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At Dartmouth, Economists Spar Over Remedies to Increasing Economic Inequality in U.S.

  • Jared Bernstein, Vice President Joe Biden's Economic Policy Adviser, speaks during the daily briefing, Monday, June 8, 2009, at the White House in Washington. (AP Photo/Haraz N. Ghanbari)

    Jared Bernstein, Vice President Joe Biden's Economic Policy Adviser, speaks during the daily briefing, Monday, June 8, 2009, at the White House in Washington. (AP Photo/Haraz N. Ghanbari)

  • Harvard University professor of economics Greg Mankiw is a former economist in the George W. Bush White House. (Courtesy Harvard University)

    Harvard University professor of economics Greg Mankiw is a former economist in the George W. Bush White House. (Courtesy Harvard University)

  • Jared Bernstein, Vice President Joe Biden's Economic Policy Adviser, speaks during the daily briefing, Monday, June 8, 2009, at the White House in Washington. (AP Photo/Haraz N. Ghanbari)
  • Harvard University professor of economics Greg Mankiw is a former economist in the George W. Bush White House. (Courtesy Harvard University)

Hanover— Two prominent economists on either side of the political divide squared off Monday in a cordial Dartmouth College debate over an issue that President Obama has called “the defining challenge of our time” — income inequality. That is, the growing gulf between America’s wealthiest five percent and everyone else.

Contesting the issue before a mostly student audience of about 200 in the campus’ Filene Auditorium were Gregory Mankiw, Harvard economics professor and former chairman of the Council of Economic Advisers under President George W. Bush, and Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former chief economic adviser to Vice-President Joe Biden.

Both are prolific writers and authors of popular Internet blogs, mainly about economics and public policy but also spiced with eclectic offerings such as a commentary about Pharrell Williams’ big hit song “Happy” (Bernstein) or Mankiw’s best friend, Tobin, a border terrier named after the famous economist James Tobin, now deceased.

Both speakers generally agreed on the nature of the problem but diverged on what to do about it.

Starting off, Mankiw cited several “facts about income inequality. It is very high now by historical standards. It was low in the 1970s but is now back to where we were in the early part of the 20th century,” he said.

This is consistent with the analysis of a best-selling new book, Capital in the Twenty-First Century, by French economist, Thomas Piketty. The tome has hit the best seller lists of both the New York Times and Amazon-e-books. It was cited several times during Monday’s debate.

Mankiw gave several hypotheses that he believes are the “primary drivers of the inequality. One is that the historical race between technology and education is now being won by technology. That means that the demand for skilled labor is increasing, not so much for lower paid unskilled,” he explained.

Other causes include globalization and trade — imports from China produced by lower paid unskilled laborers; immigration patterns that tend to bring unskilled workers to the United States, thus impacting demand for indigenous workers; “superstars in movies and sports ... and super-managers earning multi-millions and more (than the average worker)” and “what I call the Dartmouth effect ... elite education institutions of very smart people that foster assortative mating with the partners going on to earn two high incomes. Forty years ago it was very different, one income-earner in the family.”

Bernstein, while agreeing with Mankiw’s causes of the inequality, focused on the problems he said it creates.

“First is fairness,” he explained. “You have a very significant problem when a small percentage see their income increase dramatically and most other people are falling behind or treading water. The basic social compact is broken.”

Bernstein also contended that growing income inequality is “effectively blocking opportunity for advancement for most people, blocking mobility and is a threat to representative democracy. It also creates macro-instability with the shampoo effect — bubble, burst, retreat.”

When the discussion turned to possible solutions, differences emerged, particularly on the minimum wage and federal tax options.

Mankiw said he favored a “progressive consumption tax ... and a value added tax as in several European countries,” which he contended would begin to push back on the inequality.

Bernstein countered that “every economist wants to do that (progressive consumption tax) but it ain’t going to happen. Before that we need to fix the broken tax system, close the loopholes.” He said he favored a “financial transactions tax ... a small step, but it could generate about $350 billion in revenue over 10 years.”

Berstein said he supports an increase in the minimum wage, as recommended by the Obama administration, from the existing $7.25 an hour to $10.10 over three years. He cited a recent report by the Congressional Budget Office stating that while such an increase might result in the loss of 500,000 jobs it would increase incomes for about 24 million people.

Mankiw said he would eliminate the minimum wage and instead go for an expansion of the existing earned income tax credit.

Debate moderator Charles Wheelan, senior economics lecturer and Rockefeller Center policy fellow, asked the speakers about “the role of political leadership in all of this.”

Mankiw said “the American people get the government they want. We need to convince the people (about the seriousness of the problem and possible solutions). They need to realize that political leaders are really followers. We need more public discussions like this, more newspaper op-ed pieces, the internet and social media.”

Bernstein’s reply: “Greg just nailed it.”

The debate was sponsored by the Dartmouth Rockefeller Center and the college’s new multi-disciplinary Political Economy project.