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Q&A: CEA Chair Alan Krueger on inequality

By Ezra Klein,

On Friday morning, Alan Krueger, the Princeton economist who is on leave serving as chairman of the White House Council of Economic Advisers, gave a speech at the Center for American Progress on the causes and consequences of inequality. Excerpts here, full speech here. On Thursday night, I spoke with Krueger about the speech, his past as an inequality skeptic, and Rep. Paul Ryan’s allegation that the Obama administration is looking for “equality of outcomes.” A lightly edited transcript follows.

Andrew Harrer

BLOOMBERG

Alan Krueger leads the White House Council of Economic Advisers.

Ezra Klein: I read the speech as an effort to make the case for why we should care about inequality. The problem, it seemed you were saying, was not the widening gap between the rich and the poor but consequences of that gap, which are beginning to hurt the economy.

Alan Krueger: That’s absolutely right. We’ve gotten to the point that the disparities are so great that they’re limiting opportunities for children from disadvantaged families. That’s not good for the economy. There’s work I cited that economies are more stable when there’s more equal distribution of income. There’s a connection between the sluggish, even stagnant income growth we’ve seen for the middle and excess leverage. And, finally, there’s the microeconomic evidence that wage disparities can reduce morale and productivity. All of it points in the direction that we’re all losing as a result of the extreme inequality that’s developed in recent years.

EK: You mention in your speech that you used to object to the term “inequality,” which was too loaded. You preferred “wage dispersion.” But now you think “inequality” is the right descriptor. Why?

AK: I try to make a distinction between what my personal values are and being a more remote economic analyst. I think we reached a tipping point where the trend became so extreme that it was jeopardizing the size of the pie for all Americans. I once wrote a piece called “Inequality:Too Much of a Good Thing?” The idea was we, of course, need disparities and rewards, but we’ve gotten to a point where it’s counterproductive for the country as a whole.

EK: The Republican take on the administration increasing focus on inequality is that you’re focused on the wrong kind of inequality. As Paul Ryan, for instance, says, the question is “whether we are a nation that still believes in equality of opportunity” -- that’s the Republicans, in his view -- “or whether we are moving away from that, and towards an insistence on equality of outcome.” Your response?

AK: A theme I try to develop in my speech is that the rapid and extreme increase we’ve seen in inequality in the U.S. is resulting in inequality of opportunities. The part of my speech that I would hope people would take notice of is what I call the Great Gatsby curve, the relationship between inequality and economic mobility. Countries that have a high degree of inequality in, say, the parent’s generation, tend to have more stagnant societies when it comes to upward mobility for children from low-income families.

EK: During your speech, you repeatedly note that the economy accelerated under the Clinton-era tax rates. But the White House doesn’t favor restoring them for anyone save those in the top two percent. There seems to be a bit of a disconnect there.

AK: The president has promised not to raise taxes for people making less than $250,000, and he’s adhered to that. The situation for the middle class has gotten to be so severe that I think it makes a lot of sense to avoid raising taxes on the middle class. The reason why I pointed to the performance of the ’90s is to show that a return to taxes that will be lower than they were in the ’90s should not be expected to stymie the economy. The evidence suggests the ’90s were much better years than when we went through the experiment of the tax cuts in the 2000s.

EK: When I last looked hard at the inequality data, I became convinced that there were two possible separate trends here: One was the stagnation of median incomes in the ’70s, and the other was the acceleration of incomes for the top one percent or so in the mid-’80s. Do you see these as separate?

AK: There are lots and lots of crosscurrents, I think. What we should be looking for are a set of policies that lead to more widely shared economic growth, and achieving that will have a spillover effect to all segments of society. Take technological change. Technological change has raised income for some groups, and for others it has reduced demand for their skills because their work has been automated. Having more training services for workers so their skills are a better match for what employers are demanding is a solution that cuts across a lot of these groups and explanations.

EK: The factors you identify as contributing to inequality -- technological change, globalization, etc -- seem massive, almost world-historic. Comparatively, the policies you identify as possibly providing a response seem a little thin. Health-care reform and a more progressive tax code will certainly help alleviate inequality, but are they really enough?

AK: Let me explain the process in the speech. My main focus was trying to emphasize the consequences of the changes taking place. But I needed to be careful with the State of the Union coming up not to get too far out ahead in terms of policy.

But I do think one should make the connection between continuing the recovery and reducing inequality. I think the evidence is quite strong that those struggling to make it into the middle class are most harmed by the slump. In terms of future policies, it wouldn’t be appropriate to go into too much detail at this time, but it’s worth emphasizing that we do know what can make things worse. We had this experiment from the 2000s that didn’t help the middle class, did widen inequality, and there’s no evidence that it helped the economy at all.

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