Business, Politics & Society

Inequality: The Growing Gap

Paul Krugman

Lesson time 11:34 min

The growing income gap poses a danger to the well-being of our economy. Learn the history of economic inequality, how race is always related, and the economic effects of growing up boomer vs. growing up millennial.

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Paul Krugman
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We have a problem of inequality. An awful lot of the gains from economic growth have gone to a small number of people, at least within rich countries. And that's a bad thing, I would say on multiple fronts. It's a bad thing partly because it means that regular people aren't getting that much, partly it's because extreme inequality I think distorts our politics, distorts our society. So trying to find ways to mitigate that, to get back to something that's more like a middle class society, that's a big economic challenge. [MUSIC PLAYING] If you're watching this, I don't know, what age you are. I was born in 1953. So I was born right in the middle of the baby boom. I grew up during the great postwar economic expansion. And the America I knew when I was growing up was one that was, it was a middle class society. There weren't big differences. We thought somebody was rich if they had a split-level ranch, as opposed to just a ranch house like we did. And that all shows in the numbers, that we had this relatively flat distribution of income, and the growth after World War II was shared just about equally across the whole economic spectrum. If you're a younger person, you grew up in a very different America. You grew up in one in which a small number of people are extremely rich, in which even at the upper fringes of the middle class, you feel like you're struggling, you've been left behind. When I was growing up, you didn't think-- you wanted to work hard, you wanted to succeed, you didn't worry too much about whether you were going to make it, because everybody was going to make it. That's what we thought. Now it's like, for a 20-something, it's like one of those old war movies, where the tough Marine sergeant says look at the man to you're left, look at the man to your right, only one of you three is going to make it. And that's what a highly unequal society does. There's a rat-race feel to America now that wasn't there before. And I think it's a source of great anxiety. And of course, if you lose in that race, bad things happen. [MUSIC PLAYING] How do we know what we know about inequality? How do we know how incomes are distributed? A lot of it comes out of this project that Piketty and Emmanuel Saez at Berkeley have been pursuing. They've tracked top incomes, how one of the incomes-- what share of the income generated is going to the top 10%, the top 1%, the top 0.1%, all of which follow pretty much the same pattern. And it looks like this. We're going back to World War I. And this is the top 10%. But the truth is, it's going to be the same shape, although even more extreme, if you look at the top 1%, or the top 0.1%. So we have an early on period where almost half of total income went to just 10% of the population. Then something happened, the drastic drop on the eve of World War II. We come out the other end of World War II and we are a middle class society. Wartime policies, the rise of unions have a whole lot ...


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Comments

Tashi N.

Is there are a possibility of the next crises, how can economist predict it. What should a novice economic student do to understand the future economy?

A fellow student

I really liked this lesson, great Content. Thank you Paul A note to IT; I like to take notes and copy from the video from time to time. So I hit pause on the video to capture the words or graphics. But when I pause the video, two pop ups come up blocking the view of the slides (download pdf, and link to next lesson). Can you move those to the corners so I can read the slides while paused? Thank you.

A fellow student

Inequality is inherent in our structure, no matter how we set up the system, look at the nature. If you dig up historical graveyard, wealth also seemed to had gravitated toward the 1%. I think it is better to accept the fact rather than wanting to flip the system upside down. What's most important is to bring together even the lowest of our society (the dispossessed) to have opportunities for gradual progression towards a better life, meaning that for the weakest to be able to collect wealth and have a proper safety net so they can come back and keep trying. Problem occurs when the society decided to force the poor to become rich instantly.

Tyler B.

Post WWII left much of the world in ruins, and Americans were the direct beneficiary. Inequality may have manifested itself more along geopolitical lines than class lines. I'd love to see what the percentage of income growth looks like if you ask from a global, rather than an American perspective. Would the "gilded age" trends persist post world war II if you considered the rest of the world in those calculations?

A fellow student

For a different point of view, read my book, "Economic Inequality: Is It the Real Issue?: An Investigation Into the Current Debate Among Intellectuals." This book adds to Paul's excellent discussion.

Mia S.

"In America, there's always a tendency to think of some policy like Medicaid or food stamps as being not, 'This is to help people who have had bad luck, this is a safety net,' as 'Oh, this is a program that helps "those people," the people who don't look like me.' I don't think inequality is fundamentally a racial problem, I think the politics of inequality are very racialized and the impacts of inequality do tend to hit races disproportionately. In the very short run, bad stuff in the economy tends to have a bigger - at least percentage - impact on people with high incomes, because people with high incomes, executives get a lot of their money through stock options, and when the stock market collapses, they get hurt. Usually, we see some squeezing of income differentials when the economy has a bad patch. That did happen this time, but not for very long, and then a funny thing happened which was that, as the economy started to recover, the recovery was disproportionately concentrated at the top. That was partly just because the underlying trends towards inequality just reasserted themselves, partly because at the core of this last crisis was a housing bust, and the stock market recovered but housing prices have not. For middle class families, their house is their principal asset. That's where their wealth is concentrated. It's only - most people, about half the population, owns a little bit of stock, usually in their retirement funds, but most stock is concentrated in the hands of a small number of people at the top, so the big rebound in the stock market was a rebound for the top 10%, especially the top 1%, not so much for people in the middle. So we've come out of the crisis even more unequal than we were before. Kind of a disappointment, I have to say; some of us thought that the crisis might lead to a new New Deal, that we would once again take - inspired by how badly things had gone - that we'd take measures to make ourselves a more equal society. And there was some of that - without the crisis, we wouldn't have gotten the big expansion of healthcare that took place under Obama. But overall, not so much."

Mia S.

"If you read Piketty - thanks to Kindle highlights, we know not only how many people have bought the book, but how far in they read, and the answer is actually, on average, about 27 pages; but if you do read it - he talks a lot about rates of return. It matters a huge amount how much people earn on their assets. If the rate of return on assets is faster than the growth of the economy, then wealth can feed on itself - people who have a large share of wealth can expand that wealth faster than the economy grows, which means that they own a larger and larger share of the economy's assets, and that has been true in some periods, not true in others. Part of what was going on during the postwar generation was that between relatively high rates of taxes on profits and very vigorous growth, the return on assets was actually less than the rate of growth of the economy. So wealth did not - wealth inequality was not self-perpetuating, was not self-reinforcing. But what Piketty pointed out is that actually, we're increasingly starting to look again like the robber-baron era, that we're getting back to where wealth and a particular inherited wealth is playing a big role. So we're full-on back to the bad old days, in terms of an unequal society in which what you have depends a lot on what you inherit. You can't understand why America is in some ways so different from other advanced countries without talking about race - the political map, red states, blue states, pretty much resembles the map of the state of the Civil War in 1862, right? When you have rising inequality, it's actually true that the less fortunate - the people with less education or just people who were in the wrong place at the wrong time - are left behind. But that does disproportionately hit non-whites. It is, in fact, the case that rising inequality is bad for the white working class, but it's also bad for just about everybody who's African American, a large number of people who are Latino. In the days when there were a lot of good union jobs for blue-collar workers (that included at least a fair number of African American workers as well) so the disappearance of those jobs has a racial element, as well as everything else. On the other hand, if you ask, 'Why don't people just vote against this? Why don't people vote for more equalizing policies?' then the racial side becomes really critical."

Mia S.

"How do we know what we know about inequality? How do we know how incomes are distributed? A lot of it comes out of this project that Piketty and Emmanuel Saez at Berkeley have been pursuing. They've tracked top incomes - what share of the income generated in the economy is going to the top 10%, the top 1%, the top .1%, all of which follow pretty much the same pattern, and it looks like this; the truth is it's going to be the same shape, although even more extreme if you look at the top 1% or the top 0.1%. So we have an early on period where almost half of total income went to just 10% of the population. Then something happened, the drastic drop on the eve of WWII. We come out the other end of WWII, and we are a middle class society. Wartime policies, the rise of unions have a whole lot to do with it, but it sticks, so we have this long period, this long flat stretch of a pretty equal society. That's the America I grew up in. Then it takes off, starting in the late 70s. There's some wiggles, ups and downs, but more and more of the income gets concentrated in the hands of a few people. In many ways our image of ourselves is still that we are this middle class society, where all of us are leading more or less the same lives, but that's not actually the way we live. We are a society in which lots of people are barely making it, and in which a few people are living on a scale, a level of lavishness that is actually hard for people, most people, to imagine. Income is what you earn in a given year - what you get; your salary, it may be dividends on stocks you own, whatever. Wealth is the value of your assets. Historically, if we go back to the 19th century, people who had high incomes typically had high incomes because they had a lot of wealth; they owned stuff, railroads, lots of land. In the 80s, 90s, we started to have people with very high incomes again, but it was mostly not because of what they owned - they were financial wheeler-dealers, or they were corporate CEOs being paid enormous compensation. But now, increasingly, we're also going back to the days when a lot of the people who have very high incomes have them because they own lots of assets, sometimes because they inherited it from people who made a lot of money as CEOs or as financial wheeler-dealers. So both are a problem for society, I would say - huge inequality is a big problem for society, but if it's based upon wealth, it's even worse because people who've inhereited lots of wealth are in a position that people who don't inhereit lots of wealth can't have very much hope of getting."

Mia S.

"We have a problem of inequality. An awful lot of the gains from economic growth have gone to a small number of people, at least within rich countries. And that's a bad thing, I would say, on multiple fronts; it's a bad thing partly because it means that regular people aren't getting that much, partly because extreme inequality I think distorts our politics, distorts our society - so trying to find ways to mitigate that, to get back to something that's more like a middle class society, that's a big economic challenge. I was born in 1953, right in the middle of the baby boom. I grew up during the great postwar economic expansion, and the America I knew when I was growing up was one that was a middle class society - there weren't big differences; we thought somebody was rich if they had a split-level ranch as opposed to just a ranchhouse like we did. And that all shows in the numbers, that we had this relatively flat distribution of income and the growth after WWII was shared just about equally across the whole economic spectrum. If you're a younger person, you grew up in a very different America. You grew up one in which a small number of people are extremely rich, in which even at the upper fringes of the middle class you feel like you're struggling, you've been left behind. When I was growing up, you didn't think - you wanted to work hard, you wanted to succeed, you didn't worry too much about whether you were going to 'make it' because everybody was 'going to make it,' that's what we thought. Now it's like, for a 20-something, it's like one of those old war movies, where the tough Marine sergeant says, 'Look at the man to your left, to your right, only one of you three is going to make it.' That's what a highly unequal society does - there's a rat-race feel to America now, that wasn't there before, and I think it's a source of great anxiety. And of course, if you lose in that race, bad things happen."

charles S.

If you follow the link to the inequality.org article, you have a graph showing 'top 10 income shares across the world' for 8 different regions (Africa through Europe and US to the middle east. Europe is least unequal, with the top 10% harvesting 35% of income (applause). Does the graph represent pre-tax or taxed income? I'm guessing after tax...