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Earlier this month Federal Reserve Chair Janet Yellen spoke of the increasingly unequal distribution of wealth and income in this country. She warned that Americans at lower income levels have relatively very little chance to advance, and she questioned whether “this trend is compatible with values rooted in our nation’s history”. Some criticized her for stepping so squarely into what many perceive to be a partisan debate. Others argue that recent Fed policies have themselves contributed to the economic divide. Please join us as Senator Elizabeth Warren and three economists discuss what’s driving economic inequality and what, if anything, we should do about it.
- Elizabeth Warren U.S. Senator, D, Massachusetts; author of The New York Times bestselling memoir, "A Fighting Chance" (2014)
- Edward Kleinbard Professor of law, University of Southern California Gould School of Law; author of the forthcoming book: "We Are Better Than This: How Government Should Spend Our Money" (October 2014)
- Scott Winship Walter B. Wriston fellow at the Manhattan Institute for Policy Research; formerly research manager of the Economic Mobility Project of The Pew Charitable Trusts.
- Dean Baker Co-director, Center for Economic and Policy Research and blogger, Beat the Press; author of "The End of Loser Liberalism: Making Markets Progressive."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The gap between rich and poor is growing in this country. Some, including Federal Reserve Chair Janet Yellen, believe this reality is a problem not just for people with low income hoping to get ahead, but for the overall U.S. economy as well. Joining me to talk about what's behind income inequality in this country and how we might address it, Edward Kleinbard of the University of Southern California School of Law, Scott Winship of the Manhattan Institute for Policy Research and Dean Baker of the Center for Economic and Policy Research.
MS. DIANE REHMBefore we begin our discussion with our three guests here in the studio, joining us by phone from Boston, Massachusetts, Senator Elizabeth Warren. Thanks for joining us, Senator.
SENATOR ELIZABETH WARRENOh, I'm delighted to be here, thank you for having me.
REHMThank you. Some people thought that Fed Chair Janet Yellen shouldn't be wading into the debate over income inequality. What were your thoughts?
WARRENOh, I (technical) Yellen did something that was truly remarkable by wading. It was exactly the right thing to do. You know, it's the responsibility of the Federal Reserve to protect and expand the overall health of the U.S. economy. And one of the things we know is that great income inequality, great inequality in the economic situations of Americans does not promote overall economic growth.
WARRENYou know, it's as straight forward as -- when you've got a middle class that can't afford to buy things, then we have an economy that becomes far more sluggish and starts to contract. So she's right to do this.
REHMSo at Carleton College, which, by the way, was my daughter's alma mater, you said the game is rigged and Republicans rigged it. How do you address what is causing this growing gap between rich and poor?
WARRENWell, you know, I started by pointing out, one thing should make us very optimistic and that is that income inequality is not an act of nature. It is about the policy choices we make. The problem is that the policy choices we're making right now increasing favor those who've already made it big and leave everyone else behind.
WARRENAnd it's -- for example, how about on student loans? So young people whose parents can afford to just write a check for them to go to college, they do fine. They graduate from college. They have no debt and they are set to launch their lives. But cost of college is up. You got to go to college, say many, if you're gonna have a shot at a middle class life and many, many young people are borrowing in order to get that loan.
WARRENAnd they're borrowing in order to get an education. Borrowing from the federal government, the federal government is charging them interest rates that, after you adjust for the cost of the money and the bad debt losses and the administrative costs, produced tens of billions of dollars in profits for the government. That's like an extra tax on kids trying to get an education. That just further separates the two groups.
REHMSo to what extent do you agree with those who say that the gap is not just threatening those on the low end, but threatening the entire economy of the U.S.?
WARRENOh, I think they're exactly right, that it's not just about the top and the bottom. It's about hollowing out America's middle class. And the student loans, for example, are a good place to see this. The Federal Reserve Bank, the Treasury Department and the Consumer Financial Protection Bureau have all three issued reports warning about the economic dangers, that is the danger to the whole economy, from the fact that there's $1.2 trillion outstanding in student loan, $40 million people who are dealing with it.
WARRENIt means that those people, as a group, are not buying homes at the rate we would expect. They're not buying cars. They're not starting small businesses. And so the Fed and the Treasury Department are starting to ring the alarm bell, saying that this massive amount of debt is actually dragging down the whole economy.
REHMAt the same time, however, as we began this conversation, we talked about the fact that Janet Yellen, herself, is making the comment about the income divide. To what extent are Fed policies themselves contributing to the problem?
WARRENWell, you know, right now, the Fed has very limited tools that it's able to use and it's keeping the interest rates low in the hopes that that will stimulate the economy more. I think the problem we've got is the Fed can't promote an economic recovery on its own. It can't counter a Congress that continues to favor far too often the millionaires and the billionaires.
WARRENYou know, the student loan, just because we've talked about that, that's a great example. We tried to introduce -- the Democrats introduced a bill to reduce the interest rates on student loans. We said, look, it's a low interest rate environment right now. People can refinance their homes. They can refinance cars. They can refinance other debts, but there's no way to refinance your student load debts.
WARRENThe government doesn't provide anything. So here are these young people paying huge amounts on these student loans, relative to the amount of risk involved. And just to give you an idea how much money we're talking about, the loans from 2007 to 2012, just that little slice, are on target right now, after all the expenses are accounted for, to produce an extra $66 billion in profits for the United States government.
WARRENThat's money that comes off the backs of kids who are trying to get an education. So we said, let's reduce that interest rate, but you have to remember, the government has already effectively pre-spent the money. So we had to find a way to pay for it. And what we proposed was that millionaires and billionaires, we should stitch up a couple of tax loopholes so they will pay taxes at least at the same rate that middle class families do.
WARRENThe Republicans filibustered it. They said it was more important to protect tax loopholes for billionaires than it was to give our kids who are trying to build a future a fighting chance to do that.
REHMGive me a sense of, in addition to student loans, what you are trying to do in the Senate to diminish this gap between rich and poor.
WARRENSo let me do it in two different ways. One is we absolutely need to raise the minimum wage. If we would raise the minimum wage, there hasn't been an increase to the minimum wage in over seven years. No one in this country should work full time and still live in poverty. If we raise the minimum wage, we would lift, literally, millions of children out of poverty.
WARRENWe also need to make more investments in our future. That means investments in education, from pre-kindergarten through college. It means investments in infrastructure like roads and bridges and the things that small businesses need, strong infrastructure so they can start their businesses and flourish, investments in research. We've proven before that if we make those investments in research, it creates this giant pipeline of ideas that feeds our economy and makes it grow.
REHMAnd on that note, I know you've been pushing for funding for biomedical research for a number of years well before this ebola threat. What do you think has been our government's financial commitment in biomedical research and what should it be?
WARRENWell, our commitment has been not nearly enough. You know, we have to make it clear. I'm concerned about the outbreak of ebola in West Africa and the cases in the United States. We need to keep our country safe. But this is an opportunity for us to remember the enormous threat of complacency when it comes to scientific research and investments in our public health agencies.
WARRENYou know, ebola is not a new disease. It's been around for decades. But the Republicans have cut, cut, cut on investments in research and that means that much of research on ebola, for example, has fallen to the side and that's not where we want to be. Investments in research used to be bipartisan, but they aren't anymore. And the NIH is struggling and that's not how we build a future and that's not how we keep ourselves safe going forward.
REHMAnd if, as many are predicting, Republicans take control of the Senate, what legislative shifts do you see coming?
WARRENWell, you know, Mitch McConnell has made clear that the direction he wants to go is to reduce access to healthcare. That's his number one and number two is to reduce any limitations on Wall Street, any accountability that we've tried to put in place through the Dodd-Frank laws. He also has gone on the attack after the Consumer Financial Protection Bureau, the one little agency out there that tries to level the playing field for families on financial products.
WARRENAnd by the way, I should say, over the last three years since its been in effect, has forced the biggest financial institutions to return more than $4 billion that they cheated American consumers out of. You know, that's his agenda.
REHMAnd, finally, Senator Warren, lots of Democrats still hoping you'll run for president. Are you thinking about it?
WARRENI am not.
REHMYou are not. Well, I want to thank you for joining us this morning. Senator Elizabeth Warren of Massachusetts. And you're listening to "The Diane Rehm Show."
REHMAnd now turning to our guests here in the studio, Edward Kleinbard of the University of Southern California School of Law. He's the author of "We Are Better Than This: How Government Should Spend Our Money" that's just published in October. Scott Winship is with the Manhattan Institute for Policy Research. Dean Baker is co-director of the Center for Economic and Policy Research. He's the author of "The End of Loser Liberalism: Making Markets Progressive."
REHMScott Winship, a new Pew survey finds that Americans do consider the greatest threat to American security to be the growing gap between rich and poor. How do you see it?
MR. SCOTT WINSHIPWell, I've not seen that question. The research I've seen from the Pew Research Center, for instance, asked Americans open ended, what do you see as the most important problem facing the country economic or otherwise? Typically income inequality or the gap between the rich and poor gets about 1 percent of the vote when the question is asked that way without any priming. That's below things like lack of respect for each other and foreign aid. So I'm not familiar with that particular question but my read is that Americans are not as concerned about inequality actually as a lot of people on the left are.
REHMSo you don't -- you see a fair amount of dispute then among economists themselves about whether this gap exists, number one, and whether it's growing, number two.
WINSHIPWell, I don't think there's a lot of dispute about the gap existing. I think pretty much everyone agrees that inequality in the U.S. is high by international standards and is rising. There's some dispute about how much it's risen but I don't think anyone disputes that it has risen. Now when you come to whether income and equality has negative effects on the poor or the middle class mobility -- economic mobility for instance, there I think you do get a lot more disagreement.
WINSHIPAnd, you know, I think Senator Warren, with respect kind of misrepresented some of the evidence about, for instance, whether inequality hurts economic growth or the incomes of the middle class or poor.
REHMEdward Kleinbard, how do you see it?
MR. EDWARD KLEINBARDWell, market income -- the markets are inherently unequal in their outcomes. We can't expect markets by themselves to produce equality in results. But income inequality has grown in the United States and there are things that government can do to change that. Effectively the largest asset class in the United States economy is us ourselves as people. And systematic investment in ourselves through early childhood nutrition, through early childhood education all the way right on up has a material impact.
MR. EDWARD KLEINBARDGermany has about the same level of inequality as the United States does before taxes, before government interventions. But Germany is a much more equal society after government. And one example of that, one reason for that is public universities. Their universities are all public. We graduated kids from my law school with well over $100,000 of debt. That limits the kind of jobs they can take, it limits their economic mobility. It is just a big load around their necks that they have to deal with for years and years before they're free of that debt.
REHMAnd Nicholas Kristoff wrote recently that education in those early grades really defines the gap between those who will make it and those who won't make it even excluding university-level education, Dean Baker.
MR. DEAN BAKERWell yeah, I mean, I agree with that. And I'd say that it's just remarkable because we are talking general about fairly small sums of money. So it is remarkable that we aren't willing to come up with the money particularly for lower income people to ensure access to Head Start, preschool education, you know, basic nutritional needs for the mother and child in their early years, health care needs. That, you know, we made some headway there but, I mean, it's just remarkable we haven't done better.
MR. DEAN BAKERBut I will take a little issue with Ed that, you know, in terms of markets, they don't just naturally produce inequality. We've had much more inequality over the last three decades than we did over the prior three decades. And I would say there was very much policy and I would just point to a few areas. You know, one is the deregulation of finance. A lot of the biggest fortunes in the United States are in the financial sector. That's because we basically -- I'd like to say, one-sided deregulation because it wasn't deregulated when they were on their backs back in 2008, 2009. They ran to the government for help and got bailed out. So that was very one-sided deregulation.
MR. DEAN BAKERAnother case, if we look at CEO pay, pay the top executives in major corporations, that's literally gone through the roof in the United States in a way that is not true in other countries. And I'd say that's because of a real failure, I would say corruption of corporate governance. So I think these are not market processes. These are the way in which we structure the economy. I can give you much, much longer lists but I think those are some very good examples.
REHMSenator Warren talked about the minimum wage. Tell me about the wealth income versus the...
REHMNo. There's sort of the wealth income at one level and the very basic income at another level. How has the differentiation between those at the top and those at the bottom grown?
BAKERWell, sort of a basic number. If you'll take a look at the top 1 percent, and here I'm just looking at pretax income, they had about 10 percent of pretax income if we go to the '70s. Today it's about 20 percent. So it's more than doubled so their share has come primarily at the expense of the middle. There's been some counter availing forces in terms of government programs. But if you just look at before-tax income the share of the rich as 1 percent is more or less doubled over the last three decades.
REHMAt the expense of those at the bottom, Ed Kleinbard?
KLEINBARDWell, it's not just those at the bottom, although that's clearly the case that those at the bottom have, in fact, fallen behind. When you look at a share of national income, the share of the rich can increase because they've increased in absolute terms which is unquestionably true at the very top. But it's also the case that the fundamental driver to a large extent of the dissatisfaction in the United States, the anger that you see in politics of the United States, is the fact that the middle class is struggling harder and harder to tread -- just to tread water.
KLEINBARDWages for working class full time year around male employees peaked in this country in the 1970s and is actually lower today after inflation terms than it was in the 1970s. Households have made -- middle-age households have made very little progress in real terms over the last couple of decades. And what progress they've made is entirely attributable to the second spouse in the workforce, usually the woman. And their wages have caught up to some extend and still inexcusably lag male wages. But not every household wants to have two workers.
REHMSo now it takes two workers...
REHM...to be able to meet the expenses that one workers used to be able to do.
KLEINBARDAnd it's not globalization because if you look at productivity numbers in the United States, the productivity of the average worker has continued to increase. What's happened is a disconnect, a disassociation between productivity gains on the one hand and wages on the other.
REHMScott Winship, you're shaking your head.
WINSHIPI'm going to need about ten minutes here. So first of all, productivity...
REHMCan't have it.
WINSHIPProductivity and compensation have tracked each other. I have an article in Forbes last week that showed a lot of technical measurement issues. Dean has actually written pretty eloquently about this as well. The median worker, their pay has not tracked economy-wide productivity but we don't know whether it's tracked the median worker's productivity, which is the benchmark that we would need, on whether the gains at the top are coming from the middle.
WINSHIPYou know, there's a big assumption there that if we somehow had capped the incomes at the top that the economy would've grown just as much. And, by the way, that the proceeds from capping gains at the top would've been evenly distributed. I did a sort of back-of-the-envelope computation. If you assume that by capping the share of income that went to the top at its 1979 level and you assume that that would've slowed the economic growth by only 8 percent, so not by a lot.
WINSHIPAnd then if you assume that the middle 20 percent of Americans, rather than getting 20 percent of the proceeds from capping that, had only gotten 13 percent of the proceeds, what you find is that under those assumptions, the middle class wouldn't have been any better off in 2007 than they actually were for having prevented the rich from getting richer. So I think what sounds intuitive turns out not to be. Would love to talk more about working women as well.
REHMIt's all very complicated. Go ahead, Dean Baker.
BAKERYeah, just to take Scott's example, and he's right, we have to be careful while we measure wages and productivity. And I would say until the last few years average wages did track average productivity properly measured. There is a divergence since like '07 where we've actually seen an increase in the profit share.
BAKERBut the more important point here is, you know, Scott's issue, and he's right, if we'd had slower growth. But I would argue it might actually be the opposite, that we've actually had pretty slow growth during this period of inequality. So if we look at the period '47 to '79 when we didn't have rising inequality compared to the period since '79, we've actually had much slower growth in this period. And I think some of those reasons are directly related to inequality, most importantly, the growth of the financial sector which is a very big drain on the economy.
REHMSo then you get around to this question, does income inequality affect overall national security? How do you answer that?
KLEINBARDIn the broadest sense it does. And it does because inequality, it's not just the question about envy. There's this idea that the very rich get a lot richer. There's no reason for anyone to object unless you're just motivated by envy. But, in fact, putting aside the fact the reality that envy is something that resides in all of us, is that consumption decisions by the rich affect all of us. If -- to get into a good school district requires a house in a certain neighborhood.
KLEINBARDThere's extraordinary data demonstrating the connection between test scores on the one hand on standardized tests and average home prices. The more expensive the neighborhood, the better the test scores. And the principle reason is the schools are better and wealthy families can afford to provide supplemental educational enrichment programs that others cannot. So when one group runs away from everyone else, you get that kind of problem. You get also security problems in terms of living in gated communities and simply insulating yourself from life.
REHMEdward Kleinbard of the University of Southern California School of Law and you're listening to "The Diane Rehm Show." Dean Baker, you point to France and the rise of Pen.
BAKERWell, you know, I think the issue there is that if people don't see progress, they don't see hope in their lives then you get a case where they go looking for answers. And a lot of those answers might not be very pretty ones. So in France you have La Pen who's, you know, apparently in line to make very real gains in the next elections there. I mean, presumably they won't actually come to power. It's certainly my hope. My expectation is they won't but you don't want to see a party that's openly anti-immigrant, arguably openly racist being a serious force in politics. And that's what you're seeing in France today. You're seeing that in other countries as well.
BAKERAnd, you know, again, my point is people have to be seeing a situation where their lives are getting better, where they have hope for the future. And at least in France and unfortunately I think many other countries to some extent, obviously in the United States, people aren't seeing that.
REHMSo do you agree with Ed Kleinbard that where you live, where you can afford to buy a home leads to where you can afford to send your child to school, leads to how good an education that child gets, whether you can provide the extras and therefore whether you create a better educated stronger population that goes on to lead the country in better directions?
BAKEROh, absolutely. And, you know, that's an enormous problem because, you know, again one thing is, you know, inequality within a generation with the idea that this will be passed on generation after generation, I think that's very, very disturbing I think to almost all of us. And I think it's hard to deny that's going to be the case. We clearly see the advantages of those who already have money passing it on to their kids.
REHMAnd Scott Winship, do you disagree with that premise?
WINSHIPI do. I mean, I think it's certainly the case that people who have more income than others tend to concentrate together. And that's more common today than it was. I think where my dispute is is that the income per say is the thing that's important about that, right. I mean, I think what's important versus income inequality is just things like parental educational inequality. So when you have neighborhoods of the highest skilled parents who have the highest aspirations for their kids to begin with, that's going to create inequality of opportunity. And I am worried about inequality of opportunity. I just think that focusing on the income, what money buys, is really the wrong thing to focus on.
KLEINBARDSo the OECD, so the trade association of developed countries around the world, and there are 34 countries in the OECD, the United States is one of four countries in the OECD that spends more on the public education of rich kids than on the public education of poor kids. We all know that rich parents are going to supplement and enrich the educational experiences of their kids and therefore any sensible country looking at the largest asset class of the country which is us ourselves as human beings would say, we need to invest more in the poor kids to make up for those kinds of differences so that they can develop their full potential.
KLEINBARDThe issue to my mind -- and I agree with what Dean said earlier, there's an awful lot that goes on in terms of top market incomes that is really the result of economic rents, of just taking advantage of the situation you find yourself in. But the real question is, what can be done in ways that are consistent with our country's values? And the answer is the government here can do a lot. And government can choose to spend -- that is all of us acting together can choose to spend adequately on early, early childhood nutrition and on early -- and on education. We can choose to have better jobs through infrastructure investment, and in doing that, enrich the middle class.
REHMAnd here's what the Pew study says. Republicans, some 39 percent are most likely to say that the divide exists because some people work harder than others. Democrats and Independents are much less likely to blame the poor's work ethic. We've got a short break here. When we come back, time to open the phones.
REHMAnd welcome back, as we talk about the existence, or lack thereof, of income inequality in our society and what can be done about it. Here's an email from Dave in Leesburg, Va., who says, "I think in a capitalist society, you should be able to be as greedy as you like. But the people you employ should get a piece of the pie. If a corporate manager is making 100 times in compensation that which his lowest employee is paid, the CEO should encounter a disparity tax. If it were high enough, then there would be an incentive by the CEO to actually raise the salaries of his or her employees in order to lessen the amount of the disparity of the tax levy." Dean Baker.
BAKERWell, the actual gap between highest and lowest is probably about 600 or 700. But, so, this gentleman's being -- or woman, I don't know -- is being conservative in that. But I think tax isn't the answer. I think the real problem is that we have corporations that are basically run by management for management. It really is a problem of corporate governance.
REHMAnd for shareholders.
BAKERWell, less. I mean, I'm going to be sympathetic to the shareholders here, because I think there's a very big problem with CEOs getting, you know, these pay scales in the tens of millions, when they -- there's no way on earth they deserve that. I just mean a market relationship. They don't get that in other countries. And the reason why I focus on that is because that sets pay scales throughout the economy. So university presidents that are getting $1.5-, $2-million, sometimes even more. Heads of charities get pay like that. And their argument is, Well, if I were in a company -- private company this size, I'd get two or three times as much.
BAKERSo I think it is important to get those CEO pay scales down. The biggest way is changing corporate governance structures so that, in effect, the shareholders really can put a check on CEO pay. They're not doing it now.
REHMHere's a posting on Facebook from Rick, one I think we can all understand very clearly. "Everything one needs to know can be learned from the board game Monopoly. When one person has all the money, the game is over. Or your cousin gets mad and flips the board over. Either way, though, the game is over." Scott Winship.
WINSHIPWell, so I mean, if I could return to the issue of CEO pay, which I think is important, just three quick points. The first is that a lot of the figures around how many multiples of income CEOs have than workers are based on taking kind of the CEOs of the top 500 companies.
REHMThat's a lot of companies.
WINSHIPWell, but in the grand scheme of the economy, it's not -- it's a small share of CEOs. Second, if you look at the increase in the market capitalization of public companies -- how much the value of outstanding stock is worth -- that has increased by pretty much the exact same factor as CEO pay has increased over the last few decades. So that argues that, well, maybe the rise in CEO pay is rational after all. And then, third...
REHMBut what about the rise or lack thereof in that of the employees' pay?
WINSHIPRight. So there, certainly pay has slowed down. But the slowdown in pay started in the early 1970s -- a full decade before income concentration started rising in the United States. It's been experienced by nations around the developed world, who experienced a lot less of an increase in income concentration than the United States did. The reason is that there's been this big productivity slowdown. If we could figure out how to get the productivity that we had in the 1950s and the 1960s, you know, you would go much further in increasing pay of middle-class workers.
REHMAnd by productivity, what you're saying is people have to work faster, work harder, work more.
WINSHIPWell, no. So it means that they're getting paid more for doing the same amount of work. So the extent to which that has risen over time has slowed a lot versus what it was in the '50s and '60s.
REHMThat's what's not happening.
WINSHIPI agree. But it's unrelated to inequality, I would argue.
BAKERWell, again, getting back to this point. I mean, Scott and Ed were both touching on this earlier that there is -- if you look at balance of productivity and wages, the average wage track productivity is to roughly 2007. There has been a divergence. It's fallen behind over the last seven years. But the other point that I think is very fundamental here is that we have seen this divergence between the median wage and average productivity. And that's largely a U.S. story. It's a little bit and tends to be English-speaking countries.
BAKERBut that's not true in Germany, not true in France, not true in Italy. So in those countries, workers at the middle, workers at the bottom have continued to see wage growth over most of the last three decades. That's really a U.S. story.
KLEINBARDSo what is it that really defines us as a people, that makes us different from other countries. And I would argue that we define ourselves through work. We define ourselves by the quality of the job and the nature of the job we have. The productivity problem is not one of investment in people. We have heavily subsidized tax rules for investment in physical plant and in intangible assets. I think the fundamental problem is that we don't have enough good quality jobs. And there -- the funny thing is, government can really play a role.
KLEINBARDBecause that's what infrastructure investment does, two things. First, there are just old-fashioned financial returns to government infrastructure. People have looked at -- economists have looked at it, come up with numbers like 8 or 10 percent a year returns on investment at a time when government can borrow for 2 or 3 percent. But it has the positive spillover effect as well, of creating really good quality jobs for people who aren't following a Silicon Valley software engineer path. And with that, comes higher income levels for the middle of America.
REHMAll right. Let's open the phones. First, to Oliver here in Washington, D.C. Hi, you're on the air.
OLIVERHi. Good morning. Thank you for taking my call.
OLIVERWhen Apple or Google opens up a corporation in Ireland, they don't call it desertion. They call it an inversion. I'm going to try to dive in the middle of the two methods of political fact that are being thrown back and forth today on the news show. Raising the minimum wage as a stop-gap measure. America must look at the heart of the matter, which means reconsidering the merit of our corporate charter -- maximizing profit for the shareholder.
BAKERWell, you know, I don't think we're going to change the way corporations do business in a sense that, you know, I don't think we're going to move away from their efforts of profit maximization. And I think the main thing -- I just sort of take it for granted, corporations are going to try and make money. And what we have to do is try and structure their opportunities so that when they're making money, they're doing it in a way that advances the economy, advances society. We often have not done that.
BAKERSo when you have insurance companies that make money by ripping people off, when you have the financial sector that's making money by trading, you know, one millisecond ahead of another big trader -- there's lots of ways I could point to where we have corporations making lots of money that are very unproductive. But when you have a corporation that makes money with a great innovation that, you know, provides entertainment for people, improves our health, you know, that to my mind is a good thing. But I don't think we're going to get anywhere by trying to say corporations shouldn't make money.
REHMGo ahead, Ed.
KLEINBARDSo international tax is one of those few areas where I'm an authentic expert. And when you talk about Apple or Google in Ireland, you're absolutely right that the international tax rules today are completely screwed up and that they do incentivize U.S. firms to book huge profits outside the United States in very low tax countries or outright tax havens. That needs to be addressed. But when you address that, you have to put things into context. We raise about $3 trillion a year in tax revenues in the United States. $300- or $350-billion of that is corporate tax revenue. When you fix international tax, you're going to raise that perhaps to $400 billion.
KLEINBARDThat's significant, but it doesn't -- it's not a fundamental change in our ability to raise revenues to support government.
REHMBut, you know, it seems to me, as we look at this overall picture, if you take this slice and you take this slice and you take this slice, none of them by themselves is going to make a huge difference.
KLEINBARDBut you add them up.
REHMSo what you need is a grand plan to bring them all together. I fully agree with you. Inversion may be just one part of it. But put together with corporate dis-quality, if you will, I mean, you've got a lot of problems here.
KLEINBARDYes. And you're absolutely right. I only mean to suggest that -- and there are lots of knock-on effects to the distortions that come from our international corporate tax system. All of that needs to be addressed. We have to, unfortunately though, look a little bit further. What we need is a larger government that does useful stuff for us in the form of investment and effective insurance programs. That larger government is going to have to be financed. It's going to come from all of us. It'll come more from the rich than from the poor.
KLEINBARDBut government spending is so inherently progressive that you can raise tax revenues without getting whipped up about taxing the highest income Americans at 70 percent, and spend the money progressively, and end up with a more progressive net outcome for the United States.
REHMScott Winship, a bigger government?
WINSHIPWell, so I think where you'll find disagreement and pushback from conservatives here is that we actually spend a lot of money on the poor. And I am certainly in favor of trying to figure out more ways to increase upward mobility. But we spend, at the federal level, about $800 billion a year. When you add in state and local spending, it's up to a trillion dollars. And I think that is a big problem with arguments that if we just taxed the top more or taxed everybody more, which I think Ed is admirably upfront about, that that would be required, that we would increase opportunity.
WINSHIPWell, we don't actually know a lot of models that work when you scale them up. Head Start, for instance, hasn't shown very impressive results. And that's probably the biggest way that we have for improving kids' early-childhood education.
REHMAnd, Dean Baker, you say taxes aren't necessarily the way.
BAKERWell, I think taxes are probably part of the story. I mean, you know, Ed's comment, you know, take Social Security. I think it's a great program that's progressive in the payback. The tax is regressive. I would support, you know, raising the cap to make the tax somewhat more progressive. But also, we will need more taxes on the middle income. I don't think there's any way around. We don't need it this year or next year, but somewhere down the road. And one of the things that's striking, we did a little poll, a survey, when they raised the payroll tax because a holiday ended back in 2013 -- and we asked how many people -- we just asked a question, at the start of this year, were taxes raised, lowered, stayed the same? Most people did not even know.
BAKERAnd this was a very large increase, two percentage points in the payroll tax. Most people didn't even know. So people do value that program hugely. And I think the evidence is they're prepared to pay for that and we could probably think of a few others. But quickly, just taking Scott's point, we do have some poorly spent money and much of it, ostensibly, is on the poor. And I'll single out health care here. We pay twice as much per person for health care as people in other wealthy countries and really have nothing to show for it in terms of outcome. Now, that's a place where we could have serious cuts and still provide better services.
REHMAnd you're listening to "The Diane Rehm Show." Let's go to Kate in Amesville, Ohio. Hi, there. You're on the air.
KATEHi. Hey, I want to ask, I've been spending a lot of time in the Dayton, Ohio, region. I hadn't -- I lived there 40 years ago, but I -- so I talked to a lot of former G.M. workers. One of the spots -- one of the plants is in Boehner's district. And right there in that spot on Needmore Road, the factory got torn down and now there's a, what do they call it, a racino, a casino. And so a lot of these G.M. workers I'm talking to, you know, are driving vets in, you know, vehicles out to the V.A. for 10 bucks an hour, when they had formerly made, you know, 25 bucks an hour.
KATEAnd so, talk about the decline of union wages and this inequality gap, as well as, in Ohio, it's been determined, I believe like four times, that the way public school funding is distributed is unconstitutional. So in a poor area, say, for instance, the kids are having, I don't know, last I looked it was something like $9,000 per year. And then in a wealthy neighborhood, you know, they might be spending $15,000 on a kid. So talk about how this distribution of public school funds is systematically embedded and unfair.
KLEINBARDWell, I agree 100 percent that the United States is one of only a handful of developed countries in the world that systematically spends less on poor kids' education than on rich kids'. And by doing that, you are giving -- you are handicapping them in the great economic race of life. They do not have the same investment behind them that a rich kid does. And therefore, it's not surprising that mediocre students from rich families go to college more. Rich kids just start with so many advantages that that is the gene by which inequality is transmitted from generation to generation.
REHMHere's the one thing I'd like from each of you. What would you do if you had the power, right now, to change this situation of income inequality. I'll start with you, Dean Baker.
BAKERWell, if you only give me one thing, I would say, you know, we really have to push to get a full-employment economy. Because we actually saw a lot of things going in the right direction when we got to the late '90s. We got the unemployment rate down to four percent. We saw wage gains up and down the income ladder. Too short a period of time to see the longer-term impact of that, but I would love to see that carried out. In other words, I'd love to see the unemployment rate stay at four percent for, say, a decade or two and see what would happen.
KLEINBARDWell, I -- I guess my first priority would be to make everyone buy my book. But the second would be to follow actually on what Dean just said, and say that the way you get to more employment and more quality jobs of different kinds for everybody is for government to invest more. There's too much slack in the economy right now. Interest rates are super low for government borrowing. We can have really strong, positive returns to government investment of the sort that Elizabeth Warren outlined, and in return, better jobs for everyone, more equal and happier society.
WINSHIPI'm actually going to agree with Dean. I think, you know, the most important thing we could do for low-wage workers and middle-income workers is to get the unemployment rate back down and have it stay there for a while. I think I'd probably go about it differently than Dean would. But there's no question the economic growth is the best antipoverty program that we've got.
REHMScott Winship of the Manhattan Institute for Policy Research, Edward Kleinbard of the University of California School of Law, and Dean Baker of the Center for Economic and Policy Research. Thank you all.
REHMAnd thanks for listening. I'm Diane Rehm.
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