- INCOME INEQUALITY IN THE UNITED STATES

[Joint House and Senate Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

S. Hrg. 113-202

INCOME INEQUALITY IN THE UNITED STATES

=======================================================================

HEARING

before the

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

__________

JANUARY 16, 2014

__________

Printed for the use of the Joint Economic Committee

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JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES SENATE
Kevin Brady, Texas, Chairman Amy Klobuchar, Minnesota, Vice
John Campbell, California Chair
Sean P. Duffy, Wisconsin Robert P. Casey, Jr., Pennsylvania
Justin Amash, Michigan Mark R. Warner, Virginia
Erik Paulsen, Minnesota Bernard Sanders, Vermont
Richard L. Hanna, New York Christopher Murphy, Connecticut
Carolyn B. Maloney, New York Martin Heinrich, New Mexico
Loretta Sanchez, California Dan Coats, Indiana
Elijah E. Cummings, Maryland Mike Lee, Utah
John Delaney, Maryland Roger F. Wicker, Mississippi
Pat Toomey, Pennsylvania

Robert P. O'Quinn, Executive Director
Niles Godes, Democratic Staff Director

C O N T E N T S

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Opening Statements of Members

Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota.... 1
Hon. Kevin Brady, Chairman, a U.S. Representative from Texas..... 3

Witnesses

Hon. Robert Reich, Chancellor's Professor of Public Policy,
University of California at Berkeley, Berkeley, CA............. 5
Dr. Scott Winship, Walter B. Wriston Fellow, Manhattan Institute
for Policy Research, New York, NY.............................. 8
Dr. Melissa Kearney, Director of the Hamilton Project and Senior
Fellow at the Brookings Institution, Associate Professor of
Economics, University of Maryland, College Park, MD............ 11
Dr. Aparna Mathur, Resident Scholar, American Enterprise
Institute, Washington, DC...................................... 13

Submissions for the Record

Prepared statement of Hon. Kevin Brady........................... 38
Prepared statement of Hon. Robert Reich.......................... 40
Prepared statement of Dr. Scott Winship.......................... 61
Prepared statement of Dr. Melissa Kearney........................ 73
Prepared statement of Dr. Aparna Mathur.......................... 83

INCOME INEQUALITY IN THE UNITED STATES

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THURSDAY, JANUARY 16, 2014

United States Congress,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 10:00 a.m. in Room
216, Hart Senate Office Building, the Honorable Amy Klobuchar,
Vice Chair, presiding.
Representatives present: Brady of Texas, Campbell, Amash,
Paulsen, Hanna, Carolyn B. Maloney, and Delaney.
Senators present: Klobuchar, Casey, Jr., Sanders, Murphy,
Heinrich, and Lee.
Staff present: Hank Butler, Gail Cohen, Carroll Conor,
Niles Godes, Colleen Healy, Christina King, Robert O'Quinn, and
Patrick Miller.

OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE CHAIR, A U.S.
SENATOR FROM MINNESOTA

Vice Chair Klobuchar. We are going to call this hearing to
order, and I want to thank our witnesses for coming, and thank
the Chairman. I think we are going to have good attendance at
this hearing. And I want to thank everyone for being here this
morning to discuss this very important issue about income
inequality in our country.
As we will hear today, income inequality in the United
States has been growing for more than three decades and is now
near a record high. If history means anything, that is not good
for anyone in the United States of America.
That is because 70 percent of our economy is consumer
based, and if people do not have enough money to buy stuff it
slows the entire economy down.
Meanwhile, as the data has shown, the top 400 people in
this country have more wealth than half of America. That is why
we are having this hearing today, and that is why we need to
make some changes.
Now I would like to introduce our witnesses who have
enormous expertise and insight on this subject.
Robert Reich is the Chancellor's Professor of Public Policy
and Senior Fellow at the Blum Center for Developing Economies
at the University of California at Berkeley. He served as
Secretary of Labor during the Clinton Administration from 1993
to 1997. Time Magazine named him one of the 10 most effective
cabinet secretaries of the 20th Century. I am laughing because
I watched his movie recently and he went back through all of
the Presidents he had served under, including President Carter,
and then these young students in California. He said: Maybe you
don't remember. And then he added, ``I also was an aide to
Abraham Lincoln.''
[Laughter.]
But it is the 20th Century. He has written 13 books. His
new movie, ``Inequality for All'' that I just referred to was
released last week on DVD.
Scott Winship, our next witness, is the Walter B. Wriston
Fellow at the Manhattan Institute for Policy Research, where he
focuses on economic mobility, living standards, and income
inequality. Previously Dr. Winship was a Fellow at the
Brookings Institute, Research Manager of the Economic Mobility
Project of the Pew Charitable Trust, and a Senior Policy
Advisor at Third Way.
Melissa Kearney is the Director of the Hamilton Project, a
Senior Fellow at the Brookings Institution, and an Associate
Professor in the development of economics at the Department of
Economics at the University of Maryland. Previously she was an
Assistant Professor at Wellesley. Her research focus is on
inequality and poverty.
Aparna Mathur is a Resident Scholar at the American
Enterprise Institute. Her research areas are tax policy, wages,
and labor market outcomes. She has consulted for the World Bank
and taught economics at the University of Maryland.
As the data is going to show today, income inequality, as I
mentioned, has been growing for several decades. According to
the JEC report, which I released today, since 1980 the average
income for the top one percent of households, as you can see,
has grown more than seven times as fast as it has for the
average household.
So the average household is there in red, and you can see
what has happened for the incomes for the top one percent. For
the rest of America, income growth has stalled completely. The
average American household earned less in 2012 than they did in
1989. The middle class is shrinking and less secure, and this
hinders economic growth.
Growing inequality and low economic mobility do not reflect
our values as a nation, and both are bad for the economy. At
the same time, we know that it has gotten tougher and tougher
because the costs have gone up. Costs of health care have gone
up. The costs of college have gone up. And it has become harder
to save for retirement. This has been especially true for those
with less education.
Stagnant wages and rising income inequality are also
associated with lower levels of economic mobility. As you can
see in our report and in other reports that have been done, a
lot of people are stuck at the bottom.
As the Secretary notes in his work, the United States is
64th in the world in terms of income inequality. He also points
out that 42 percent of kids born into poverty in the U.S. will
not get out--42 percent.
To give you some comparison, in Denmark the figure is 25
percent. In Great Britain, it is 30 percent. Now there are a
number of steps our country should be taking to make sure that
our economy continues to grow for everyone. Raising the minimum
wage would be a good start.
At $7.25 per hour, the real value of the current minimum
wage is now lower than it was in 1968 when I was 8 years old.
If the minimum wage was raised to $10.10 per hour, as currently
proposed in the Senate, 4.6 million people would be lifted out
of poverty.
We must also invest in worker training. We have to train
our workers for the jobs of today and tomorrow. Congressman
Paulsen and I are from Minnesota where we have a relatively low
unemployment rate. Know that we have jobs that are open today.
In fact, in a recent poll in our state of manufacturers, 60
percent of them said that they do have job openings where they
need workers with the skills to fill those jobs. So that is a
piece of this.
Increasing the number of STEM schools is a piece of this.
Supporting policies that have proven to lift people out of
poverty, including emergency unemployment insurance, something
we are debating right now, the earned income tax credit, and
the supplemental nutrition assistance program.
Finally, we have to look at our Tax Code and make sure it
is fair. I think we should implement the Buffett Rule, applying
a minimum tax rate of 30 percent on people making more than $1
million a year. Fairness in the Tax Code will ensure that a
secretary does not pay a higher effective tax rate than the CEO
in the corner office.
It is estimated that such a rule, in addition to making the
Tax Code more equitable, would raise more than $47 billion over
10 years.
In conclusion, the American economy continues to recover,
adding private sector jobs for 46 straight months. Gross
Domestic Product in the third quarter of 2013 grew at more than
a 4 percent annual rate. We are making progress, but there is
still more work to do.
Our issue today is, as we make progress, to make sure that
everyone is sharing in that progress, and that we continue to
make the American Dream attainable for everyone in this
country.
Thank you very much, Mr. Chairman.

OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS

Chairman Brady. And thank you, Vice Chair Klobuchar,
Committee Members, and very distinguished witnesses today.
Today the Joint Economic Committee will begin to examine
the complex questions of economic inequality and mobility in
the United States.
We are not all blessed with the same talents, but in
America we should all have an equal chance to climb the ladder
of success--driven upward by our personal initiative, and not
burdened by the deadweight of a bloated government.
We know that too many families are struggling, even in a
country where 9 of 10 children born to the poorest families
will earn more than their parents.
Economic mobility is very much alive. In America today the
children of the poorest are more likely to climb up the ladder
of success than the children of the wealthy are likely to stay
where they are.
Through hard work, today one in three American families
live an upper middle-class lifestyle or better, more than
double what it was just 40 years ago.
Astoundingly, better than one in five Americans are likely
to rise to the top two percent of earners sometime during their
lifetime. The American Dream is still very much alive.
Do some Americans earn more than others? Absolutely. I
cannot fathom how Madonna earned $125 million last year, or how
actor Johnny Depp will earn nearly a half a billion dollars
from the Pirates of the Caribbean series.
We can all appreciate, though, how Mark Zuckerberg became
the world's youngest billionaire launching Facebook from his
college dorm room, or how Mary Kay Ash of tiny Hot Wells,
Texas--frustrated with the glass ceiling in a male-dominated
industry--built Mary Kay Cosmetics into an international icon
with other a half a million entrepreneurs.
The real challenge that we face today is too many Americans
no longer believe the ladder of success is available to them.
They have lost hope that if they work hard and play by the
rules tomorrow will be better than today.
And who can blame them? Thanks to the weakest, most
disappointing economic recovery in a half century, millions of
Americans cannot find full-time work, and millions more have
simply given up looking for work. Proportionately, fewer adults
are working today than when the Recession ended four years ago.
These struggling Americans have not benefitted from the
White House's controversial stimulus which failed to fulfill
its promise of getting them back to work by now. They watch as
the Federal Reserve has pumped up Wall Street with trillions of
dollars, while Main Street and middle-class families are left
behind.
In the past five years, college costs have soared and
energy costs have doubled. And while some Americans, no doubt,
are being helped by the Affordable Care Act, millions more have
been forced out of the health insurance plans they liked and
are being forced to pay even more for plans that they did not
want.
While President Obama should not shoulder all the blame,
out of fairness he should accept--some of the responsibility
for why so many Americans believe the ladder of success has
been pulled from their reach.
He should not divide America further, pit one American
against another based on their success, or fuel resentment and
jealousy in the pursuit of political gain. That is just not an
America we can be proud of.
I admit I cannot imagine how Washington bureaucrats that
have never met you or even know your name can ``equalize'' your
income. Can the same incompetent government that brought us the
bungled Affordable Care Act Web site be trusted with your
dreams and your children's dreams?
What we will learn from today's hearing is that respected
economists disagree about the issue of economic inequality. For
example, by using a definition of ``income'' that excludes both
taxes that reduce disposable income and government programs
like Social Security, Medicare, and unemployment insurance that
boost it, economists Piketty and Saez found large and growing
income inequality. You saw the chart earlier.
Other economists, by using a more realistic definition that
considers the effects of taxes, government programs,
employment-provided health insurance benefits, and the changing
size of the modern family, found a very modest change in income
inequality over the past 20 years.
Still other studies that measure what families actually buy
and consume reveal that the ratio between the consumption of
the poorest fifth and the most successful fifth of Americans
remained stable for the past quarter of a century.
I hope we will agree that personal decisions affect every
American's ability to make a better life. A college degree,
steady work, marriage, and children within the marriage,
increase the odds of climbing the ladder of success--although
in our great country some have succeeded beautifully without
any of those.
I also hope that we can agree that education and skills
drive high wages, especially for those earning a college,
graduate, or professional degree.
For example, Pew Research found that children from families
in the bottom fifth of earnings have a 1 in 10 chance of
climbing into the wealthiest fifth of Americans with a college
degree--1 in 10 can go from the very bottom of the economic
rung to the top of that ladder with a college degree. But
without it, they have only a 3 percent chance.
Similarly, children from families in the second fifth
have--of the bottom of the economic ladder, have nearly a 1 in
4 chance of climbing to the top rung with a college education,
but merely a 9 percent chance without it.
So finally, how should the government act to help restore
Americans' belief in opportunity?
We can heed the advice of President Abraham Lincoln,
perhaps the greatest ``equalizer'' to inhabit the White House.
In his message to Congress on July 4, 1861, he made clear the
proper role of government in promoting economic opportunity is,
quote, ``to elevate the condition of men--to lift artificial
weights from all shoulders--to clear the paths of laudable
pursuit for all--to afford all, an unfettered start and a fair
chance, in the race of life.'' End quote.
We must do more to ``lift the artificial weights'' off our
poorest families and get Washington out of the way so that
every American truly has ``an unfettered start and a fair
chance in the race of life.''
I yield back, Vice Chair.
[The prepared statement of Chairman Brady appears in the
Submissions for the Record on page 38.]
Vice Chair Klobuchar. Thank you, very much.
We will start with our witnesses.
Secretary Reich.

STATEMENT OF HON. ROBERT REICH, CHANCELLOR'S PROFESSOR OF
PUBLIC POLICY, UNIVERSITY OF CALIFORNIA AT BERKELEY, BERKELEY,
CA

Professor Reich. Vice Chair Klobuchar and Chairman Brady,
and Members of the Committee:
Thank you very much for having this hearing on what the
President has said is the defining challenge of our time. The
Pope has said it is a moral challenge affecting countries
around the world. It is not just the United States.
In the interest of brevity, I will submit my testimony for
the record. I also had prepared some wonderful, dramatic
slides, but in the interest of brevity I will also provide
those for the record.
Let me just, in the limited time I have, talk about what is
at stake. The data are not controversial. The Congressional
Budget Office, the Bureau of the Census, almost every agency
that has looked at the issue, almost every policy analyst and
economist who has looked at the issue, has come to the
conclusion that, however you divide and slice the data,
inequality is growing particularly between the top and
everybody else, but the entire income and wage ladder is
getting so elongated that we have got three huge and growing
problems.
Now I am not arguing--and I do not think anybody is
arguing--a respectful argument, that we have to in any way
avoid inequality, or that inequality--some inequality is not
necessary or inevitable. For a growing economy, if you are
going to have the right incentives, obviously there is going to
be some inequality.
The issue is: Are we getting to a tipping point where the
extent of inequality is harming our economy, hurting the ideal
and undermining the ideal of equal opportunity, and undermining
our Democracy?
And I want to argue that in all three domains we are
getting to that tipping point, if we are not already over that
tipping point.
In terms of the economy, Mr. Chairman, one reason that the
recovery is so anemic is that 95 percent of the economic gains
since the recovery started have gone to the top one percent.
There is no way that the middle class, or those aspiring to
join the middle class, have enough purchasing power to keep the
economy going if they are not going to have money in their
pockets. They cannot go deeper and deeper into debt any longer.
It is no coincidence that the 2 years over the last 100
years where there was the most pronounced inequality in terms
of the 23.5 percent of total income going to the top one
percent were 1928 and 2007.
If those do not tell you something, I do not know what
does. You see, in both of those eras leading up to 1928 and
2007, you had a middle class that was going deeper and deeper
into debt to keep up basically with the fact that most of the
gains of the economy were going to the very top.
And in both of those years, you had a kind of penultimate
and unfortunate bursting in the year following of debt bubbles.
We are now living with the consequence of the second of those
great bursting debt bubbles.
Over the last 30 years, what has happened to the American
middle class is they have coped with stagnant or declining
incomes by women going into paid work, by working longer hours,
and then by going deeper and deeper into debt. All of those
coping mechanisms are exhausted. And so we have no choice but
to face the reality now of stagnant or declining real incomes
for a huge percentage of Americans.
The median household income has been dropping even as 95
percent of the gains have been going to the top.
What is a business-friendly strategy to create jobs? It is
to create customers. Business executives and Wall Street
traders are not job creators. The job creators in the United
States are customers. And if the vast middle class and the poor
do not have enough money in their pockets, they cannot be
customers.
The most business-friendly thing we can do is raise the
minimum wage, provide extended unemployment benefits, encourage
unionization, give people the bargaining power they need to
have a strong middle class and a growing middle class that
includes a lot of poor people in this country. That is a
business-friendly strategy.
So the first problem with inequality of the degree we are
now seeing is that it robs the economy of the aggregate demand
the economy needs to get out of in this case the gravitational
pull of the Great Recession.
Problem number two has to do with equal opportunity. Madam
Vice Chair, as you pointed out, 42 percent of Americans' kids
born into poverty will never get out of poverty. That is a
higher percentage than in any other advanced country.
Now there is controversy about the measure upward mobility.
A lot of policy analysts and economists have come to different
conclusions about the rate--that is, the velocity--of upward
mobility in this country.
But even if you take the heroic assumption that the
velocity--that is, the rate of upward mobility--is the same
today as it was 30 or 40 years ago, which I think is very
questionable, you can see logically how as the income and
wealth ladder get longer and longer, even at the same rate you
are not going to get very far up the ladder. And that is at the
least what has happened today.
One of the charts that I show you shows the high
correlation--one of the charts in my testimony--shows the high
correlation between inequality and slow mobility. The nations
with high inequality have the slowest upward mobility.
Problem number three has to do with the democratic process.
And again, here I tread on delicate ground, or thin ice,
because I do not want to be heard to in any way impugn the
integrity of any Member of Congress. But we all know that money
counts. And when more and more money is lodged in a smaller and
smaller number of people at the top, political power inevitably
gravitates upward.
As the great Justice Louis Brandeis said in the late 19th
Century at a time in our history that is not all that
dissimilar to what we have today in terms of the gap between
the wealthy and everybody else, a time when we had robber
barons and the lackeys of the robber barons literally
depositing sacks of money on the desks of pliant legislators,
Louis Brandeis said: We can either have great wealth in the
hands of a few, or we can have a democracy, but we can't have
both.
So number three, the last really important argument against
high inequality is what it is doing to our democracy. In
summary, there are many things that we can do. Raising the
minimum wage it seems to me is critical. Enlarging the Earned
Income Tax Credit is a good companion to raising the minimum
wage. Minimum wage is now 30 percent below what it was in 1968.
If we simply raised it adjusted for inflation, it would be over
$10. If we adjusted it relative to productivity improvements
since the late 1960s, it would be $15 an hour.
But that is not all. We have got to invest in education,
invest in infrastructure. We have got to strengthen unions. We
have got to constrain Wall Street.
Too many of those banks are too big to jail, too big to
fail, and too big to curtail.
We have got to limit the size of the big banks so that they
do not do what they have already done to the American middle
class and the poor. We have got to resurrect the Glass-Steagall
Act--I think very, very important.
We have also got to have a tax system that is progressive.
And I do not mean ``progressive'' in a political progressive
way; I mean simply in an economic sense. If you look at the
income tax, and add in the payroll tax, and add in sales taxes
at the state and local level, look at the entire tax system, it
is regressive. That is, the poor are paying, and the middle
class are paying a higher percentage of their income than the
wealthy.
Finally, let me just say there should be no debate at all
over extending unemployment benefits to the long-term
unemployed. Since 1970 we have never debated it. It has not
been a partisan issue. We have not seen--we have not even
searched for offsets. It is an emergency.
We have got 37 percent of the unemployed in this country
who right now have been unemployed for more than six months;
1.3 million have run out of unemployment benefits; another
72,000 are running out of them every week. This should not be a
partisan issue.
We have got to do this. And if we actually have to have an
offset--and I hope we don't--I have a nomination.
The Carried Interest loophole for hedge fund managers and
private equity managers, closing that would yield as much money
as we need for extending unemployment benefits for some of the
most disadvantaged and hardest-up families in America.
And on that upbeat note, thank you very much.
[The prepared statement of Hon. Robert Reich appears in the
Submissions for the Record on page 40.]
Vice Chair Klobuchar. Thank you very much.
Dr. Winship.

STATEMENT OF DR. SCOTT WINSHIP, WALTER B. WRISTON FELLOW,
MANHATTAN INSTITUTE FOR POLICY RESEARCH, NEW YORK, NY

Dr. Winship. Chairman Brady, Vice Chair Klobuchar, and
Members of the Committee:
Thank you for inviting me today to discuss the topic of
income inequality in America. I am going to use my time--I have
also submitted written testimony that I will submit into the
record, and use my five minutes to rebut as much as I can from
what we heard from the Secretary, respectfully, or you can cede
me 20 or 30 minutes. Barring that, I will move forward with my
oral testimony.
With long-term unemployment historically high and still
pervasive economic insecurity in the wake of the Great
Recession, it is understandable that many Americans have grown
more concerned about the Nation's levels of inequality.
Too many families struggle in poverty. Too many workers
have given up on finding full-time work. And too many young
adults have graduated into a weak economy that will lower their
lifetime earnings.
At the same time, it is important to note that it is the
fragility of the economy that lies behind concerns with
inequality. Inequality was high and it was rising in the late
1990s, but because the growing economy was largely benefiting
everyone, few people were worried about income concentration at
the top at the time.
In long-run perspective, living standards have improved,
despite what we have heard so far this morning, have improved
for the poor and middle class even as income inequality has
grown.
And contrary to claims that rising income inequality has
hurt inequality of opportunity, the evidence of a link between
the two is weak. Allow me to elaborate.
As I demonstrate in my written testimony, income inequality
within the bottom 80 percent of households has grown only
modestly, primarily during the 1980s, and hardly at all since
then. This is Census Bureau data, so this is not anyone doing
any funny business with the numbers.
Indeed, a wealth of research, including by the
Congressional Budget Office, including by Emmanuel Saez, one of
the folks who created the inequality measures that Vice Chair
Klobuchar showed, a wealth of research indicates that earnings
and income inequality between the middle class and the poor
have not risen since the mid- to late-1980s. It actually
includes research by my colleague Dr. Kearney.
Nor can the modest rise in middle-poor inequality be
attributed to income stagnation. Average income in the middle
fifth rose 66 percent between 1969 and 2007 and by 55 percent
of the bottom fifth.
Congressional Budget Office figures show since 1979
increases of along the lines of 40, 45 percent for both of
those groups.
It is true that this growth was much slower than the 1950s
and 1960s, but for reasons I discuss in my written testimony
there is little reason to think that the slowdown should be
attributed to rising income concentration.
Here I will just note that the slowdown began in the 1970s
before income concentration started to take off, and it
affected the top one percent as well.
Even when it comes to income concentration at the top,
there are good reasons to believe that the increase has been
overstated, especially since the 1980s again.
The oft-cited estimates of Thomas Piketty and Emmanuel
Saez, and of the Congressional Budget Office are problematic
for a number of reasons that I describe in my written testimony
that I am happy to elaborate on in questioning.
Earnings concentration estimates from another paper by
Emmanuel Saez are less problematic and show that the top one
percent share rose only from 11 percent in 1989 to 13 percent
in 2004, versus 14 to 20 percent in the Piketty and Saez income
data.
A careful recent paper coauthored by economist Richard
Burkhauser found that household income concentration at the top
fell between 1989 and 2007. It is a minority view, for sure,
but I give it even odds that it will actually hold up over
time.
Not only has income inequality not grown as much as many
suggest, but intergenerational mobility has probably not
declined much, if at all, in the last three decades. To be
clear, no research shows a sizeable increase in mobility since
the mid-20th Century, but the most common finding is a change
so modest up or down as to be statistically indistinguishable
from no change at all.
In my own forthcoming research I find that today's 30-year-
olds have experienced no less mobility than did 30-year-olds in
the mid-1970s.
Faced with such an unsupportive research base, some
proponents of the view that inequality has hurt mobility have
turned to cross-national evidence, which the Secretary
mentioned, a line of argument that culminated in the Obama
Administration's popularization of the ``Great Gatsby Curve.''
This chart, showing a strong statistical relationship between
countries' inequality levels and the extent of mobility that
their citizens enjoy, is problematic as evidence for a number
of reasons that again I lay out in my written testimony, but
the most damning shortcoming is that it uses a measure that by
construction produces lower mobility when the growth in
inequality is greater than another country's.
Recent research by economist Miles Corak, the originator of
the ``Great Gatsby Curve,'' measures mobility by focusing on
the relationship between parent and child rankings. So the
differences in inequality between nations do not mechanically
affect mobility comparisons.
Corak finds that Sweden and the United States have the same
mobility levels by this measure--repeat, the United States and
Sweden have the same level of mobility by this measure. These
two countries have the lowest and highest levels of inequality,
respectively, in the Great Gatsby Curve. The implication is
that there may be no cross-national relationship at all between
inequality and mobility when the relationship is not baked in
mechanically.
In closing, while upward mobility has not diminished over
time, and while it has not been hurt by rising income
inequality, it has nevertheless been stuck at unacceptably low
levels for decades. If past patterns hold, 70 percent of poor
children today will fail to make it to the middle class as
adults; 4 in 10 will be mired in poverty themselves in midlife.
These are not the kind of odds that those of us solidly in
the middle class would accept for our children. The American
Dream is in poor health if children who grow up in the bottom
can aspire only to fill the same sorts of jobs their parents
did, even if better paid than their parents were.
The challenge is to identify real solutions to the problem
of limited upward mobility. Fifty years after Lyndon Johnson's
declaration of War on Poverty, we should establish a second
front against immobility. Attacking inequality, however, is
unlikely to mitigate either problem.
Thank you, very much.
[The prepared statement of Dr. Scott Winship appears in the
Submissions for the Record on page 61.]
Vice Chair Klobuchar. Thank you very much.
Dr. Kearney.

STATEMENT OF DR. MELISSA KEARNEY, DIRECTOR OF THE HAMILTON
PROJECT AND SENIOR FELLOW AT THE BROOKINGS INSTITUTION;
ASSOCIATE PROFESSOR OF ECONOMICS, UNIVERSITY OF MARYLAND,
COLLEGE PARK, MD

Dr. Kearney. Chairman Brady, Vice Chair Klobuchar, and
other distinguished Members of the Joint Economic Committee:
Thank you for inviting me to participate in today's hearing
on income inequality. This is an issue on which I have focused
my academic research over the past decade, and also an area of
focus for the Hamilton Project which I currently direct.
There are three main points I want to make about the high
level of inequality we are experiencing today.
First, the trends in inequality we have witnessed over
recent decades are largely the result of structural changes in
the labor market that have favored the very highly skilled.
The Great Recession has exacerbated these issues, but the
dominant forces were present long before the Great Recession
and they likely will not go away when the economy fully
recovers.
Since the late 1970s, the U.S. labor market has experienced
increased demand for skilled workers, and the supply of highly
skilled workers has not kept pace with the rising demand,
especially among men.
The result has been that those with more than 16 years of
education have seen their wages rise steadily. Those with
exactly a college degree or some college have seen some
improvement, but not to the same extent.
High school graduates and those with less than a high
school degree experienced falling real wages through the late
1970s and 1980s. Their wages rebounded a bit in the early
1990s, and have basically remained stagnant since.
In addition to growing wage disparities, there has been a
related trend of job polarization. We have seen expanded job
opportunities in high skill, high wage occupations on the one
hand, and low skill, low wage occupations on the other.
Employment prospects for the middle skill have eroded, and this
is true in both white collar and blue collar occupations.
This employment polarization is not a uniquely American
phenomenon and has been experienced in Europe to at least as
large a degree. This implies that there are global economic
forces that have led to a restructuring of the labor market.
Our main policy response should be a committed focus on skill
upgrading.
Ultimately we need to equip our workforce with the skills
that are demanded and rewarded in today's global economy.
Second, the growing levels of income inequality have
translated into sizeable gaps in educational achievement
between the children of the rich and the poor. While the racial
gap has declined significantly over time, gaps between low and
high income students in terms of educational achievement have
increased. This is true for K through 12 education, and college
completion.
And these gaps in educational measures appear early in
life. Marked differences between kids from rich and poor
families appear by the time they enter kindergarten. The class
of highly educated, high-income individuals are marrying one
another and showering advantages on their children. That is not
a problem.
The problem is that children born into the bottom half of
the distribution are falling behind. Here I want to raise the
issue of family structure. The diverging destinies of children
from low-income and high-income homes is in part driven by the
divide in race of nonmarital child bearing, and this matters.
Children from single-mother homes are five times more
likely to live in poverty than children in two-parent homes. We
cannot ignore this uncomfortable issue. But I also want to
emphasize that the dissolution of the family should be
considered a market of social and economic problems, as opposed
to a primary cause.
A decrease in the economic prosperity of low-skilled and
low-educated men leads to lower rates of marriage among this
population. The most effective way to increase marriage rates
at the bottom end of the income distribution is going to be
through increased economic security for these men.
Third, income inequality has the potential to interact with
poverty in ways that perpetuate disadvantage. In ongoing
research with my coauthor Phil Levine I've been investigating
this particular issue for some years now and have come to some
striking conclusions.
Low-income youth, both males and females, are more likely
to drop out of high school if they live in a place where the
gap between the bottom of the income distribution and the
median is wider. The same goes for rates of early nonmarital
childbearing. Young women are more likely to become young
unmarried mothers if the gap between the bottom and the middle
is greater.
A leading explanation as to why is because inequality
exacerbates the economic isolation and hopelessness that comes
with being poor. Simply put, these individuals do not see
promising opportunities, and so they essentially give up.
This all leads me to the conclusion that it is of the
utmost urgency that we make the necessary investments to ensure
that all Americans can participate productively in the global
economy and be rewarded with genuine economic security.
There is no silver bullet policy prescription, but we have
many policy levers available to us. The Earned Income Tax
Credit has been shown to be a very important program, and has
encouraged work among single mothers and led to long-term
improvements of the well-being of these families and children.
SNAP, the food stamp program, is the quintessential safety
net program and has proven to be responsive to weak economic
conditions in exactly the way it should. Researchers have
documented the long-term health and economic benefits of this
program to low-income children and families.
Expanded access to higher education has been important to
keep the supply of college-educated workers from falling even
further behind. And there is more that we should do. We need
effective intervention in early childhood, including expanded
access to high-quality child care and preschool. We need to
keep adolescents and older teens engaged in school. For the
one-quarter of American youth inclined to drop out of high
school each year, we need to find ways to equip them with the
skills necessary to become productive workers and citizens.
We need to think seriously about a role for vocational
training and employment apprenticeship. In general, we must
maintain and expand programs and policies that constitute
investments in the health, education, and skills of individuals
from broad swaths of the population.
Thank you for the opportunity to testify. I would be happy
to take questions.
[The prepared statement of Dr. Melissa Kearney appears in
the Submissions for the Record on page 73.]
Vice Chair Klobuchar. Thank you. Dr. Mathur.

STATEMENT OF DR. APARNA MATHUR, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE, WASHINGTON, DC

Dr. Mathur. Chairman Brady, Vice Chair Klobuchar, and other
Members of the Committee:
Thank you for inviting me to testify on the important issue
of income inequality. The discussion of income inequality often
tends to get very focused on definitional issues, and my
testimony explores these in detail. But I also argue that the
reason we care about income inequality is because it tells us
something about the well being of people at the bottom of the
income distribution.
The fundamental issue is about poverty. To this end, my
testimony discusses how low-income individuals are faring
today, particularly given the weak recovery of the last few
years and what policies can we put in place to alleviate the
problems.
To begin, let me first talk about the definitional issues.
Researchers have come up with different responses to the
question: Is income inequality trending up or down? On the
basis of very different definitions of ``income.''
As per the latest 2010 data from the Congressional Budget
Office, trends since 1979 suggest that households at the very
top of the income distribution have increased after-tax incomes
at a much faster pace than households at the bottom.
The much cited paper by economist Thomas Piketty and
Emmanuel Saez confirms this trend, though it fails to account
for taxes and transfers. Other economists, however, countered
these results by using a different definition of income.
In a 2013 paper, Richard Burkhauser and colleagues contend
that using a broader measure of income that includes accrued
capital gains, income inequality has narrowed between 1989 and
2007.
The results for widening income inequality are further
weakened when we use consumption as the measure of household
welfare. In my own research, coauthored with Kevin Hassett, we
find that consumption inequality is a lot narrower than income
inequality.
Further, we document that there has been an increase in
material standards of living even for low-income households,
resulting in a narrowing of inequality in terms of access to
everyday household appliances and electronic devices.
However, it is true that, despite these secular
improvements in living conditions, the Census Bureau documents
that more than 47 million people live in poverty in America
today.
We are now in the 5th year of an economic recovery that
does not seem like a recovery to most people in the labor
market. There are more than 10 million unemployed workers, of
which nearly 4 million have been jobless for longer than 27
weeks.
In addition, there are another 10 million who are either in
involuntary part-time jobs, or are too discouraged to look for
work. Therefore, I would argue that the focus on income
inequality is somewhat misplaced.
Fundamentally, this is a problem of poverty. And when these
high rates of poverty exist in an economy with low economic
mobility, the problem is exacerbated.
What policies can we encourage in order to improve economic
mobility and the access to high-wage, high-skill jobs that are
one of the primary drivers of economic success?
Access to high-quality education and schools is extremely
important as an investment into children's futures. Poor
quality schooling can limit an individual's earning ability.
Research has shown that the quality of local public education
has improved in areas where there is more competition due to a
larger number of school districts, or a greater availability of
nonpublic education.
The labor market poses serious concerns about the future
livelihoods of millions of unemployed workers, particularly
those who are long-term unemployed.
One solution that is being proposed is the extension of
unemployment benefits to the long-term unemployed. I believe
that the unemployment benefit programs have to be supplemented
by skills' training and greater help with matching workers to
jobs.
Towards this end, workers who have been long-term
unemployed should be provided skills training and placed in
jobs through wage subsidy programs that allow some share of the
wages to be paid by the employer and the rest to be paid by the
unemployment insurance program.
This would allow employers to test and see if the match
with the prospective employee is a good one, while at the same
time it would allow workers to receive on-the-job training and
gain experience, with the likelihood that they will be able to
keep the job.
Raising minimum wages is a particularly bad idea when we
think of high youth and teenage unemployment rates. Workers
under age 25 make up half of those paid the federal minimum
wage or less. Instead, research suggests that internship or
apprenticeship programs may improve employment prospects and
also boost college attendance.
Minimum wages are also not a tool to fight poverty. Less
than 25 percent of minimum wage workers live at or below the
poverty line, based on family cash income. An alternative to
the minimum wage is the Earned Income Tax Credit Program.
The EITC arguably is one of the Federal Government's most
efficient means of encouraging work and fighting poverty. As
per the Census Bureau, the EITC has lifted 5.4 million people
above the poverty line in 2010. While the EITC has some
significant disadvantages such as the tax penalties on earners
in the phase-out range, it has been shown to encourage labor
force participation for single mothers, and has lifted millions
of adults and children out of poverty.
To conclude, the bulk of the evidence suggests that
programs that enable people to work or transition to work are
more effective at fighting poverty than simple cash assistance
programs. As such, wage subsidy programs that combine skills
training and tax credit programs like the EITC are a better bet
today to get the unemployed back in the labor market and
improve the lives of low-income individuals.
Thank you.
[The prepared statement of Dr. Aparna Mathur appears in the
Submissions for the Record on page 83.]
Vice Chair Klobuchar. Thank you, very much.
Dr. Kearney, why don't we start with you. I am looking
forward to seeing your research, because certainly I have seen
this in my old job as a prosecutor and other places where you
have these areas where there is a lot of inequality, and people
see less hope. But I did want to ask you about something you
did not mention.
I know you have analyzed the minimum wage recently and
found that raising the minimum wage will have a ripple effect
and might actually raise wages for about one-third of the
workforce, about 35 million workers.
Could you tell me more about the impact of the minimum wage
on workers who currently make more than the proposed minimum
wage?
Dr. Kearney. Thank you for the question.
So indeed as you mentioned, the Hamilton Project has
recently put out work showing that 35 million people could
potentially be impacted with higher wages if the minimum wage
were raised.
And what I want to emphasize here is that I think there is
reasonable, or compelling academic evidence that we can--the
labor market could absorb a modest increase in the current
federal minimum wage, and many states and localities, given the
level of wages in where they are, the labor markets there could
absorb an increase in the minimum wage such that low-wage
workers will receive higher wages with very modest, minimal I
should say, disemployment effects.
The worry of course is if we raise the federal minimum
wage, or a state minimum wage, too high--then that of course is
where we need to consider the employment effects more
seriously.
But I would emphasize, along with what my colleagues said,
this is a policy that is sort of a first step in allowing these
workers to take home higher wages. But we should think about
minimum wage jobs as an entry job into the labor market, and
really should focus on skill upgrading so that these people can
move up the wage distribution.
Vice Chair Klobuchar. Agreed. Thank you very much.
Secretary, one of the most striking statistics in your film
is the increased concentration of wealth in the country, the
idea that 400 people, the top 400 people now hold the same
amount of wealth as the bottom half, as 50 percent of this
country.
And I thought the argument you make from that is how we
traditionally got our economy moving, and why we are where we
are today, is that the wealthy, those 400 people, or even the
top 1 percent, or 5 percent, can only buy one or two pair of
jeans a year. Or they can only buy, you know, one or two pair
of tennis shoes a year. And if you have half the country not
able to do that every year, you have a huge problem in an
economy that is 70 percent consumer-based.
Could you elaborate on that?
Professor Reich. Yes. Right now we have 65 percent of
Americans living paycheck to paycheck. Almost all the savings
in our system are coming from the very top, which ordinarily is
a good thing. But we are not in ordinary times.
For one thing, it is a global economy and these savings are
going around the world to wherever they can get the highest
return.
For a second, we have a demand-side crisis. We do not have
enough aggregate demand. And if government is embracing
austerity, we are not getting the demand out of government
spending.
So the vast middle class and everybody wanting to join the
middle class who are poor, if they do not have enough money in
their pockets, there is simply not enough demand for buying
goods and services.
I mean, why is it that American companies, sitting on $1.5
to $1.7 trillion of cash, are not expanding? They are not
creating new jobs.
Well, there are many responses but the major response from
every survey of businesses is that they cannot justify adding
jobs because they do not have enough customers. They do not
have enough sales and revenues.
The reason they do not have enough customers, sales, and
revenues is because the vast middle class does not have the
purchasing power to justify those sales and revenues. This is
something that Henry Ford understood in 1914. He doubled his
factory wages, thereby creating in other factories a demand to
double their wages, and thereby generating a demand for the
products that his factory, Model T Fords, and other factories
were producing.
It was a virtuous cycle created by companies that raised
their wages. The Confederation of British Industries, just two
weeks ago, urged industries in Britain to raise wages as a way
of promoting economic growth.
Vice Chair Klobuchar. And one of the most striking graphs
that you had was that bridge graph where you showed, right
before the Great Depression, that there was this high amount of
inequality, and then it got better, and then it's coming up
again, and here we have what we call the Great Recession. And
so, just my last question would be, as you look through
history--and I think we can learn a lot from history--and you
said what country can we best look at to figure out how to fix
this, and you said: Our own country.
Because if you look at what we did after World War II, we
did a lot to bring up the middle class and our whole economy.
Professor Reich. Yes. And here's I think a very important
lesson for us that we forget. For three decades after World War
II we had a recipe. We invested huge sums in education--not
only K-12, but public higher education. We invested in
infrastructure. The biggest infrastructure project in the
history of this Nation, the National Highway Building Defense
Highway Act, we had strong unions. We regulated Wall Street.
And we had a high marginal income tax that was never below 70
percent, and an effective rate, if you include all deductions
and tax credits, of over 50 percent on highest income earners.
After 1981, we did just the opposite. We cut back,
relatively speaking in terms of per capita as a percentage of
our economy, on education, on infrastructure. We deregulated
Wall Street. We had a much less progressive tax system. We
essentially enabled corporations to bust unions. We have a much
smaller percentage of unionized workers than we did in the
1950s.
And what do you expect when we turn our back on the
successes of the first three decades after the Second World
War? The net result is a huge and, with due respect to my
colleague sitting next to me, the consensus, the overwhelming
consensus with regard to looking at the data and understanding
the data, is that inequality has been growing and we are
surging to greater inequality.
And if you don't want to play a numbers game, just walk out
the door.
Vice Chair Klobuchar. I think that is why we have a lot of
people here today, and we will turn it over to Chairman Brady.
Thank you.
Chairman Brady. Well I want to thank you all. The testimony
was great that you presented, as well as the testimony today.
Secretary Reich, you will be surprised to know I agree with
you. I think the majority of economic benefits in this recovery
has accumulated to the wealthy, and it is by government's
design that that has occurred.
The stimulus was not aimed at infrastructure. Certainly not
jobs skills. It did not stimulate new job creation along Main
Street. It was focused at bailing out state governments and
other areas.
The Federal Reserve has pumped trillions of dollars toward
Wall Street. Wall Street is roaring. Good for them. Middle
Street, middle class families' Main Street, not so much.
Just consider this. Wall Street's index value has almost
doubled in this economic recovery, but Main Street, middle
class families, their incomes have barely budged. Think about
this. In this terribly weak recovery, historically weak, the
worst, frankly, in the last half-century, if it would have just
been average, just C Grade, just nothing much to speak of,
every family of four in America would have $12,000 more in
their pocket today than they do. $12,000 more to pay utilities,
$12,000 more to shop at that local business, $12,000 more to
pay down student debt, or avoid it in the first place.
So I lay much of the blame and responsibility for middle
class struggling with this government, and the President shares
some of the responsibility, much of that, for that.
I think the problem is joblessness. I do not think income
inequality is dragging down the economy. I think this weak
economy is dragging down income equality.
People just are not finding good-paying jobs. Certainly
this Congress and White House are not focused on that. And I
think that is where our greatest effort needs to be: getting
Washington out of the way to allow our small businesses to
grow.
The Washington Post blogger and columnist Ezra Klein, I
notice he argues inequality is not the defining issue of our
time. He says joblessness is. The fact so many million
Americans have given up on work, and many more are stuck in
jobs and are underemployed.
So I guess, Dr. Winship, Dr. Mathur, to begin, why isn't
joblessness--why isn't this poor recovery really the focus of
why we should be here today? Dr. Winship?
Dr. Winship. Thanks for the question.
So I think what the Administration has done that has been
unproductive has been to frame everything in this inequality
frame. And I think, with all respect, the Secretary does that
as well.
All of the ills of the economy are sort of laid to rest at
things that progressives like to think that have worsened over
time. But the bottom line is that if we could get back to the
1950s and 1960s, it is pretty clear what we need. We need the
productivity growth that we had back then.
We never saw it before that. We have never seen it since.
It is hard to imagine a story where inequality is the main
factor behind that. And the best thing that we could do to
reduce the unemployment rate to move people out of long-term
unemployment into work would be to expand economic growth. And
I think the way to do that is not by talking about inequality
and demonizing folks at the top who are doing a lot of business
investment.
I think the way to do it is to try to get some consensus
around things that would grow the economy that would not be
polarizing. I think we can agree on things like high-skilled
immigration. I think we can agree on a deregulation agenda. I
know the Chairman supports a consumption tax. I think that that
would be a very pro-growth reform to pursue.
And inequality I think just is divisive. It is essentially
ensuring that nothing gets done. It is using, it is using a
political issue to guarantee gridlock through the rest of the
President's term, and sort of hoping that with small-sized
policies like unemployment insurance extension, a minimum wage
which I agree with my colleague, Dr. Kearney, that a modest
minimum wage might not do any damage and might actually be
helpful, a 40 percent increase to an unprecedented historical
level, which is what $10.10 would be, there is some dispute
about what the level was in 1968 depending on how you adjust
for the cost of living, $10.10 would be unprecedented, and the
40 percent increase would be something that we have not seen in
a long time, in a recovery that is sort of still fragile.
I think it is just a terrible idea. We ought to stop using
these divisive frames and agree on some consensus that everyone
would agree would move the economy forward.
Chairman Brady. Thank you.
Dr. Mathur.
Dr. Mathur. Thank you. I would agree with Secretary Reich.
You know, it is a demand problem. There are consumers out there
who do not have the money to buy things. But I think the seed
of all that is coming from joblessness. I mean, this is
something that has happened over the course of the Recession
that people do not have the money, and there does not exist
enough demand. And I think a lot of it is coming from the fact
that they have lost value in their homes, and they are out in
the labor market.
They do not have jobs, and they do not have the wages and
the salary to earn enough income to be able to go out there and
buy things. And I think, you know, the current policy is to
extend let's say unemployment benefits, which are intended to
help people. I think, you know, the intentions are great. I
think they are intended to help people who have been out of the
labor market for so long that they have little hope of finding
a job.
I think we could do much more than simply extending cash
assistance benefits for, you know, 72 weeks, or 99 weeks. I
think after a worker has been unemployed for 4 to 5 months,
they need active help in finding a job. And so coming up with a
program that would actually match workers to jobs, you know,
either with a subsidy program or, you know, sort of skills
training, or just on-line searches of helping workers find
jobs, would be much more effective than simply, you know,
extending benefits, and what happens at the end of the 99 weeks
when the worker is still unemployed.
Chairman Brady. Thank you. Dr. Kearney, I know my colleague
from Minnesota wants to talk about the value of education and
skills and climbing the economic ladder.
Secretary Reich, you were so good--are so good to be here
today. Let me ask you about the minimum wage. I come from a
Chamber of Commerce background, so helping create small
businesses and building a business community. And I know, you
know, when you force a small business with 10 workers to pay
$5,000 more a worker each year, no change in productivity, no
new customers, just $50,000, it may be in fact the whole profit
for the year.
Not only does it discourage new hiring, it often leads to
cutting workers' hours. I notice, too, that forced into that
situation that small businesses will look to new workers, young
workers. They are more likely to hire those who have had the
advantages of a middle class family, and education, and a work
ethic, and all that goes with sort of creating advantages. They
are less likely to take chances on a younger worker from a
poorer community, you know, that perhaps has not had those
chances.
So we in effect, in my view, not only do we make small
businesses make terrible decisions on hours for the workers,
make it tough for them to survive, but I really think we remove
the lowest rung of the ladder for especially young, minority
people.
So my question to you is: As you look at income inequality,
have the years that have raised the minimum wage, has that
lowered income inequality in raising minimum wage over the
number of years? Has that changed it? Decreased it? Shrunk it?
Professor Reich. Mr. Chairman, the last--or one of the last
times I testified before this Committee was in 1995, and the
subject was do we raise the minimum wage? Many members of the
Committee, particularly Republican members but not exclusively,
were concerned about raising the minimum wage because they were
concerned about its negative effect on job growth.
At that time, I presented evidence that a raise in the
minimum wage, not a gigantic raise but a substantial raise,
would actually help job growth in terms of creating, as I
talked about before, more money in the hands of people who
could turn around and buy stuff, and thereby have a positive
multiplier effect.
Now we did an experiment----
Chairman Brady. And I don't want to interrupt, but
specifically to the issue of income inequality, has raising the
minimum wage shrunk the income--the difference between
earnings?
Professor Reich. Well I was just about to get to the point,
Mr. Chairman. In the short term what we discovered is that
raising the minimum wage actually was correlated in 1996, 1997,
1998, 1999 with increases in employment, not decreases.
But in a larger--in the larger time horizon, we have not
raised the minimum wage. The minimum wage is still 30 percent
now below what it was in 1968. Had we merely maintained the
1968 minimum wage, adjusted for inflation, it would be today
substantially above $10 an hour.
So the answer to your question, the larger scale answer to
your question, is that we have not, in inflation-adjusted terms
since 1968, really raised the minimum wage. In fact, the
decline of the minimum wage has contributed to widening
inequality particularly among women, because most minimum wage
workers are women.
If we raised the minimum wage, we would get about 4.6
million people, a conservative estimate, out of poverty.
Vice Chair Klobuchar. Okay----
Chairman Brady. Excuse me, if I could give just a quick
response. It just seems to me, you know, our focus should not
be on raising the minimum wage; it should be getting people off
it, and education and skills and better jobs is how we do it.
Vice Chair Klobuchar. Okay. Since we were citing The
Washington Post blogger, I wanted to note that Bill O'Reilly
has come out strong for increasing the minimum wage.
Professor Reich. Well if Bill O'Reilly has come out
strongly for increasing the minimum wage, I've got to rethink
my position.
[Laughter.]
Vice Chair Klobuchar. And also, just to clarify, what you
are saying is that back when we had adjusted for inflation, the
minimum wage in 1968 was much higher than it was today, and
back then we did not have near the income inequality that we
have today.
Professor Reich. Exactly. And also back then most minimum
wage workers were teenagers. Today most minimum wage workers
are providing a substantial part of family income. They are
major bread winners.
Vice Chair Klobuchar. Okay, very good.
Chairman Brady. Without the skills.
Vice Chair Klobuchar. Senator Heinrich.
Senator Heinrich. Secretary Reich, I want to give you an
opportunity to take a crack at Chairman Brady's other question,
which was, is the problem inequality, is the problem
joblessness, and how you see those as related.
Professor Reich. We could reduce joblessness by taking the
low road in this country--and that is, reducing wages. That is
pretty much what we have been doing, with essentially
production workers--that is, hourly wage workers, the median
hourly wage continues to drop adjusted for inflation.
Median household incomes, even including two-income earners
in those households, keeps on dropping, adjusted for inflation.
Now we could theoretically create more jobs by eliminating the
minimum wage, people working $25 an hour, and continuing to
drop real incomes.
That is not a success story. In other words, what we want
in this country is more jobs, but more good jobs.
Unfortunately, most of the jobs created in recent years have
been in retail, restaurant, hotel, hospital, surface
transportation, child care, and elder care. Jobs paying low
wages, close to the minimum wage.
Most of the jobs we lost in the Great Recession paid more
on average than the jobs we have gained since the recovery. So
the vast middle class and the poor are on a downward escalator.
We do not want to add to that burden by simply saying, all
right, the way to get more jobs is to reduce wages and benefits
even further. That is a--that is a recipe for a low wage, low-
skilled, low secure, insecure workforce even more than we have
now.
Senator Heinrich. Well it seems like that takes us to
education, which is one of the things that there is some
agreement on, you know, across this panel from one side to the
other. And I would love to get all of your thoughts in the
limited time that is left, starting with Secretary Reich and
just going down the line, on what you think in particular we
can do about early childhood education to make sure that this
early disparity that we see is mitigated.
And then, what we should be doing to create better policy
to incentivize the sort of long-term skills and vocational
training that makes sure that people are well matched to the
jobs that are there.
Vice Chair Klobuchar. And that is a good question, if
everyone could try to keep their answer to about a half a
minute because I know the House is going to have some votes
here coming up. Thank you.
Professor Reich. Senator, very quickly, there is a great
deal of evidence that early childhood education pays off
enormously in terms of lower dropout rates in primary and
secondary school, lower social problems, more people going on
to higher education. It is a good investment.
Number two, we do need to have a world class technical and
vocational education track. It is ridiculous to assume that the
only way into the upper middle class is through a four-year
college degree. That is a conceit that is not fair to many,
many of our young people. We do not have that vocational
technical track.
Germany does, and that is one reason why Germans--the
Germany economy, even with the huge cost of incorporating East
Germany, is doing so well relative in terms of wages and
productivity.
Thirdly, we need to invest in public higher education. And
I can tell you from being both a professor at Harvard at one
point, and now at the University of California Berkeley, one of
the preeminent public higher education institutions, that there
is a difference. Public higher education has much more economic
diversity.
A third of my students are Pell Grant eligible. We need to
help more public higher education.
Mr. Chairman, you were referring to Abraham Lincoln before,
the Land Grant Institutions that President Lincoln actually
instigated were the Nation's first major investment in public
higher education, and that was a huge benefit for the future.
Vice Chair Klobuchar. Okay.
Professor Reich. Thank you.
Vice Chair Klobuchar. Dr. Winship.
Dr. Winship. Well I think that early childhood programs
need to be an important part of an opportunity agenda,
actually. I think the problem is that I think, contrary to what
a lot of folks who advocate for these programs say is there is
not a lot of great evidence for models that consistently work,
especially when you scale them up.
And I am thinking of a really interesting book by David
Mulhausen at the Heritage Foundation who has evaluated all of
the programs that have been randomly evaluated at the federal
level across multiple sites. And it is a really depressing
read.
So I think that we do not know the way to move the lever. I
think we need to be prepared to make it a priority and try to
discover more successful models. But paired with that, we've
got to be prepared to shut down models that do not work because
we are just throwing money away in that case.
Vice Chair Klobuchar. Dr. Kearney.
Dr. Kearney. Thank you. So I will start with early
childhood education, and I agree with Dr. Winship completely.
It is not enough to offer preschool to 4-year-olds. We need
really high quality preschool, and that is a lot harder and
more expensive.
K-12 education, money is not the problem. Teacher quality
has been shown time and time again to be the key determinant of
children's outcomes and success. And so we need high teacher
quality. We need to retain good teachers, and we need to
eliminate bad teachers.
Vocational training, I agree completely with Dr. Reich. It
is just, you know, it is laudable that we want everyone to go
get a four-year degree, but we have a quarter of our high
school students dropping out of high school every year.
College, four-year college, is simply not for everybody.
Perhaps it will be when they are older, but not at that
time. And we need to retain those students in the educational
system.
And finally on the issue of college, I would applaud the
efforts of our government and policies like the Pell Grant. I
think we have worked to address the issues of cost and access.
We need a larger emphasis on college completion and
retention. Disadvantaged students have very low completion and
retention issues. And I would need more than 30 seconds to
address that.
Vice Chair Klobuchar. Thank you. Very good. Dr. Mathur.
Dr. Mathur. So I would like to echo the sentiments of my
colleagues here. I think access to early--good quality early
childhood education is extremely important. It is a big
investment into childrens' future.
And I think, you know, the fact that we have poor quality
schools, the one way around, the research suggests and models
suggest, would be if we had more competition among schools. So
I think, you know, even if at the early stage if people had
more access to different school districts maybe, to different
types of schools, you know, that would be one way to get higher
quality education at that level.
Vice Chair Klobuchar. Thank you. I want to let my
colleagues ask some questions.
Mr. Paulsen.
Mr. Paulsen. Thank you, Vice Chair Klobuchar.
I appreciate hearing all of your testimony today. Let me
ask you this: First of all, we all know that the essence of the
American Dream is economic mobility and opportunity to succeed.
There is no doubt about that.
And by most measures, Americans are better off today than
they have been in past decades. And there still is significant
opportunity for all individuals--including low-income
individuals--to move up the economic ladder.
I want to focus some of my comments as well on education,
because a couple of you touched in particular on that as part
of your testimony. And in particular the skill upgrading
concept you mentioned, Dr. Kearney.
Information technology has boosted the marginal
productivity of highly skilled and college-educated workers.
This has caused the real wages paid to these workers to
increase more rapidly over time as the demand for them grew
more rapidly than the supply. And at the same time, information
technology directly competes with some generally less skilled
and less educated workers, causing those real wages then to
stagnate.
Economists have called this phenomenon skill-based
technological change and estimated that it could account for a
majority of the increase in income inequality both in the
United States and around the world.
Dr. Kearney, I will just start with you. Would you agree
that skill-based technological change is a major cause of
income inequality, not only in the United States but in other
countries as well?
Dr. Kearney. Yes. I am firmly in the camp among labor
economists who subscribe to this notion of skill-biased
technological change. But it is a nuanced view.
The computerization and information technology has
certainly accentuated the skills in a positive way, increased
the return to skills for the higher educated. But in the most
recent decade, in the 1990s, in contrast to the 1980s, it
actually did have some positive effects on the earnings of the
lowest skilled, or I should say folks in the service sector.
Truck drivers have better GPS systems, for example.
And where it has really hurt is right at the middle. And
those are blue collar and white collar jobs that are more easy
to automate, for example. Those are the jobs that have gotten
hit by this skill-biased technological change.
To Chairman Brady's earlier question, I will say that while
I believe that skill bias technological change and essentially
the supply and demand of skills are the primary drivers of our
patterns of income inequality, there is strong evidence that
the erosion of the minimum wage during the 1980s contributed to
the decline in low wages at the bottom during the 1980s.
Now of course in the 1990s, as I mentioned, those wages
rebounded without a coterminous increase in the minimum wage.
Mr. Paulsen. And, Dr. Kearney, would you also say that
education would be the most effective long-term solution to
closing that growing gap between skills that employers seek and
the skills that workers actually have?
Dr. Kearney. Yes. It is a focused education. It is a smart
education. It is an education that is committed to STEM
education, right, and educating and training the students for
the jobs of today's global economy.
Mr. Paulsen. And Dr. Mathur, maybe you can add some
comments, but I also wanted to ask if you actually agreed with
Dr. Kearney that retaining good teachers and dropping bad
teachers should be a policy that we should consider to help
with education?
Dr. Mathur. Absolutely. I think, you know, the more we
create high quality education, the better off people are, the
better off children are.
But again, also talking about the minimum wage issue that
came up, I mean the most recent research suggests that it is
not sort of the single important thing that has been
responsible for income inequality.
I think there is some evidence suggesting that, you know,
over certain time periods the minimum wage was highly
correlated with female wages, which is what it affects the
most, but I think if you look at the long period starting in
1986 to 2005, there is no correlation between female wages and
the increase and decline in the minimum wage. So it is not
clear that that is the single smoking gun that has been
responsible for the rise in income inequality.
Mr. Paulsen. Thank you, Madam Chair. I yield back.
Vice Chair Klobuchar. Thank you very much, Representative
Paulsen.
Senator Sanders.
Senator Sanders. Thank you, Madam Vice Chair.
One of the interesting aspects of discussions about the
economy or income inequality inside the Beltway as opposed to
back home in the real world is the very different tone that we
hear.
The idea that anybody could suggest that we are not seeing
massive increases in income and wealth inequality is beyond my
comprehension. If you go outside of the Beltway, there is no
debate about that. The idea that anyone could suggest that
today the economy for the middle class is anywhere near where
it used to be is beyond comprehension I think for the vast
majority of the American people.
The reality that we are seeing today is that the middle
class in this country is disappearing. Median family income is
going down. We have more people living in poverty today than at
any time in the history of the United States of America. And as
Secretary Reich pointed out, between 2009 and 2012, 95 percent
of all new income generated in this country went to the top 1
percent.
And in terms of wealth, the situation is even worse. Maybe
some of the panelists might want to defend the situation where
the top 1 percent in America owns more wealth than the bottom--
that the top 1 percent owns 38 percent of the wealth in this
country, and the bottom 60 percent owns 2.3 percent of the
wealth.
Does anybody on that panel--and I would ask that question
in a moment--think that that makes moral sense, or economic
sense? Does anybody think it makes moral or economic sense that
one family, the Walton family, owns more wealth than the bottom
40 percent of the American people?
Now in terms of government action, we have heard that the
stimulus package presumably had no impact. Well that was not
true in my State, nor was it true in America. By investing in
our economy, in our kids, in infrastructure, according to the
CBO, the Recovery Act, the stimulus bill created or sustained
up to 3.6 million jobs, a 4.2 percent boost for GDP in the
first quarter of 2010, and a reduction in the unemployment rate
of up to 2.1 percent in the last quarter of 2009--at a time we
needed the jobs the most.
The last point that I want to make, and I want to ask a
question on this one, the Walton family is the wealthiest
family in America. Does anybody on the panel think that they
need significant welfare help?
And yet it turns out that they are the largest recipient of
welfare in America. Because when you pay workers starvation
wages, which is what Walmart does, how do the workers at
Walmart, or McDonald's, or Burger King, survive? Well, they get
Medicaid for their kids and for themselves.
They get food stamps. They live in government-sponsored
affordable housing. So I start off with my question to Dr.
Winship, and we will go down the line.
Do you think the Walton family, worth $144 billion, is in
need of welfare from the middle class of this country? Or do
you think maybe we should raise the minimum wage so that those
workers can earn a living wage and not have to get Medicaid, or
food stamps?
Dr. Winship.
Dr. Winship. Thank you, Senator.
So let me start with your earlier question about defending
the wealth distribution that we have.
Senator Sanders. Well actually my question was on the
Walton family. Do you think they need welfare?
Dr. Winship. So I would not use the word ``welfare.'' I
think it is stigmatizing.
Senator Sanders. Do you think their workers in large
numbers should have to get Medicaid or food stamps?
Dr. Winship. What I think is that Walmart has the low
prices, which----
Senator Sanders. Please answer my question.
Dr. Winship. I'm sorry, repeat the question for me?
Senator Sanders. The question is: Do you think the
wealthiest family in this country, the Walton family, should
have employees, large numbers of employees, who depend on
government help--Medicaid, food stamps, affordable housing--in
order to get by? Or should they pay their workers a living
wage? And should we raise the minimum wage to make sure that
they do that?
Dr. Winship. I think that we should not raise the wage
above levels that's going to cause Walmart to not hire their
workers. The only way that they are able to have the prices
which benefit low-income people more than people up on the
income distribution is by paying wages that are not as high as
you or I might like.
Senator Sanders. So I'm hearing your answer to be that the
middle class of this country, through increased taxes, should
be subsidizing the wealthiest family in this country who are
paying inadequate wages.
Secretary Reich, what is your take on that?
Professor Reich. Senator, I do not think that taxpayers in
this country ought to be subsidizing the wealthiest family in
this country, or any company and any corporation that is paying
its workers so little that those workers, in order to have a
decent living, have got to rely on food stamps, Medicaid,
subsidized housing, and so on. That is a corporate welfare of
the worst kind.
But more broadly, let me simply say that Walmart is the
largest employer in the United States. It is paying its
workers, if you include its part-time workers, on average $8.80
an hour.
Now compare that to 1955 when the largest employer in the
United States was General Motors, and it was paying its
workers, in today's dollars, $37 an hour.
Senator Sanders. That is a huge point. I do not have much
time----
Vice Chair Klobuchar. No----
Senator Sanders. But Dr. Kearney and Dr. Mathur, if they
could answer the question, should the taxpayers----
Vice Chair Klobuchar. Quickly.
Senator Sanders [continuing]. Of this country be
subsidizing the----
Vice Chair Klobuchar. Thirty seconds each.
Senator Sanders. Thirty seconds is fine.
Dr. Mathur. So I don't think we should be subsidizing
Walmart, but I think the workers have a choice about where they
want to work. If they are choosing to work at Walmart, you
know, that is their choice and we should not decide for them
whether it is a good choice.
The program subsidizes workers. You know, these are poverty
programs that, you know, benefits go directly to workers. So,
you know, if you think that they're creating jobs and people
are able to work and earn enough benefits to survive, I think
that's a good thing.
Senator Sanders. Dr. Kearney.
Dr. Kearney. When Walmart came to Washington, D.C., the
number of job applicants per job, there were more than dozens
of people willing to take each job. I think Walmart is a
brilliant innovation, and I have no beef with the Walton
family.
It would be great if people could move up the wage
distribution faster at Walmart and aspire to management
positions, and better incomes for themselves and their
children.
Vice Chair Klobuchar. Okay. Thank you.
Next, Mr. Campbell.
Mr. Campbell. I thank you very much. You know, in politics
these days we want to do everything in sound bites, and we want
to come up with a solution for every problem.
This issue, income inequality, mobility limitation,
joblessness, whatever thing you want to deal with, is extremely
complex, multi-faceted and international, as many of you have
mentioned.
It does not lend itself well to that. And I think we do the
problem a disservice when we try to say it can be solved with a
single thing, or a single solution.
I also think we do it a disservice if we use it to further
divide America. If people bring it up and try and say that it
is somebody against somebody else, that whenever that is used
it not only does a disservice to the country but it does a
disservice to solving the issue.
The third problem I think we have with this--which I am
hearing on this panel, frankly--not there, here, well to some
degree there--is if we use this issue to simply justify the
policies that one party or the other have advocated for
decades, we are not being serious. And we are also not looking
for a real solution.
We are simply using the issue to justify the things we
already believe, and that perhaps the other side does not
believe.
So I think when we do any of those things, we are being
counterproductive--and I think the issue is too important. I
think it is too significant to trivialize it and reduce it in
that manner.
Now that being said in the five minutes of this sound bite,
I cannot engage in a thorough discussion, but I did hear some
interesting things that we have not discussed much.
Secretary Reich, you mentioned about vocational and
technical training and educational conceit. I do not think that
is necessarily something where either party has staked out
ground where they cannot move.
Dr. Kearney, you mentioned about devolution of the family
and social issues. Those are difficult. I understand. They are
emotional. They involve other things. But they cannot be
ignored. And in one way or another people need to discuss it.
One thing I wanted to bring up is whether--you know, I have
spent much more of my life in the private sector than in
public, and I never worried about how much somebody else made,
as long as I was making what I felt I ought to earn.
When you look at the top incomes these days--and I am not
going to go into either business people or into entertainment,
because that politicizes it--but I always like to bring up
sports, because that tends to depoliticize the thing. And if
you look at any major sport today, the players in those sports
make way, way more money adjusted for inflation and anything
else than they did in the 1960s and prior.
And you talk to people who were huge names in those eras
and they say, well, you know, I got out just before the really
big salaries came up, the really big income. That, by the way,
will apply to team owners as well in some of what they do and
what these teams are worth.
Why is that? Dr. Kearney, or anybody?
Dr. Kearney. Thank you for your serious attention to this
very difficult and nuanced problem. I think a focus on the top
1 percent and why those folks have, you know, such enormous
wages and incomes is a fascinating question. In some sense it's
an academic question. Why has it become okay in a question of
norms for a CEO to make so much more----
Mr. Campbell. Keep it to sports, please.
[Laughter.]
Dr. Kearney. On sports, now we have a global television
market. The revenues to these sports franchises are larger, and
so some would argue that they are earning it because of the
value brought into the sports team, and the TV licenses, et
cetera.
But I do want to say, this I think distracts us from the
real policy question. Those are fun questions to talk about,
right, but the bigger issue, and the one that we need to do
something about is the inequality between people with different
education levels. College workers make twice as much as those
with a high school degree. We could do something about that.
Mr. Campbell. So is what you're saying is we should ignore
that? Unfortunately, this thing has focused--a lot of people
focus on the pitcher that gets $240 million.
Dr. Kearney. Of course, because it's so fascinating. It's
huge.
Mr. Campbell. But it distracts from the real issue, does it
not?
Dr. Kearney. I would tend to agree. I would tend to agree.
Mr. Campbell. Okay. My time is up. Thank you.
Vice Chair Klobuchar. Okay, next, Representative Maloney
from the State of New York.
Representative Maloney. Thank you. It is very good to see
you again, Secretary Reich. In your entire career you have
shown a spotlight on the problems of income inequality, and
your ideas and concern are gaining momentum I would say here on
Capitol Hill. Both parties are expressing concern. Major
leaders, Pope Francis has been very critical of the trickle-
down economy. Warren Buffett and others.
And you testified about the way, the economy we had after
World War II that lowered that gap. And actually in the Clinton
years you were working hard to lower that gap. And you
mentioned those long-term goals of education, infrastructure,
tax structure, stronger unions, people working together.
Is there anything that we can do in the short term that
would gain--that we could take advantage of this renewed
urgency that we are feeling in the country to do something now?
Or is it just a long-term goal? Is there something we could do
right now that would help us move forward?
Professor Reich. I think there is no magic bullet. It is
going to take years. There is no substitute for the public as a
whole understanding the dimensions of the problem.
In the short term, I would recommend an increase in the
minimum wage. I think that can be done. It would be helpful. It
is not going to solve the problem entirely, but it is a major
step in the right direction.
I also want to mention something with regard to the issue
of divisiveness, because this is important. Even the wealthy in
this country would do better with a smaller share of a rapidly
growing economy, growing rapidly because the middle class and
the poor had more purchasing power and therefore there was more
aggregate demand than they are doing now with a large share of
an economy that is barely growing.
It is not a zero sum game, in other words. And I do not
think anybody up here, or anybody who has thought about this
issue, sees it as a zero sum game. It should not be. It should
not be even a partisan issue.
Representative Maloney. But many of my Republican
colleagues have been critical of government programs. They call
them trapping people in poverty. Not building their future. Not
a job. But these programs, such as increasing the minimum wage,
extending unemployment insurance, Medicaid, Medicare, the
nutritional program. There was at one point a proposed $40
billion cut to nutrition.
Yet all of this goes back into the economy and helps move
many people out of poverty, and helps increase the purchasing
power. And, believe me, everyone who gets an unemployment
insurance check is going to plow every single dollar back in.
Every minimum wage earner is going to plow every single dollar
back into the economy.
So what would your response be when the pushback on minimum
wage and the extension of unemployment insurance, which you so
eloquently have argued would be positive for growing our
economy, how do we convince and move forward to do these things
which we can do now in the short term to help the overall
economy for everyone?
Professor Reich. Representative Maloney, let me just say
that in my career as Secretary of Labor and before then, and
since then, I have not met anyone who does not want to have a
job. People want to work. They want to contribute. They want
the dignity of having a job.
Right now there are three people without jobs for every job
opening in the United States. It is absurd to think that under
these circumstances extending unemployment benefits are
deterring people from looking for work.
In fact, the only way you qualify for extended unemployment
benefits is you are actively looking for work. The big problem
we face right now is so many people are dropping out of the job
market because they are too discouraged even to look.
Representative Maloney. My time is up. We have heard
statements today that people made a choice for a minimum wage
job. No one is making that choice. That is the only choice
they--the only job they can find. Someone else said that people
gave up their job. They did not give up their job. They wanted
to work. They lost their job.
But all of the social safety net programs help provide the
economy and the safety net to move forward. How would you--how
would you answer the critique of the safety net as being part
of answering the job growth in our country?
Vice Chair Klobuchar. Okay, we will have that answer for
the record because we have a vote coming up, if that is okay,
Representative Maloney, and I want to try to get our last two
House Members, including Representative Delaney, in.
Representative Hanna.
Representative Hanna. Thank you. What is clear to me is
that we cannot have a peaceful society as long as some young
people born in poverty have a 40 to 70 percent chance of dying
in poverty.
What is also clear to me is the last industrial revolution
provided a lot of jobs. The automation of cognitive work has
made pre-K education vital, if we are not going to have long-
term structural unemployment.
Also, as Dr. Reich said, 98 percent of the jobs we have
created in this country in the last 20 years are jobs that no
one in this room would consider a living wage or a job they
would want.
So the theme here today is education. The theme here is
transcendence and how do we do that? And I do not think there
is a person in either party who does not understand the value
of their own education, therefore the value of that education
towards others.
Is it the case that if we do not recognize the need--and
Secretary Duncan has a bill out now to provide quality pre-K,
quality education with competitive opportunities between
schools and between teachers, et cetera, that we can ever get
away from the structural--and you would have to agree that it
is structural and becoming more so--how can we get away from
that? And how can we create the society we want in terms of
what is everyone's notion that you have an opportunity. The
aspirational nature of upward mobility is in many ways as
important to the peace of a society as is the reality, although
not quite as much.
So I just want to know--and it is kind of answering--I am
asking you to answer my question in reverse--do you think we
have structural unemployment that is going to grow if we do not
recognize that? And the automation of cognitive work is
increasingly not matching up to employment like the industrial
revolution.
Dr. Reich.
Professor Reich. Yes. We do have a structural problem. It
is primarily technological. It is not entirely technological.
It does have to also do with the globalization of production.
And those forces have been exerting a divisive force on the
American workforce, undoubtedly. Education is critical, but I
just want to suggest to this panel that, although education is
critical, it is not the sole issue we have to deal with here.
Education can take us so far. But we are also seeing in
this country an extraordinary degree of segregation by income
in terms of where you live. And that geographic segregation has
in it problems not only of education, but public services, the
failure of young people to see models of adults who are
ascending into professions, the failure of many of our
institutions to respond to what many lower middle class, what
we used to call working class, and poor people in this country
need.
It is a complicated bundle of problems that have got to be
addressed if we are going to maintain a strong middle class and
achieve many of the other objectives that I think everybody who
has spoken today shares.
Dr. Kearney. I agree with Secretary Reich completely on
that.
Dr. Mathur. I agree. I think the interesting thing is that
if you do any poll, I think people still believe that 40 to 50
percent of people still believe that if you work hard, you get
a good education, you can still, you know, move up. It does not
matter what the statistics say.
And I think reinforcing that through better education,
through higher job finding rates, would be great for the
economy.
Dr. Winship. I agree with you entirely, Congressman, about
the importance of pre-K. I think there are a lot of useful
things that could be done for higher education, but the truth
is that we have 50 percent dropout rates today. A lot of that
is because people are not prepared, and so I think----
Representative Hanna. But doesn't that relate to--I mean,
isn't that----
Dr. Winship. Absolutely. So I think----
Representative Hanna. It is one and the same.
Dr. Winship. Yes. I completely agree. So I think to the
extent that we are focusing on marginally increasing people
into getting people into college, but not reducing the dropout
rate, it would be much more productive if we could have an
impact at the beginning.
On technology, I am more bullish there. Technology does
destroy jobs, but to the extent that it does it reduces prices,
which then other people--it means other people can afford to
spend more, and that creates other jobs. So I actually think
that there is a risk of worrying too much about that.
Representative Hanna. Thank you.
Vice Chair Klobuchar. Okay, we have one last House Member.
The vote has been called.
Mr. Delaney.
Representative Delaney. Thank you very much.
And, Secretary Reich, I enjoyed your last comments. It
reminded me of the book Coming Apart by Mr. Murray, which I
thought summarized the segregation issue quite well.
But what I wanted to ask the panelists in there is an
agreement or a consensus around what the real problem is, and
what the macro solutions are.
You cannot solve a problem unless you describe it. It seems
to me the big problem we have here is what was touched on
throughout the testimony today, which is the effects of
globalization and technology.
I think 30 years ago there were a billion people in the
global world, now there's 5 [billion] active in a global
economy, and computing power has grown 100,000 fold over the
same period of time. And this has really helped people with
great educations, and it has helped people with access to
capital, which is why they are doing so well.
And it has been enormously disruptive to everyone else,
which is why we have income inequality, however we want to
frame these things. And so in my opinion that is the center of
the center in terms of our problem.
And if we agree that that is the problem, it seems to me
there are some obvious things we have to do. One, we have to
realize we are in this very competitive global technology-
enabled world, and we have to compete in that world. And to
compete in that world we have to make, in my opinion, massive
investments in our infrastructure--because it is a good
investment. It creates jobs in the long term. It creates jobs
in the short term.
We have to reform education to prepare people for that. We
have to do the immigration reform we have discussed. We have to
do tax reform so we can pay for some of these things and make
sure that companies don't keep trillions of dollars overseas,
and bring it back to the country.
And those four portfolio solutions, which I will describe
as infrastructure, education, immigration, and tax reform, are
long-tail solutions. Meaning, if we did them all right now it
would still take a long time before it makes a difference.
So to deal with the short-tail problem, we need government
programs to keep people, give them a helping hand as we try to
fix this in the long term.
So my question--really quickly, for each member--almost a
``yes'' or ``no'' answer, is: Do you agree that this is the
central problem? And do you agree that this, on a macro level,
without getting into the details, this portfolio of solutions,
are the right solutions? And I will start with our good
Secretary.
Professor Reich. Yes, I agree that the central challenges
are globalization and technological change. And I also agree
that the portfolio you referred to--that is, education,
infrastructure, tax reform--I would describe it as toward a
more progressive income tax, not just corporate tax reform.
I would also add financial reform. Because I think
financial markets have gotten out of control and the burden has
fallen tremendously on the middle class. But if I may, just----
Representative Delaney. I am going to switch to Dr. Winship
quickly because we have to get through this, and I have to run
and go vote, if you don't mind.
Professor Reich. Okay.
Representative Delaney. Thank you, Mr. Secretary.
Dr. Winship. I agree completely on education.
Infrastructure to me does not feel necessarily like a sure
thing for growing the economy, short term or a longer term.
I think people were disappointed in what infrastructure
gave us for a bump over the last year.
Representative Delaney. But you agree with the problem
being----
Dr. Winship. Globalization.
Representative Delaney [continuing]. Globalization and
technology?
Dr. Winship. Absolutely. I think that is absolutely right.
Representative Delaney. And don't you think we need a more
competitive portfolio of transportation, logistics, energy,
communication, and educational infrastructure to compete
against that backdrop?
Dr. Winship. I guess I feel like the human capital
challenges that we have related to global development are much
more important than the sort of physical capital
Representative Delaney. Okay, so keep going through your
list of solutions.
Dr. Winship. Tax reform I think is important. We actually
spend a lot of money in the Tax Code to promote upward
mobility. The problem is it is sort of upside down. We
subsidize a lot of purchases that people who could have
afforded to make them anyway----
Representative Delaney. What about helping people as we
deal with these bigger issues? Government programs to support
people while----
Dr. Winship. Yes, I mean we need a safety net. I think it
can promote work, and marriage, and savings a lot better than
it does.
Representative Delaney. Thank you.
Dr. Kearney.
Dr. Kearney. Yes, I agree with your characterization of the
problem. The four items that are issues that you have laid out
I think are perfectly sensible, and I would agree with all of
them.
I would amend a little bit your characterization of the
safety net as merely something to support people in the short
term. Well designed safety net programs are investments.
Representative Delaney. Yes, and I did not really mean to
treat it that way. But we have to acknowledge that the
solutions are long-tail solutions, right?
Dr. Kearney. Yes.
Representative Delaney. If we got them all right today----
Dr. Kearney. That's right.
Representative Delaney [continuing]. It would take a long
time before they really had a meaningful effect on a lot of
people.
Dr. Mathur. So I agree that globalization is an issue, and
I think the focus on technology and the fact that, you know,
some skilled workers are able to get access to those
technologies and improve, that is an issue.
I think the local issue is sort of distinct also from the
global--you know, what's happening in the global markets. I
think we have a very challenging current labor market crisis
that is not completely driven by what is happening in terms of
globalization.
In terms of solution, yes, I think education is, you know,
the first step towards encouraging people to, you know, make an
investment in human capital and be out in the labor market.
Tax reform is important. I think government programs work
if they are effectively designed----
Representative Delaney. You mean like infrastructure
investment?
Dr. Mathur. I think it is a long-term solution--it might be
a long-term solution.
Representative Delaney. Thank you very much.
Vice Chair Klobuchar. Thank you very much, Representative
Delaney.
Senator Lee.
Senator Lee. Thank you very much, Madam Chair, and thanks
to all of you for joining us today.
This past summer, the Equality of Opportunity Project
released a study looking at the state of economic opportunity
in the United States throughout various regions. One issue in
the study looked at the geographic variation in
intergenerational poverty, the question of how likely one's
parents' income at the time of one's birth might be an accurate
predictor of where one ends up on the economic continuum later
in life as an adult.
I am pleased to say that Salt Lake City and the surrounding
area in my home State of Utah out-performed every other major
metropolitan region in the country in that regard in this
important metric.
Children growing up in Salt Lake City, in other words, see
a greater potential for economic mobility during their
lifetimes than children born, really, almost anywhere else in
the world.
So I would like to ask a couple of questions to kind of
follow up on this. Let's start with Dr. Winship. You know, I
think Utah provides an example of what success in the area of
economic mobility might look like.
Could you comment on how strong institutions, robust civil
society, and a successful private welfare system might factor
into this equation?
Dr. Winship. Sure. Thank you for the question, Senator. I
do think that when people look at the fantastic mobility rate
that Salt Lake City does have, those are the things that make
sense. Especially if you talk to people on the ground, I think
that it is these social capital strengths that the local area
has.
So among the most--among the strongest predictors of
mobility in the data set that you are talking about are a
number of indicators of sort of family strength and stability.
Dr. Kearney raised this earlier. I think it is an important
issue that we need to take seriously.
Utah fares very well on those sorts of measures. Broader
social capital measures like how integrated people are into the
community that they live. Even, you know, the book Bowling
Alone, you know, has sort of found these correlations between
even how many people are in bowling leagues and economic
outcomes.
So it does seem to make a big difference. And there are
these cultural components that I do not think we understand
well, where you do find pockets of people that have assembled a
society that seems to work. I think you find that in places
where there are a lot of Scandinavians for some reason.
Vice Chair Klobuchar. Thank you.
[Laughter.]
Dr. Winship. That's right.
Senator Lee. Because they like to bowl?
Dr. Winship. I have not established an empirical link
between the two, but you do sort of tend to find similar
outcomes among Swedish Americans, Norwegian Americans, and
looking at actually in Norway and Sweden. I do not think it is
well understood yet.
Senator Lee. What about policies encouraging robust hiring
and providing strong incentives for work?
Dr. Winship. Well I think incentives for work are very
important, and I think you are seeing a lot of energy among
some prominent conservatives such as yourself, Senator Rubio,
Congressman Ryan, around reforming our safety net programs to
fix the disincentives that we currently have to make it clear
to folks that taking work will benefit them.
And in fact to do that in a way where taking work does not
necessarily benefit them under today's systems. We have these
incredibly high marginal tax rates where the argument is not
that the poor are receiving these benefits or are bad people
somehow, they are behaving as you and I would behave faced with
the same incentives.
There is very little reason in a lot of these programs to
actually look for work and take that job when you are going to
lose all these benefits. So I think the exciting thing among
some of the proposals on the right is to think very seriously
about poverty, but also to remedy these disincentives that are
not good for anyone.
Senator Lee. It is a nice segue to the question I was going
to ask to Dr. Mathur. There is some consensus that our federal
welfare system is clunky and poorly designed, uncoordinated
phase-outs of means tested programs where individuals with
modest incomes may see astronomical effective marginal tax
rates are part of the problem.
Would you agree with the fact that they are a part of the
problem? And what do you think we ought to do about that?
Dr. Mathur. I think there is truth in the fact that even
though let's say the Earned Income Tax Credit Program, which
has really high marginal tax rates in the phase-out, says
people who are earning higher incomes are suddenly faced with
extremely high marginal tax rates.
You know, those do create a disincentive to work, or at
least to put in more hours. It might be an hour's impact. So I
think, you know, designing those better, or designing them so
that people do not face these huge disincentives to work could
actually go a long way towards getting more people into the
labor market, and sort of keeping them there.
Senator Lee. These, in other words, create effectively
poverty traps in which people feel compelled not to do that
which might be for their long--inure to their long-term
benefit, but in the short term they might face penalties. And
if we could coordinate these phase-outs so that they are more
carefully designed----
Dr. Mathur. Absolutely.
Senator Lee [continuing]. We could avoid those.
Dr. Mathur. You could avoid those situations.
Senator Lee. I see my time has expired. Thank you, Madam
Chair.
Vice Chair Klobuchar. And thank you, Senator Lee, for being
willing to discuss this issue. We may not agree on every
solution--the two of us chair, or co-chair the Antitrust
Subcommittee of Judiciary, so we have worked on a lot of things
together, and I think it is a nice end here.
I think we have had a civil hearing. We have approached an
issue, as Secretary Reich and I were discussing before this
hearing, there are a number of Republicans that are being
willing to talk about this issue this time, which I think is
really important as we go forward.
I did want to note, Senator Lee, I was checking out our
report. This is now my time to hawk our products. Secretary
Reich has a movie out that is on DVD, right? What is the name
of it?
Professor Reich. It is called ``Inequality for All.''
Vice Chair Klobuchar. ``Inequality for All.''
Professor Reich. iTunes, DVD, On Demand.
Vice Chair Klobuchar. And coming out on Netflix?
Professor Reich. Late February.
Vice Chair Klobuchar. Very good. And then we have a report
for the Joint Economic Committee on the Democratic site here on
Income Inequality In The United States. It is not as exciting
as the movie, but pretty good, right here. And I was looking as
you were talking about Salt Lake City, and in fact this is
supported by our report. We looked at the quintile, the lowest-
income quintile, lowest 20 percent, and the chances of reaching
the highest quintile. And in fact of the 13 States that are 10
percent or higher, Utah is one of the highest. I will also note
that Minnesota is in the group.
And I would also note that California is in the group,
interestingly enough. And the highest one is, can anyone guess?
In what state do you have the best chance of going, right now,
at this moment in time from the bottom 20 percent to the
highest 20 percent? North Dakota, with all of the energy work
that is being done there.
So that is at 18.3 percent. So I think that being said, the
fact that we only have 13 states that you have about a 1 in 10,
1 in 11 average chance of going from that quintile to the top
is still a reason to be concerned.
One of the things I did want to end here with is that there
was some talk of people trying to divide over this issue. I do
not think that is what Senator Lee is trying to do. I do not
think that is what Chairman Brady was trying to do. And I think
that this is an issue that we must address in our country.
We may have some disagreements on what exactly the data
shows, but I think we know there is a problem. And I think we
clearly have some disagreements on the solutions, but I am
looking for some common ground here. And I really appreciated
the tone of the witnesses and how we were able to approach this
issue. And I am actually quite excited to be working on it.
So the record is going to stay open for five business days
for any Member who wishes to submit an additional statement or
any additional questions.
Thank you very much to our witnesses. The hearing is
adjourned.
(Whereupon, 11:49 a.m., the hearing was adjourned.)

SUBMISSIONS FOR THE RECORD

Prepared Statement of Hon. Kevin Brady, Chair, Joint Economic Committee

Vice Chair Klobuchar, Committee Members, and distinguished
witnesses, today the Joint Economic Committee will begin to examine the
complex questions of economic inequality and mobility in the United
States.
We're not all blessed with equal talents, but in America, we should
all have an equal chance to climb the ladder of success--driven upward
by our personal initiative, and not burdened by the deadweight of a
bloated government.
We know that too many families are struggling, even in a country
where nine of ten children born to the poorest families will earn more
than their parents.
Economic mobility is very much alive. In America today the children
of the poorest are more likely to climb up the ladder of success than
the children of the wealthy are likely to stay where they are.
Through hard work, today one-in-three American families live an
upper middle-class lifestyle or better--more than double what it was
just forty years ago.
Astoundingly, better than one-in-five Americans are likely to rise
to the top two percent of earners sometime during their lifetime. The
American Dream is still very much alive.
Do some Americans earn more than others? Absolutely. I can't fathom
how entertainer Madonna made $125 million last year, or how actor
Johnny Depp will earn nearly a half billion dollars from the Pirates of
the Caribbean series.
We all can appreciate, though, how Mark Zuckerberg became the
world's youngest billionaire launching Facebook from his college dorm
room, or how Mary Kay Ash of tiny Hot Wells, Texas--frustrated with the
glass ceiling in a male-dominated industry--built Mary Kay Cosmetics
into an international icon with over a half million entrepreneurs.
The challenge that we face today is too many Americans no longer
believe the ladder of success is available to them. They've lost hope
that if they work hard and play by the rules, tomorrow will be better
than today.
And who can blame them? Thanks to the weakest, most disappointing
economic recovery in a half century, millions of Americans can't find
full-time work, and millions more have simply given up looking for
work. Proportionately fewer adults are working today than when the
recession ended over four years ago.
These struggling Americans have not benefited from the White
House's controversial stimulus, which failed to fulfill its promise of
getting them back to work by now. They watch as the Federal Reserve has
pumped up Wall Street with trillions of dollars, while Main Street and
middle-class families are left behind. In the past five years, college
costs have soared and energy costs have doubled. While some Americans,
no doubt, are being helped by the Affordable Care Act, millions more
have been forced out of the health insurance plans they liked and are
being forced to pay even more for plans they didn't want.
While President Obama should not shoulder all the blame, out of
fairness he should accept some of the responsibility for why so many
Americans believe the ladder of success has been pulled from their
reach. He should not divide America further, pit one American against
another based on their success, or fuel resentment and jealousy in the
pursuit of political gain. That's not an America we can be proud of.
I admit I can't imagine how Washington bureaucrats that have never
met you or even know your name can ``equalize'' your income. Can the
same incompetent government that brought us the bungled Affordable Care
Act Web site be trusted with your dreams and your children's dreams?
What we'll learn from today's hearing is that respected economists
disagree about the issue of income equality. For example, by using a
definition of income that excludes both taxes that reduce disposable
income and government programs like Social Security, Medicare, and
unemployment insurance that boost it, economists Piketty and Saez found
large and growing income inequality. Other economists, by using a more
realistic definition that considers the effects of taxes, government
programs, employment-provided health insurance benefits and the
changing size of the modern family, found a very modest change in
income inequality over the past twenty years. Still other studies that
measure what families actually buy and consume reveal that the ratio
between the consumption of the poorest fifth and the most successful
fifth of Americans remained stable over the past quarter century.
I hope we will agree that personal decisions affect every
American's ability to make a better life. A college degree, steady
work, marriage and children within the marriage increase the odds of
climbing the ladder of success--although in our great country some have
succeeded with none of these.
I also hope we can agree that education and skills drive high
wages, especially for those earning a college, graduate or professional
degree. For example, Pew research found that children from families in
the bottom fifth of earnings have a one-in-ten chance of climbing into
the wealthiest fifth of Americans with a college degree, but only a
three-percent chance without it. Similarly, children from families in
the second fifth have nearly a one-in-four chance of climbing to the
top rung with a college education, but only a nine-percent chance
without it.
Finally, how should the Federal Government act to help restore
Americans' belief in opportunity?
We can heed the advice of President Abraham Lincoln--perhaps the
greatest ``equalizer'' to inhabit the White House. In his message to
Congress on July 4, 1861, he made clear the proper role of government
in promoting economic opportunity is ``to elevate the condition of
men--to lift artificial weights from all shoulders--to clear the paths
of laudable pursuit for all--to afford all, an unfettered start and a
fair chance, in the race of life.''
We must do more to ``lift the artificial weights'' off our poorest
families and get Washington out of the way so that every American truly
has ``an unfettered start and a fair chance in the race of life.''

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