
wages and salaries. Warren Buffet doesn’t
make any salary. He gets all of his income
based on investments. So he pays the capital
gains tax which is lower than the income tax
rates that we pay. Does that promote equity? Is that just? Consider the estate tax. Congress over the last
15 years has been phasing out the estate tax. Today you can inherent
from your parents solely because you were born
to a wealthy family five and a quarter million
dollars entirely tax free. Does that promote equality? Does that promote justice? Does it promote work effort? If somebody dropped five and a
quarter million dollars on you, would that want to make you work
more, or maybe retire earlier? So there are things we can do from a public policy
perspective, to reduce inequality and
make our country more just. And there are things we
can do as individuals also. We can be active. Certainly, we can be active. Challenge for you, students
out there, challenge for you. How about a club, how about an
inequality and justice club, band together, figure out what
you can do to make a difference. And we can give. But we do need to give wisely. Let me share with you a couple
of principles of smart giving. Principle one, be sure to give
in the way you can give best, or using economics language, according to your
comparative advantage. If you have a lot of
money, give money. Wouldn’t make sense for Bill
Gates to be handing out soup at the soup kitchen, right? His time is too valuable, he should spend his time making
money and giving that away if he wants to do the most good. If you have some free time and don’t have any
money, give your time. If you’re like me today
and you have a microphone, give your voice. Principle two, give to
those who need it most. You probably do the most good
if you give to the neediest. And remember, the neediest are
probably not your neighbors, they’re probably in one of those
red countries we showed a little bit ago. Principle three. Give in a way that
provides benefits not just to the recipient but
to the others as well. Give it in a way that
promotes positive spill-overs to other people. For example, giving to
promote vaccination program that would stop the spread
of an infectious disease. That would be a wise
way to give, you help the person vaccinated and many others at
the same time. Other giving can do that too. Giving for education, small business loans can
help whole communities. Now I don’t pretend
to know the best way for you or for me to give. But let me leave you
today with one example of what I think is a smart way
to give, if what your goal is do as much good with as
little money as possible. Here’s one example. Yes, a child dies every
minute in Africa from malaria. It only costs $10 to manufacture
and distribute a bed net that can protect three children from the risk of
catching malaria. There’s a web site right there, it takes two minutes
to go to it. This has been shown to be one of the most cost effective
ways to save a life. For every 230 bed nets
that are purchased, three children are prevented
from getting malaria, and one child’s life is saved. So takes $2,300 to save a life and save two other children
from getting malaria. That means we can go on that
European vacation for a week, or we can save a child’s
life and two others from catching malaria. I don’t want to give you a guilt
trip, but these are the kinds of choices that face us. In any case, in your
own ways we all can make positive differences. And research backs me up on
this, if you do what you can to make a positive
difference you’ll make yourself happier too. So let’s do what we can do. Thank you all for listening. Thank you very much. [ Applause ]

Author: Kennedi Daugherty

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