0:33 Intro. [Recording date: April 16, 2013.] Russ: Before I get started I want to mention I recently hosted an event at Butler University that was co-sponsored with Liberty Fund. The event was called "Capitalism, Government, and the Good Society." Richard Epstein, Mike Munger, and Robert Skidelsky spoke on the topic and then I moderated a conversation between the three of them. Today's guest, James Galbraith, was supposed to make that a quartet, but weather intervened and he wasn't able to arrive in time for the program. There will be a very nice video of the event, produced by John Papola. When it's available we'll put up a notice at the EconTalk home page and I'll tweet on it. I remind you that you can follow me on Twitter at EconTalker. And we may get an EconTalk podcast out of it. But in the meanwhile I'm happy to have scheduled this interview with James Galbraith so that listeners can get a sense of his worldview. So let's get started.

1:33 Russ: Our topic today is inequality, but we're going to get into some other issues as well. Now, James, you have a very different view on the topic compared to either what I would call the mainstream view on either the left or the right. Many on the left argue inequality is partly caused by a lack of progress by the median worker; since the 1970s, the average person has been left behind; and so it's not just inequality that we need to worry about--it's stagnation. On the right when we talk about inequality the argument you often hear is that--and this is certainly a common view among many economists, left and right--that the growth in inequality over time is due to technological change, differences in productivity that have been biased against low-education, low-skilled workers. Now, what's wrong with those arguments in your opinion? Guest: I think, particularly in the case of the second, they start from a hypothesis which was framed before there was any factual foundation, a body of evidence against which one could judge it. Russ: It sounds good. Guest: The way you've characterized the first position, it's really not about inequality at all, but rather tying up the term into a larger set of concerns about the stagnation of wage growth. And I think that's a substantially different set of issues. How does my approach differ? I've been working on this for, oh, between 15 and 20 years. And from the beginning I realized that if you wanted to speak sensibly about the subject you had to enrich the available body of measurement, in order to be able to get a clearer picture of what's been going on, both in the United States and the wider world. And that's been the foundation of now three books on the topic, of which Inequality and Stability is the latest. Russ: Well, let's take each of those claims of the left and right--and I certainly agree with you that the claim I attributed to the left does conflate inequality with what you might call middle class progress or middle class prosperity or the middle class, period. But I think in our debate, as a nation and out in the world, I hear that all the time. Those issues do get mixed together. It's unfortunate, because I think they are two different issues, but they do get mixed together. So let's start with this argument about technological change. It seems reasonable. We see, if we look at the growth of, say, income over time, measured by college or lack of college or high school diploma or no or part--no diploma but some high school--there are large differences in the growth rates over time in those numbers. Do you think those are important? Are those numbers wrong? Guest: I think the mistake comes from beginning the analysis by dividing up your sample population according to the reported educational credential, and then treating those groups as the primary units of analysis. Fundamentally that's not going to tell you--if it turns out that something else was decisive in differentiating incomes of people who happen to have these different educational credentials, this approach to the analysis is not going to allow you to discern that. And it turns out that if you start with a much more eclectic approach to the primary information set, to the classification, you can distinguish the things that are important from things that aren't. And there simply isn't any evidence that inequality is being driven by educational status as such. Clearly, it's quite possible, indeed the case, that people with higher levels of educational credentials also tend to be people who have access to kinds of employment and to kinds of asset holdings which will lead them to have very rapidly growing incomes and be the beneficiaries of, be on the winning end of a rise in inequality. But that's a far cry from saying that this is in some sense causally related to their educational status. It's not. Russ: So, you are arguing--let me stick with the standard argument for a minute. The standard argument is that as globalization has increased and as technological change has encouraged the information economy, people with high levels of education are particularly benefited by that move toward the information economy; people at the low end of the distribution are competing because of globalization with low-wage workers outside the United States. So they have trouble sustaining any wage growth. The high end is benefiting from the increased demand for their services. And that, I would say, is the standard economists' view. I have my own issues with it. Guest: Right. That view has been in circulation since the early 1990s, when it was advanced in a very prominent article in the American Economic Review. And, at that time--as I said, the evidentiary foundation for it was practically nil. What you had were some surveys, widely disparate times, showing that income inequality had increased between the 1970s and the late 1980s, for example. And it was very hard to know. First of all, this is data restricted only to the United States, so it's a very, from the larger standpoint of economic analysis, provincial perspective. But secondly, given that the information set was so limited, you really couldn't tell when the increase in inequality had occurred specifically or link it to the changes in the structure of the American economy over the course of the 1970s and 1980s. So what I did in the first book I did on this, which was a book called Created Unequal: The Crisis in American Pay, appeared in 1998, was to construct new inequality measures based upon data from the Bureau of Labor Statistics (BLS), Employment and Earnings datasets. Which enabled one to basically track out the rise of inequality in pay structures on a year-to-year basis. And it became very clear from that the rise in inequality was a temporally limited phenomenon--that things had been driven up very dramatically by the recessions of the early 1980s; that what people who lived through that period knew to be the dominant fact of the time, which was that a lot of well-paid blue-collar workers were losing their jobs, was in fact the thing that's most closely associated with rising inequality in the wage structure. And that's clearly--it's a deep stretch to link that to educational status. The fact was that they were well-paid, unionized jobs, all across the American mid-West that got wiped out in the surge--first of all in the recession and then in the surge of globalized trade that followed it. But mainly it was the recession of the early 1980s that you can see very clearly in the data.

9:32 Russ: So let's--before we get to the larger picture that you have to tell with your data, I want to go to the argument that I mentioned earlier from the left. Which again is somewhat of a mainstream view, I think among many economists, left and somewhat to the right, which is that, putting inequality in itself to the side, that there has been middle class stagnation for the last 30 or 40 years. You are critical of that view. Why? Guest: I would say I'm skeptical of it. The median wage, as a technical concept, is a very slippery entity. One can easily imagine a world in which every individual has growing income from work, wage income, over their lifetime, as a result of seniority and promotions and so forth. And yet the median wage remains stagnant. And the reason for that would be that people at the high end, at the end of their careers, leave the workforce and retire. People who come into the workforce as young people come in at lower wage rates. So the population, the person who is at the median, is changing all the time. One of the things that did happen in the United States over the 1980s and 1990s is that you got a great many older white male workers who retired, left the labor force. Or were forced out--again, in the slump in the early 1980s in particular and then again in the late 1980s. And a great many people came into the labor force, mostly in service jobs, who were younger, predominantly, or more predominantly female, members of minority groups, and immigrants, all of whom were going to enter the labor force at relatively low, below-average wages. And the effect of that is going to be to pull the median, which is the middle, the pay to the 50th percentile, the middle worker, is going to pull that to the left. So you are going to have a situation in which the median is stacked--it's not necessarily reflective of any individual's experience. Russ: I make that point about every three episodes of this podcast and also at my blog, Cafe Hayek, but it doesn't seem to dent the mainstream. Nor has your critique of the standard technological change view. So I share in any frustration you have over this. Guest: Yeah. I don't think it's a political point, actually. I think that it just suggests that these very compact statistical representations of what's going on are not very informative.

12:55 Russ: So, give us your view. How would you characterize what's happened in recent decades to the distribution of incomes in the United States based on the different pieces of work you've done? What's causal? And give us any stylized facts, too. Guest: Sure. Let's distinguish a couple of things. One of them would be the distribution of pay, which is to say what people get in return for labor for work hours, wages and salaries. If you isolate that element--and that's leaving aside the component of income that doesn't come from work, that comes from asset ownership--if you just isolate the pay from work you find that it tracks very closely to the unemployment rate. And the reason for that is that people who are, I suppose, like you and me, paid on a salary basis--our incomes don't vary very much with economic conditions. But people who are paid on an hourly basis and whose hours vary from week to week depending on economic conditions are very sensitive to the economic situation. And in a weak period their weekly earnings, which is what is actually being measured, tends to fall. And in a strong period tends to rise. And so the pay structure, as measured, which is really a structure of weekly earnings, tends to become more compressed and egalitarian when the unemployment rate is, let's say 4% or below. As it was in the late 1990s. You can see this very clearly in the data. Now, if you are looking at incomes, the picture is entirely different, because the picture is governed, the inequality of incomes is governed, by the contribution made by capital income. By stock options realizations and capital gains and related--also incomes paid by firms which are basically drawing on venture capital and paying out the proceeds of that kind of investment to their employees in hopes of breaking into new markets. And so you have incomes which are extraordinarily concentrated in a small number of sectors and parts of the country. The financial sector is always very important because it's the source of the funds and [?] the fees on all of this. And then whatever it happens to be financing at any given time is important. So in the late 1990s you see this in the technology sector. And in the mid-2000s you see this in real estate. And it shows up very clearly in the data, and it's not ambiguous about what's going on. But that income inequality which is driven by capital incomes is really reflecting the experience of a very small piece of the population. One of the things I do in the book is to isolate how many counties it would take to make this effect go away altogether, and the answer is: 15. Russ: Yeah, that's rather remarkable. And those 15 are concentrated, if I remember-- Guest: This is from 1993-2000, and these are--Manhattan--New York, NY--is always an important piece of the picture. And the other big piece in the 1990s is Silicon Valley and King Country, Washington--Seattle. So, it's, as I say, looking at the data and breaking it out in this way gives you a pretty clear and unambiguous picture of what's going on. Russ: Yeah, I found that fascinating, so let me just try to restate it. If you take 15 counties in the United States, and you take them out of the data, and these counties would be from--I would summarize it as where the financial and high tech sectors have a strong role to play in employment and wages-- Guest: in the 1990s-- Russ: You take those out of the data, then between 1993 and 2000 you see no change in equality in the United States? Guest: No change in income inequality measured between counties. Now some counties are very large and there are obviously increases in inequality that would still be within counties. But the component that exists between counties is a very important one. And you can isolate it in the data very easily. It tracks the overall inequality measure very well, say, something that's done from the Census. And you can show that the extent to which incomes [?] in a very small number of places, really driving the changes. Russ: So, going back to your earlier point, that was a time when unemployment was relatively low, and what was pushing the change in equality that did exist were increases in the demand for the services of people that were really good at computers and finance, right? Guest: Well, it's really--increases in the demand--a lot of these firms never developed markets. It's really the financing of the investment of those firms, and the incomes paid out from those investment flows that's driving it. Markets are developing at this point but not all of these firms, perhaps even not many of them, are actually making their money out of cash flow from the public. Russ: I'm thinking the workers, though, whose skills were in demand and whose salaries were being paid accordingly-- Guest: If you happened to be employed, and this is a tiny number of people, by one of these emerging firms that was a favorite of Wall Street at the time, of course you--people were falling all over themselves to bid for your services. But it was even better to be an owner of those companies or chief executive, because then you were participating directly in the rise of the stock prices. Russ: And that's at the very high end, presumably. Guest: Sure. It's at the top. These are people whose names we know. Because part of their corporate strategy was to advertise how rich they were. Russ: I often like to point out that we should care about why people get really rich, if we are going to worry about it all; and somebody who gets really rich by developing a great piece of software or a company that makes my life better or a basketball player I like to watch or a singer I enjoy listening to is different from a Wall Street exec who perhaps has done nothing productive and who has not made my life better. I would make that distinction. In that particular case, the 1990s, as you point out in your book, in the tech sector there was a lot of investment made that turned out to be somewhat valuable. Some of it failed of course, and those firms disappeared and their owners lost all their stock money. But others thrived and the ones that thrived tended to be the ones who made the world a better place. Guest: Uh, up to a point. I mean, one could also argue that some thrived because they had extraordinary protection of their patents. And other intellectual property. And that they managed to fight off the Justice Department's Antitrust Division very effectively. The identity of these companies is not a secret. Some of them are not that well loved by the customer community. Russ: Which ones are you thinking of? Do you want to-- Guest: Oh, gee, just guess. Russ: A lot of them, I love. I mean, I like Google, I like Apple, I like--I'd probably like Cisco if I knew enough about them. Intel. Some of them in the tech sector, yes, maybe not as loved as others. Guest: I think there's a large company up in Seattle that you haven't named which has at least a reputation of having an ambivalent relationship with its customers. Russ: Yeah, it's true. They are still here, though. Guest: They are indeed.

21:14 Russ: Let's look across industrial sectors. A remarkable aspect of your findings that you didn't highlight--I was struck by it--maybe I've misinterpreted it. But you looked at two different eras of economic change. You look at, I think, 1993 to 2000, and then you look at 2000-2006 or 2007. And instead of looking across space, which is what we just talked about, you look across industrial sectors. And you find that there are very large differences in how industrial sectors have performed. Guest: There are, of course. And after the NASDAQ bust in 2000, you can see the rise and fall of--several little cycles that occur during the George W. Bush years, of which the first was driven by the wars. Driven by the reaction to 9/11, by the invasion of Afghanistan, eventually by the war in Iraq. And one of the things that shows up both sectorally and geographically is this funnels money into enterprises that are closely linked to the government and in locations that basically circle the national capital. Which becomes at that point the locus of income growth in the country. It's a very strange phenomenon for what was ostensibly a conservative Republican administration. But there it is. Russ: Well, government got a lot bigger under George Bush. Guest: It certainly did. And any country which is launching major military operations is going to experience that. And then, the Iraq War is the peak, the first year of the Iraq War is the peak of this phenomenon, because after that the buildup, it doesn't go away but it doesn't continue to get larger. And so its effect on the growth rate of the economy basically washes out after that. And what you see carries the economy forward into 2006, 2007 is real estate. The construction and the loans being made to increasingly dubious borrowers that eventually blows up, 2007, 2008. Russ: So the data that you are looking at in those analyses is from the BEA, the Bureau of Economic Analysis. Guest: Yeah. Russ: The one thing that's striking about it--I wasn't sure of the level of the data, whether it's--it's not county? Guest: It's county level, yes. There are two kinds of resolutions here. One is geographical at the county level, so you can map things out over the 3150 counties the country has. And the other is by sector within states, so that you can again look inside each state's boundaries at the distribution across various economic activities in that state. Russ: So, when you are looking at different industrial sectors, say you are looking, to take one example, at finance. You are looking, actually, at a very different kind of data than is usually used in these kinds of discussions. Usually what people are looking at are individual or household data. Guest: Correct. Russ: Sometimes from tax returns, sometimes from government samples of various populations. Guest: Usually, most of the other researchers working in this area are either working with tax records or working with the Current Population Survey (CPS). But you are looking at something that in many ways is more appealing, which is, first of all you are not looking at wages. You are getting a very complete picture of income that goes way beyond earnings. It includes bonuses, dividends. My understanding is it's also based on payroll. Is that correct? Guest: Yes. Two different kinds of data. Russ: So let's stick with the industrial sector ones, the statewide data. Guest: That's payroll data. Russ: So you have, every firm in theory, or at least a sample of firms in the state in, say, finance, based on what they pay their workers, inclusive of everything. Not just wages. Correct? Guest: That's right, yes. Russ: Does it also include transfer payments at the statewide level? Guest: No. Russ: Okay. So this is--I would call it 'compensation.' Guest: Yes. Russ: It does not include-- Guest: 'Pay' is the word I use, because we are looking at what the employing unit pays out. Russ: It's disbursed. Guest: It's not what the individual earns, because an individual might have multiple sources of income, multiple jobs, other assets. It's not what the household earns, because the household may have multiple earners. And there's no adjustment here for household size. In other words, it is not a measure which is directly related to individual household welfare, which is an important topic; it's not what I work on. It's related to the payments structure of the economy. And that has a real usefulness for a lot of questions that economists have been concerned with, including the one you mentioned earlier, which is: What is the role of technology? The role of technology, really, when you think about it theoretically, it's about what businesses will pay for specific jobs, and if you have to approach that through for example what people are reporting as their incomes, tax records, or what a sample survey is reporting for household income, then you are really looking at it through a rather murky glass. Because you are several layers removed from the effect of the technology on the structure of business. Russ: And you are also often missing types of payments and benefits that are not captured by some of the data that people focus on, such as wages or income. You don't include vacation days. Do you think those data include health benefits? I don't know what they include there. Guest: I don't think that they include health benefits. Russ: I assume not. Guest: That's a question I'd have to double-check. Russ: But what struck me when I looked at that--and to help the listeners who don't have the table in front of them, and I don't have it in front of me but I remember it: What we're looking at here is disbursement pay--that is, pay--by sector, across states, over a period of time. So when I looked at the 2000-2006 or -2007 changes by sector, I was struck by two things. One, I was struck by the enormous increases by sector for some of the sectors, where pay to workers over time doubled in a very short period of time. That's correct, right? Guest: Yes. Russ: You might say, well, in the heyday of the Internet it's not surprising that the people who could successfully manipulate web pages and do the things that were desperately in demand, it's not surprising that those wages and salaries and benefits went up a lot. But this is across fairly wide definitions of sectors. So you list, I think 15 high-growth sectors. Am I remembering correctly? Guest: That's right. They are, however, in relation to overall employment fairly small. And so, again, what we're picking up is the same phenomenon that is described at the geographic level, which is that the rise in inequality is really a matter of the increasing difference between a small, favored sector that is experiencing a credit-driven boom, and the rest of the economy, which includes almost all the rest of us--who are going along as before, experiencing very little direct effect of this phenomenon.

30:16 Russ: But I was struck by--you have the last line in both these tables, one is the pre-2000 change, one is the post-2000 change: there is a line called 'All Other Sectors.' And there's huge growth in all those sectors. Not compared to the top 15 or the top 8 or 6 that grew the most. But I was struck by how much growth there was across the economy. And I mention that again because we are often told that nobody is benefiting from these changes except people at the top. I accept the idea that there are sectors that are benefiting a lot more than others. But I was struck by how much positive change there was across the economy as a whole outside the highest growth sectors. Guest: Oh, I don't know what to say about those numbers. They are not that dramatic, and these are all in nominal terms so there's no inflation adjustment here either. Russ: That was my next question. Guest: The point of the tables you are looking at is to permit the reader to get some sense of what the proportionate changes were in sectors so there was really no need to adjust them. But the All Other Sectors as compared to the high-growth sectors in these tables, they are relatively low paid and their nominal wage growth is--well, in both cases you are looking at a phenomenon that is probably ordinary for a trough-to-peak business cycle change. Russ: Do you have that table in front of you? Guest: Yeah, 6.1 and 6.2. Russ: Can you just read the bottom line; say what time period they are and give us the change? Guest: This is 1996-2001, and the All Other Sectors number is $31,000-$38,000 Russ: That's over 25% in 5 years. It's nominal, but inflation wasn't very high then. Guest: Yeah, but it's also from a trough, close to a trough, to a peak. It's a period of substantial business cycle expansion and a major drop of unemployment. For 2003-2007, roughly $39,000 to roughly $44,000. A 10% increase over 4 years, so that's 2%, 3% a year. I don't think there's anything remarkable about that. Russ: Well, it is to me, just because of what we commonly hear. Obviously, this is a very complicated area. There's a lot going on. There are interactions--when we change one thing, we change other things that we can't hold constant. I just find it interesting how pessimistic most people are about the state of our economy. Even in good times. We're not in good times now. But even in good times. Guest: Just looking at that first table, which is 1996-2001, this was a very strong period for labor earnings. The unemployment rate went down to below 4% for I think 4 consecutive years, and you had a lot of demand for hourly labor. This was also the period when poverty rates--well known, remarkable moment for prosperity, poverty rates declined to historic lows. Russ: But even in that later period, the 2003-2007, which, a lot of people have described it as not much of a recovery after the 2001 recession; that any gains that occurred in that period--they may have been temporary, because obviously credit issues that we are going to talk about in a second. But it's interesting to me how big those gains are. Guest: Well, people do experience income gains in a credit boom. I don't think anybody will look back on this 2003-2007 period as a-- Russ: Golden Age? Guest: As a Golden Age. You can make an argument for the 1990s in that there was this technological transformation going on, where clearly everybody was living in the backwash of that. But the 2000s, we are looking at, on the one hand, the growth of government thanks to the wars, and on the other the impending real estate debacle. It's very hard to see permanent benefits from either one of them. Russ: I agree.

34:55 Russ: Let's go to the longer picture. If we go back to 1980, say, or even into the 1970s, your suggestion then is that a lot of the changes in economic prosperity that differed across groups depended on how close you were to that credit increase of various intensities at that time period. Is that accurate? Guest: Yes. There's a real change in the driving forces behind American economic growth after 1980. Before that there is, you could argue, a fairly balanced set of institutional spurs to growth, with the result that you get a growth path which is reasonably steady, both public and private components. After 1980 we become very heavily reliant on the credit cycle and the credit cycles become increasingly intense until you get the great debacle and the end of the last decade. Russ: So, when you say 'credit cycle,' what do you mean? Guest: The growth basically of bank credit and associated private sector venture capital extensions, with the cycle coming when the flow stops. Which it did in 2000 in the tech sector and 2007 in the real estate sector. Russ: So, do you see that--what was going on differently in the pre-1980 credit cycle, then? I'm trying to understand what's going on differently. Is this a statement about monetary policy or other things going on? Guest: A lot of other things going on as well. Monetary policy plays a much smaller role in the 1950s and 1960s than it came to play in the 1970s and 1980s. But in the 1950s and 1960s you have, first of all the growth of the public sector. You have the extension of social welfare programs in the Great Society. You have the Treaty of Detroit--the strong presence of collective bargaining institutions which gave organized labor an increasing claim on resources as time went by. And then you also have the growth of private sector credit. But no one of these phenomena is dominant in this period. Whereas after 1980, basically labor has been neutralized-- Russ: Organized labor. Guest: Organized labor has been neutralized so there's no further increase in collective bargaining settlements. And the welfare state--it's not taken apart, but it doesn't grow except in a few isolated episodes. Russ: Health care being the obvious example. Guest: Well, the Medicare Part D under George W. Bush, for example. But fundamentally the institutional structure isn't expanding after that. And so the locus of growth really shifts to that which is driven by the financial sector. You can see that very clearly in the data.

38:32 Russ: So let's try to talk about that a little bit and then let's talk about what policy issues are related to it. My sympathy with your viewpoint, which is, as you admit in the book, not a mainstream view--but it seems very consistent with the data, at least the way you gather it and work with it. The part that I'm sympathetic with is in our profession of academic economist, the rewards to being an academic economist have gone up quite a bit since I've been a practicing economist, which is roughly 1980. And I think you pretty much follow the same pattern as I do in terms of timing--that's about when your career started. Guest: That's about right, yes. Russ: And I like to think I am a lot more productive than I was, and I am more productive. But it's hard to understand why my skills are in such demand relative to what they would have been in a different world. Another way to take that out of the picture is to look at starting salaries in academic economics, and they've grown dramatically over the last 30 years, 40 years; and it's hard to argue that that's because economists are so much more productive. If anything, I think we are more dangerous. We are in high demand academic life; we are part of an education system that likes--people like to major in economics. So when I look at my own situation I'm trying to figure out how much is due to the fact that we subsidize education in a whole bunch of different ways, versus how much of it is due to the fact that we subsidize finance, a field that competes with academic economics for people to work in, on Wall Street. What are your thoughts on that? Guest: Well, this gets to another, a very interesting domain of American sociology, doesn't it? I think the second explanation, that economists are competing and having their salaries pulled up by the business schools, which are having their salaries pulled up by their connection to the financial sector, is certainly an important piece of the picture. Because there is also the fact that--and having lived through this transition it's very visible to me--that in the 1950s and 1960s the young population of the country had an enormous sense of security and confidence about its future. Which permitted people to have a great deal of diversity of aspirations. That changed in the 1970s and 1980s. Insecurity went up dramatically, as unemployment became a real threat. And that drove many people into much more economically competitive career paths. And so you see this in the rise of economics departments and business schools in colleges and universities; people will go into them because they feel, maybe rightly, maybe wrongly, it's a practical way to get yourself a career that makes money. Russ: So, should we do something about this? This sensitivity of incomes and compensation to the credit cycle, to monetary policy? What can be done, if anything? What should be done? Guest: I'm inclined to favor stabilizing institutions and social insurance. Particularly when you are moving into a period of stress, the important thing is to maintain decent floors. And decent and stably secure futures for people, which means covering them from the most extreme risks. And I think that the important of this in our present political debate really focuses on Social Security, Medicare, Medicaid, which have been institutions which have come to define American working class, middle class life by providing basically an inalienable floor that will keep you on of extreme poverty, and has successfully done that for senior citizens and also for dependents and survivors; and providing a couple of layers of protection against medical bankruptcy and against old-age-related bankruptcy, which is what Medicaid basically achieves for the middle class. Protecting those programs from what are essentially predatory attacks, efforts to restrict and limit them so that other players can cherry pick from the insurable population and make a little extra money is an extraordinarily important political task in my view. And I would add to that: I'm very much in favor of a strong minimum wage, which should be substantially higher than it is now. And the reason for that is that it helps to set a standard for the performance of the labor market. Which I think is something that we observe very clearly, particularly in the part of the country I happen to live in, is really undermined by allowing a low wage standard to prevail for workers at the low end of the scale. What you get is a market which becomes very insecure, relatively unsafe, very hard to monitor and protect [?] safety and health standards and causes a lot of other problems that would basically be greatly reduced if you had a much stronger minimum wage.

44:36 Russ: Well, let's talk about those two pieces--the safety net and the minimum wage. On the safety net side, do you think means testing Social Security and Medicare, which I think would easily make them solvent for the foreseeable future--are you against that or in favor of it? Guest: I am very much against it. Solvency for a government program cannot be distinguished from the solvency of the government itself. Russ: True. Guest: So I think treating Social Security and Medicare as though they were some kind of private funds is not a reasonable approach. Russ: Well, at their current levels, they're going to be hard to keep the promises that have been made. Guest: Well, only if you insist upon--well, first of all, that's debatable. But secondly, if you accept the pessimistic projections, it's only if you insist that you match the payout to the Federal Insurance Contributions Act (FICA) revenues for a very, very long period into the future. And I'm inclined to first of all say it's not necessary to do that, as an economic matter, certainly; and secondly, even if you think it's the right thing to do politically, it's a problem that can be dealt with down the road. It doesn't have to--treating those projections as though they were some kind of dire situation at the present is a clear mistake. Russ: You don't think there's a demographic problem with Social Security? Guest: Oh, no. I've been in the Census since 1960, when I was 8 years old. As has every other baby boomer, including you. The demographics have not--the demographics actually have become more favorable since they were addressed in the 1983 Social Security changes, because you've had more immigrants than were expected at that time. Russ: It's true. Guest: So, those are not the issue. Russ: Why are you against--let's go back to the fundamental question. Guest: Means testing is a very complicated problem, particularly for elderly people, because their 'means', their qualifying means, change all the time; and would be adjusted to accommodate whatever the means-test standard is. So first of all it's a cumbersome and unpleasant system which would give people kind of variable access to Social Security and Medicare. But secondly, we have a means test in the system. We have a perfectly good one. It's called the income tax. And if you want people to pay into the government in relation to their means, that's what a progressive income tax achieves. There's absolutely no need to layer onto that some kind of means test for whether you have to pay the cost of a catastrophic health incident, traffic accident or a heart attack or something of that nature. Russ: But I don't need a retirement safety net; and I'm happy to have paid for my grandmother when I was younger. Guest: Ah. You are, however, a person of great philanthropic and charitable instincts, and our fellow citizens should not be expected to rise to that standard. Because many of them don't. Russ: But, you've also made it harder for people to take care of themselves in their old age by taking more money from them than you otherwise-- Guest: No. No. You've got to remember that I study inequality. Diversity is the essence of any population. And what we have out there amongst the elderly are a great many people who don't have children who would take care of them, because they don't have children at all or have children who can't take care of them for one reason or another. The main one being that even with all the best will of the world, those children have children of their own who are a higher priority. Russ: Well, I'm talking about--I disagree with that for a different reason, because I think private charity would be a very good thing. But let's put that to the side-- Guest: We had private charity, we relied on private charity, up until the creation of the Social Security system in the 1930s, and the reality was that most old people didn't live very long. And I'm enough of an economist to believe that when you pay people to do something, they'll do more of it. And what Social Security does is to pay them to stay alive. And they are quite happy to take the money and live longer. Which to my mind is an excellent thing. Russ: I don't see the causation there. I don't see the causation quite as effectively as you do. Guest: Send people a check, they eat. This keeps them alive. Russ: I don't think people died from lack of resources in 1930, even old people. Guest: Oh sure they did. Lots of old people suffered privation, right up until the 1970s. Russ: Perhaps. But we're a richer country than we were then. I don't see that. But I had a different point I was making, which is that you are taking money away from young people when they could be saving it. It's a nontrivial amount. And the Social Security system has been doing that for 70-something years, and that's made it more likely they'd need a safety net. Guest: Well, again, just extending the argument I just made, there are two kinds of working people: people who have parents that they would otherwise support, and people who don't. Russ: I'm talking about people supporting themselves. Guest: No, but hear me out. I'm in the second group. My parents have passed on. They were never a burden on me, but if they never had been, they were no longer the case. But I still pay the payroll tax, which means I'm paying in to support-- Russ: other people's parents-- Guest: the whole population, everybody else's parents. Which lowers the burden on everybody. It's a very reasonable system. Russ: Well, it raises the burden on you. Because you have less money for your own retirement. Guest: Well, but it lowers the burden on people who would otherwise have a significant burden. So it seems to me that it's a very fair system. Which is why it's so popular. Russ: I don't think its fully understood. It might be popular even if it were understood. I'm willing to accept that. Guest: People do understand it, and that's why they like it. Russ: What percentage of the U.S. workforce thinks that their Social Security "contributions" that come out of their paycheck every week are put aside for them? I think it's a nontrivial number. I'm sorry, I could be wrong. Guest: That's a polling question. Russ: It's a rhetorical question. Guest: It's a polling question; I'm not a pollster.

51:07 Russ: Let's move on to your second piece of your safety net, which is the minimum wage. So you want a higher minimum wage. How much higher? Do you have a rough idea? Guest: $12 is my number. On that I'm drawing by the estimable conservative publisher of the American Conservative magazine, Ron Unz. Russ: Lucky you. Now, is there any cost to that increase? You talked about what you thought the benefits were. Do you think there would be any changes in employment for low skilled workers? Guest: Oh, yes. Now the whole point is to help change the structure of the labor market at the low end. And so yes. For example, if you think about what happens inside households, there would be some teenagers, presently working at the minimum wage, who would leave that labor market, in part because their parents would be making more money if their parents are also low-end workers. So, you'd get change, reorganization. The real issue, which is the point of contention here, is whether this would mean a higher rate of unemployment for low end workers. And we have now quite a lot of evidence that, perhaps somewhat counterintuitively to supply-and-demand-trained economists, that refutes that idea. A very important experiment has been carried out since 1999 in the United Kingdom, where they didn't have a minimum wage and they introduced one; and it has disappeared from political discussion in the United Kingdom because not even the most skeptical Tories think that it has caused unemployment there. It hasn't. Russ: Well, I actually don't think unemployment is the right issue. I think it's employment. And I think it's the difficulty it causes for people with low skills to get the experience and the first step into the labor market. I find it strange that people who--and you may not be in this group--obviously point out the eagerness with which businesses substitute capital for labor and foreign workers for American workers somehow think that's not going to happen if we artificially raise the wage. So, I don't accept that empirical evidence. There's a lot of evidence on the other side. And I would suggest-- Guest: Let me just come back at you on the second part of that. There are two things that would go on. One is that businesses would experience increases in some of their costs on the wage side. But they would also experience customers with more money coming through the door. And my view, as a matter of employment theory, is that businesses hire more workers when they need them. If they have more business and they are expanding, then they'll hire more people. Then they will pay the minimum wage. On the question of bringing in foreigners-- Russ: Not bringing in foreigners. Moving factories overseas, all the things that have happened-- Guest: Well, that's a tradeable goods issue. Most manufacturing is so far above the minimum wage it's not going to be affected by this. Russ: No, I'm not suggesting it would be-- Guest: We're looking at the overwhelming number of jobs which are service jobs, basically non-traded sector, non-moveable. And the question is: What would be the effect of a higher minimum wage on the incentive to bring low-wage immigrants into the market? The answer to that is that if you have a job which is paid decently enough so that a documented worker, a citizen or permanent worker, will take it, then you have no incentive to bring in an undocumented immigrant to hold that job. Because you couldn't pay that person a cut-rate wage. And that is the reason why this is attractive to a certain type of, I think, very thoughtful conservative, who are very concerned about maintaining the American labor market for American workers. That in fact it would discourage the use of brokers and shady labor contractors to bring in people to fill jobs at cut-rate wages. And they're right about that. I think it would have that effect. Russ: Yeah, but you missed my point. My point is that, we see from lots of evidence that businesses are willing and able to change the mix of labor to capital when capital gets relatively attractive and when overseas workers get relatively attractive. That's part of the reason that people move factories overseas. Guest: But again, you are coming back to the factory issue. Russ: It has nothing to do with the factory issue. It has to do with how firms behave. Firms are sensitive to wage rates. Guest: That's right. I'm going to give you a different theory of how firms incorporate new technology. If this were a more technical discussion I'd give you the references on it. But fundamentally what firms do is they apply the establishment wage rate to the best technology, which may well be a labor-saving technology. But they will save money on adopting that technology whether they are paying a relatively high or a relatively low wage to the workers that they have. There is, I think, no good reason to think that there is kind of a flexible frontier of the textbook variety between what we'll call 'capital' and 'labor'. There's a high-level theoretical discussion around that which I'm sure you are aware of. But I would take the position that in fact a wage rate is not an important determinant of whether firms move to a more advanced technology, because in fact they'll make money by moving to that technology even if they are paying a relatively low wage. Russ: We'll agree to disagree on that. Guest: Yeah.