 I'm Salvatore Bobonis and today's lecture is Inequality, Trends, and Social Policy. Over the last 30 years, inequality has been on the rise throughout the developed world. When we look across member countries of the Organization for Economic Cooperation and Development, the OECD, we see rising inequality in country after country. There are annual ups and downs, there are blips due to changes in data collection methodologies, but the overall trend is clear in nearly every OECD country, rising inequality. In fact, using the most widely used measure of inequality, the Gini coefficient, inequality is risen from a level of 28.28, 28% of the way towards total inequality up to 31% of the way towards total inequality. So this is a big shift when measured across 30 or more countries. The one country that stands out as being the clear leader in inequality, as in so many other things, is the United States of America. In the United States, inequality has risen unbelievably since the mid-1970s. This chart shows GDP per capita in the United States, the black line, since 1860, more than a 150-year history of continuous growth. You can see the big disruption that occurred with the Great Depression and World War II, but other than that big disturbance, growth is continuous 1.8% per year all the time for the last 150 years, and in fact, since the end of this chart, the U.S. economy has resumed growth. There's been no crisis of growth in America. There has, however, been a crisis of inequality. Despite the fact that growth has been continuous, growth in incomes stalled in 1972, and typical incomes. This graph uses median male worker incomes, but this is true no matter what indicator of income you used. Typical incomes have stagnated now for more than 40 years, going on 45 years of no growth at all in incomes. Before 1970, income consistently rose faster than GDP. That is to say, ordinary Americans were getting a bigger and bigger slice of the expanding American pie. Since 1970, the American pie has continued to grow at the same historical rate as always, but the slice going to ordinary Americans has shrunk and shrunk and shrunk. If you were to extend trend growth, the modern 20th century growth in incomes for ordinary Americans up through today, the average income of an ordinary male worker today, instead of being $35,000, would be more like $70,000. This is real money. When people say, well, what has inequality really cost anybody? No one's lost any money. Well, if the historical trends that held before 1970 had continued to hold after 1970, the typical American male worker would now have double, double the income that he actually does. There's your subprime mortgage crisis right there. If ordinary Americans had twice as much income as they actually do, they would have been able to afford those mortgages. We wouldn't have had the global financial crisis. Ultimately, the global financial crisis was the inequality crisis. You can see this in a whole range of statistics. I'll show one that's particularly dramatic. In the United States today, the middle 60% of households earn just over 46% of the total household income in the country. In Mexico today, the middle 60% earn slightly higher percentage than in America. That's right. Mexico's middle class is slightly larger than America's middle class in terms of its own society. Now, we've always thought of Mexico being a poor and highly unequal country compared to Mexico being, compared to the United States being a rich and relatively egalitarian society. Well, today in the 2010s, America is just as unequal as Mexico. Now, contrast that to the late 1960s and early 1970s, America used to be just as equal as France and Australia are today. America has gone from being just like France 40 or 50 years ago to being just like Mexico today. The change has been that dramatic. And United States has been pulling its friends down along with it. So here is the income share of the top 0.5%. These are the famous Piketty data from Thomas Piketty's database. Incomes of the top 0.5% in the United States and the United Kingdom, and United States equality maxed out in 1973 on this metric. In other words, the United States reached minimum ever inequality in 1973. For all of history, as far as we can tell, the country was becoming more and more equal until this point when it reversed and started up towards the huge concentration of incomes in the very rich that we see today. Well, in the UK, that turning point was in 1978. And if we look at the country's culturally most similar to the US and UK, 1978, 1981, 1986, 1987, the closer a country is to the United States in culture, language, society, the sooner the domino fell. And these dominoes began falling all over Eastern Europe with the fall of the Soviet Union in 1989 through 1991. Under American tutelage, Russia and then all the countries of the post-Soviet sphere implemented flat income taxes. Now, flat taxes are one of the biggest ways that inequality is perpetuated. A flat tax means that no matter how much money you make, you pay the same percentage in tax. US advocates of flat taxes have been have been talking about it for generations that they don't want to progressive income tax. They don't want a tax that equalizes income inequality. They want a tax that replicates income inequality. Well, they couldn't get it in the US. They couldn't get it in Western Europe, but they got it in Russia. And not just in Russia, flat tax regimes all across Eastern Europe in the post-Soviet space except in Poland. Notably, Poland is the only post-Soviet country that put in a progressive Western style income tax. It was one of the most aggressive post-Soviet countries in maintaining some semblance of a welfare state and building a modern social democratic welfare state. And it's been one of the few post-Soviet countries that joined the European Union to keep its own currency and thus keep currency independence. And Poland, maybe not surprisingly, has been one of the very few countries in the OECD to experience declining inequality in the most recent decade. So levels of inequality in Poland certainly rose dramatically in the early 1990s with the collapse of communism. But Poland got this problem under control with a modern progressive income tax system, with a modern social welfare state, and as a result got its inequality problem under control, brought it down, and not coincidentally has had the most successful economy in the post-Soviet sphere. All those other countries that went with high inequality, flat tax models, have performed more poorly or have performed not as well as Poland on standard metrics like GDP per capita growth. Contrast Poland with Germany. In Germany, inequality has risen dramatically since 2000. What happened then? The Bundesfuhrarbeit, the deal for work. Germany's unions made a deal with the employer associations and the government that they would not press for wage increases, for wages to keep pace with rising productivity. Essentially in 2000 Germany's union said, we make enough, and wages have not risen since. Productivity has risen since, but wages have not risen since. When I went giving, having conversations and giving lectures around Europe in 2010 and 2011, people in places as diverse as Finland and Austria told me that their biggest problem was low German wages, that they were trying to maintain some semblance of dignity for workers, but low German wages were making that increasingly impossible. Now, since 2000 it hasn't just been Germany. In the Netherlands and in Scandinavia we've seen the move towards flex security, which is no kind of security at all. It pretty much means the gig economy. Workers don't have regular jobs. In Germany they made a deal that workers would keep their jobs, but have low wages. In Denmark in the Netherlands and to a lesser extent in Sweden they made a deal that, well, workers would lose their jobs in exchange for maybe getting higher wages and maybe not. No surprise inequality has risen dramatically in Germany, the Netherlands, Sweden and Denmark over the last 10 to 15 years. Well maybe this is necessary. I mean we might say that rising inequality is just a feature of the 21st century and there's nothing you can do about it. You know if we want growing economies it's an evil we have to accept. Well I have a friend who says his favorite think tank is even the IMF. That's right, not just the IMF. Even the IMF has come to the realization that inequality is harming growth. According to the IMF's own analysis, in almost every OECD country, rising inequality has been responsible for reducing the growth rate. In their analyses only Ireland, France and Spain have seen some benefits from rising inequality. Now this is the think tank that pushed high inequality models on the world for the last 40 years. Even the IMF now admits that in most countries in most of the cases where it's pushed for higher inequality social models it's been the wrong move. Those high inequality social models have actually harmed growth, not helped growth. Rising inequality is not inevitable. Inequality is risen in specific places and specific countries for specific reasons and specific policies can be used to reverse that rise. We need to revisit systems of taxation, rules around the welfare state, the privatization of state-owned enterprises, education systems that primarily benefit the rich we're able to pay. CEO pay dynamics, there's no reason for CEOs to make 400 times as much as their workers. The corporate governance that allows those high CEO pay packages to happen despite shareholders unwillingness or desire for exactly the opposite. Corporate welfare programs that take government money and shower it on corporations instead of using it to support citizens. Competition policy, which has led to situations in which companies have more power than either their employees or their customers. And most of all the wage-setting mechanisms and institutions in countries that can either be mechanisms that favor workers and thus favor lower inequality or they can be mechanisms that favor employers and thus favor higher inequality. We can and quote-unquote even the IMF admits that we should reduce the trend towards rising inequality, reverse it and bring about more equal societies for the future. Thank you for listening. You can find out more about me at salvatorbobonus.com where you can also sign up for my monthly newsletter on global affairs.