 Hi, I'm James. And I'm Anthony. And this is Words and Numbers. And how are you doing this week? I'm feeling unequal, James. Well, you should be feeling unequal. You're having a conversation with me. It came out in the news just a few hours ago, actually, that the top two academics in the United States are the presidents of Arizona State and the University of Texas, each one pulling down over a million dollars a year. That's not fair. They're doing almost as well as college basketball coaches. That's right. Well, I'm not exactly sure why you want to talk about these guys. Is it some sort of academic class envy that you've got working? Well, it brings up the question of inequality, which a lot of people get concerned about periodically. Well, you mean income inequality, yeah? Yes, income inequality. It is the case that some people earn more than others. And when we look around, those of us on the low end get annoyed at those on the high end. Well, I guess I get annoyed when I think about people making a million dollars a year to be university presidents. But truth be told, that's not a job I want. It's probably not one I could do all that well. Yeah, see, that's the interesting thing. The people, if you look around, the people who are paid a lot are doing one or both of two things. They're either doing a job that few people want to do or they're doing a job that few people are able to do. But either way, that's largely what drives those high salaries. Yeah, no, so not surprisingly, supply and demand play even here. Right, right. And it shows up in weird places. Like, you know, you say, well, one of the most important jobs has got to be caring for children. And yet, you know, people who take care of kids, daycare centers and so forth are paid less. And it's not because the job isn't important. It's because there are so many people who are willing and able to do that work that drives the wage down. So you end up either way with inequality. Some people earning more, some people earning less. The simple fact of the matter is that I value my children and I'm not going to pay a babysitter $87,000 a year. Right, but you would if you had to because they're your children. But the fact is you don't have to because there are plenty of people who are willing to do it for less. Right, as long as we have neighborhood kids lurking about, I probably have good options for babysitters at considerably lower rates. Right, right. We make light of this, but really what we're talking about here is pretty serious business, right? The argument about income inequality in no small part fueled the last presidential election. And you think about how Bernie Sanders came out of almost nowhere with his class envy argument, which is I think what it is at the end of the day. And it resonated, it resonated hard. So we've got some things to talk about here. Not the least of which is what are we really talking about here? So we have to start with some understanding of what income inequality even is and how that's measured. Now the terms themselves indicate that most of us are going to grasp what income inequality actually is. It's a disparity in incomes. That's right. And if you want to make sense of it, you need to reduce the thing to a number that you could talk about. So there's a complex formula that economists go through to measure inequality, income inequality. We call it the Gini Index. And roughly speaking, it does something like the following. It asks, here's 10% of the country's income. What fraction of people earn that income? Here's 20% of the nation's income. What fraction of people earn that income? So you end up with things. You'll hear people say things like the top 1% earn, whatever it is, 50, 60% of the total income. That's a datum that feeds into this Gini coefficient, the thing economists use to measure. So roughly speaking, we've got a number now. The higher it goes, the more inequality there is. The lower it goes, the less inequality. All right, well, that gives us something to work with at least. So the assertion that's made over and over and over again is that inequality is on the rise. That somehow, A, this is a bad thing, and B, it's getting worse. So let's start at brass tax. Is inequality actually on the rise as it can be measured? And over what period? This sort of thing. Income inequality in the United States, it depends on what you're talking about. But if you talk about personal income, so money that people earn from all sources, income inequality has been rising in this country as far back as the data goes, which the Federal Reserve, and we'll put it in the link, Federal Reserve data goes back to about 1975. And so you see this steady increase in inequality. Now, while I say steady increase, understand that it's not a huge amount. It's going from, we measure it on a scale of 0 to 1, and we're going from like a 0.4 to a 0.5, right? Something like that. But it is a steady increase in inequality. But the interesting thing is, over this same period of time, the median household income adjusted for inflation has gone up 30%. So on the one hand, you have what appears to be bad news, which is increasing inequality. But then on the other hand, you have it tempered by this news that says, yes, but the middle American has gotten 30% richer over the course of that same period that the inequality went up. Well, that leads to some interesting questions, doesn't it? Yeah, it really gets to the question, first off, what is it that we're actually measuring? And second, what is it that we want to be measuring? I'm not sure that when people talk about their concerns about income inequality, they're necessarily all talking about the same thing. Yeah, and that's becoming more and more evident to me as the years go by too, right? Because really, I think what most people, what most people of goodwill really want to talk about is the relative condition of the poor. Right, right. And every word I just said there is important, the relative condition of the poor. Yeah. On the other hand, if they really are people of goodwill, maybe the absolute condition of the poor is a lot more important. Right, and for whatever the reason, I think we're conflating these two things over time. And the fact that politicians are constantly hammering away at this doesn't help matters either, right? Because they're out there seeking their own interest above and beyond anything everybody might be legitimately concerned with. Yeah, and I think it's worth underlining that distinction. So over time in this country inequality has risen, so relatively speaking, the poor are worse off. That is that the rich have become richer faster than the poor have. That's from a relative perspective, but from an absolute perspective, the poor are much better off today than they were 30, 40, 50 years ago. So it's as Margaret Thatcher had this famous speech that she gave in the Commons where she talks about people going up, and I think what's happened is you've got over time the rich going up, but the poor going up also. Now there's this question about well the gap between them has risen that may be of concern, but I think a lot of people will be most concerned about this thing down here, which is what has happened to the poor. The poor have actually gone up significantly in this country. Right, so one of the things that we can conclude pretty quickly here is that we're dealing in no small part with the politics of envy on the one hand. But on the other hand, we are in fact dealing with very well-intentioned people who are scrapping to get the right answer to highly technical questions in order to base their political thought. Right, and these are the people that we're concerned with today, right? They throw away the envy people as a lost cause, right? If you constantly look at someone else and say, that guy has more than I do, that's not fair. Without ever asking how much better am I doing today than I was 20 years ago, the problem probably lies with you. Right, so if we talk about this second group of people who are truly concerned with the plight of the poor, there are some things to keep in mind when we think about inequality measures. And one of the things that annoys me most when people talk about inequality is the inequality measures measure inequality of dollars. They don't measure inequality of goods and services. So I do this thing with my students. I ask how many of you have $100,000 and no hands go up, right? If you look at the dollars, there's tremendous inequality. But I ask how many of you have smartphones and every hand in the house goes up, right? And if you look at the goods and services, the things we receive in exchange for dollars, there's far more equality than there is if you look at the dollars. All right, so setting dollars aside, right, which is probably heresy to the political class, but setting dollars aside and instead looking at the things that increase the quality of one's life. All right, what can we say now? Yeah, so I mean, we can say things like, you know, cell phones, over 90% of Americans have cell phones. Almost 100% have televisions, gas or electric stoves, microwaves, refrigerators, air conditioning, all these sorts of things that you would think of, you know, they're useful for having a nice comfortable life. Virtually almost 100% of Americans have all of these things, which is dramatically different than what we saw in the 1970s and 1960s. The same point at which inequality was much greater in this country. Right, so the interesting question to ask then is why on earth do these arguments persist the way they do? Are human beings such envious creatures that will be just taken in by this all evidence to the contrary, right? Because almost anyone can walk around right now and ask a very basic question. How good is the average American life? Right. And if you do that, the answer is amazingly good. I think a lot of the disconnect goes back to these dollars. People look at an economy and they focus on the movement of dollars. And when you do that, you get a lot of things wrong. For example, it's a common thing for people to talk about the 1%, for example, receiving X% of the income. The verb is wrong. The money didn't fall out of the sky and the 1% shoved everybody out of the way and grabbed a larger portion. The correct verb is created. 1% of the people created so much income. And you get it wrong when you look at the dollars because the dollars are a zero sum game. I give you a dollar, I lose a dollar. You must have gained, I must have lost. But look at the goods and services. You produce something, I produce something. We exchange these things we produce and we're both better off. When you look at the goods and services, you actually see the true economy and you realize that exchange between people is not a zero sum proposition. You gain, I win. It's a positive sum. We both win. The astonishing thing here isn't that that happens. That seems to be the story of human life as far back as we can trace it, either anecdotally or driven by the data. The astonishing thing here is that we all overlook it, that we all look right at it and somehow miss it and then a politician comes along and says, that other guy has so much and you don't. That's not right. That's not right. Whereas maybe the more fair question would be, what is it that we all have and what is it that some of us still might need? That's a question we don't ask as often and we do really conflate wants and needs when we get into the business of envying those who have more. We tend to make that distinction, a distinction that actually isn't real, wants and needs. It's a continuum. We make the distinction and what will tend to happen is we will throw into the need category things that we have in abundance and we get so used to we start to take them for granted. Once upon a time a cell phone was a desire. This was this novel thing. Nobody had it. Today, most people would say it's a need. I got to have a cell phone, right? But the cell phone hasn't changed. What's happened is we have become so wealthy over time that this thing that used to be something that only the rich people have, everybody has now to the extent that we can regard it actually as a need. Yeah, I know. And it's any rational person would tell you in a sober moment that a cell phone is not in the same category as shelter and food. Right. Right. It just simply isn't. And yet, so maybe what we're looking at here is really an artifact brought about by how good life has gotten. Maybe that's our problem. Maybe we did so well that we finally have the time to sit back and look at the other guy and say, he did better. How can I get that? Yeah. There's something to be said for that. You know, my grandmother used to say that people these days don't know what poverty is. The things that we call poverty today in her day was middle class living. And so I think there's a lot to be said for that. But it raises another point. This is another problem I have when people quote inequality numbers is inequality numbers are a snapshot in time. So you take a snapshot of the country and you see poor people here, rich people here, and you say, lo and behold, there's inequality. And what that snapshot misses is that there's a lot of migration. Over time, a lot of the poor people become middle class. Some of them will become rich. Some of the poor will become middle class. Some of them will become poor. And so there's tremendous churn. There's a study and we'll leave a link to it that looked at churn over time. And what it found is that 56% over half of Americans spend at least one year in the top 10%. So when you think about the 10%, it's not this static group, right? It's not a group of people think of it as a room and half of more than half of us spend at least a year in this room before we come back out again, right? So if you look over time, what you find is the actual inequality that exists over time is much less than the inequality that exists at a point in time. That's all the time we've got this week, so join us next week for another episode of Words and Numbers. Until then, check out the great content at fee.org and at feeonline on social media. Catch you next week, Ant. See you next week, James.