CSAD: Inequality and the Market with Austan Goolsbee

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Late in his speech, Professor Austan Goolsbee admitted that economists, as a profession, have historically lacked either “great emotions or people skills”. Yet coming from Goolsbee, the Robert P. Gwinn Professor of Economics at U Chicago’s Booth School of Business, this assertion seemed a little disingenuous: his discussion of inequality and the market stood out for both its energy and its humor, which remained constant as he approached topics ranging from education reform to entitlement programs and how they all tied back to the problems of economic inequality in America today.

Of course, Professor Goolsbee’s credentials are unusual both in their distinction and depth. He advised Senator Obama on economic issues during his campaign, and later served in President Obama’s cabinet as Chairman of the Council of Economic Advisers. Voted the funniest man in Washington in 2009 (narrowly beating out Grover Norquist)  Goolsbee is also one of the most visible public faces of economics, having appeared multiple times on, among many others, The Daily Show and The Colbert Report to provide insight on the administration’s economic policies.

Yet despite his political background, Goolsbee was adamant that he was less concerned about the “Politics” of Economic Inequality than the (admittedly more boring) “Economics of Economic Inequality”. Right off the bat, Goolsbee said that a clearer distinction needs to be drawn between facts and the interpretation of facts. Income Inequality is a fact (despite the efforts of some on the right to explain it away) but whether or not it is a problem is heavily dependent on interpretations.

After all, as Goolsbee pointed out, the poorest person in the country is still richer than the richest man in the world was in 1200 CE: technology, medicine, and rule of law have created near-universal benefits. Goolsbee was quick to qualify this by acknowledging that many of the arguments against the existence of income inequality, i.e. “there is no income inequality since even the poor have cell phones” are nonsense. Too much time is spent trying to disprove data, especially on the right side of the political spectrum.

Although income inequality, as it is currently understood (in “real” not “relative” terms) has been present in America since the 1970s, it wasn’t until the turn of the millennium that the income of the middle class stopped tracking to the world economy as a whole. The ideal that income stagnation could become “the new normal” is one of key reasons we are having the debate about income inequality now. Professor Goolsbee dubbed this new rise in inequality as part of “the evil nexus of risk” whereby a greater and greater percentage of Americans have started losing job security and confidence that they even have a place in the labor force. It is this fear more than anything else which turns economic inequality into a political and social problem.

Strong growth does not necessarily conflict with rising economic inequality (as has been amply demonstrated by China) yet there are more insidious ways a wealth gap can threaten the U.S. economy, according to Dr. Goolsbee. He laid out three principal negative effects. Firstly, programs like Social Security are dependent on a payroll tax system which does not account for income stratification, and political deadlock makes reforming the tax code unlikely in the near future. In addition to this, the appeal of federal programs like Disability Employment is likely to grow if discouraged workers do not feel they have a chance to succeed in the jobs market.

Both of these are true, but it was Goolsbee’s third point which hit closest to home. With a small number of Americans able to pay exponentially higher prices, the cost of tuition for schools like Kenyon and U Chicago has soared. The result of this is that not only is it harder for those not in the highest economic bracket to pay for college, but that a cycle of bubbles and busts in the larger economy grows more pronounced. The result is cyclical: more instability means fewer jobs, fewer jobs mean more economic inequality, and greater inequality leads to instability.

This morning Robert Putnam noted that while segregation based on race and religion was on the decline, areas like education and employment were increasingly dividing along lines of wealth. Goolsbee takes this further, suggesting that political “tribalism” based on new economic lines, if allowed to ferment, could make it even harder to have a civil political discourse. With the easing of restrictions on lobbying and campaign finance, wealth and political power are tied closer than ever before.

Although reluctant to engage in “amateur sociology”, Goolsbee nonetheless noted that one of the most insidious effects of income inequality was psychological.  While higher stakes can help provide incentive for ambition and social mobility, Goolsbee cautioned that economic inequality also makes people more risk averse. He brought up the Skolkovo Innovation Center, Russia’s state-controlled answer to Silicon Valley, as an example of how governments cannot force innovation. If left unchecked, rampant income inequality will have a cooling effect on America’s position as a global innovator.

This leads to his final question: where does growth come from? More than anything else, it is education, and the necessary social mobility to support it, which allows a country to minimize the negative effects of economic inequality. Despite the overall levity of his talk, Professor Goolsbee emphasized that the U.S. is fast losing its educational edge. With the world’s highest University dropout rate, we are in a position where serious reform is needed to remain competitive. Addressing income inequality is deeply interlinked with this–it a country where a College Education is available only to the richest of the rich, then it is difficult to see how innovation can flourish.

2 comments on “CSAD: Inequality and the Market with Austan Goolsbee”

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