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Two Completely Different Ways to Deal With the Upward-Mobility Crisis Two Completely Different Ways to Deal With the Upward-Mobility Crisis

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Two Completely Different Ways to Deal With the Upward-Mobility Crisis

Top economists from the Clinton and Bush administrations debate how to revive the economy to keep people from getting stuck.

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Alan Blinder, left: “Little of that growth has trickled down.” Glenn Hubbard: “A more growth-oriented tax system.”(Joshua Roberts, left, and Scott Eells/Bloomberg via Getty Images)

The upheavals in the American economy over the past decade (and beyond) have challenged workers, business owners, and government officials. Even economists have struggled to reach consensus about the causes, much less the cures, of the difficulties facing American families. These debates continue unabated.

To help navigate these disputes, we recently interviewed two of the nation’s most admired economic analysts. Each is mostly identified with one political party but is widely respected in the other. Glenn Hubbard is dean of the Columbia Business School, a former chairman of President George W. Bush’s Council of Economic Advisers, and a top economic adviser to Mitt Romney in 2012. Alan S. Blinder, a professor of economics and public affairs at Princeton University, served during the Clinton presidency as a member of the Council of Economic Advisers and then as vice chairman of the Federal Reserve Board. Blinder is author of the recently published book After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. Hubbard is coauthor of Balance: The Economics of Great Powers From Ancient Rome to Modern America, due out in June.

 

We spoke with each man separately, asking identical questions to produce this virtual conversation. Their responses (which have been edited for space) show substantial convergence on the problems facing average Americans but continuing divergence on how best to respond.

NJ The median income of middle-class families doubled from 1947 to 1973. But today, in real terms, it’s only 5 percent higher than it was in 1973—and lower than it was in 2000. What’s the principal reason the median income has been growing so much more slowly than it did in the first decades after World War II?

BLINDER Two reasons. The minor one, which is the good-news part of this answer, is that you shouldn’t use 1947 to 1973 as a norm. That was in some sense the golden age for median-income growth, for productivity growth, for a lot of things. A fair amount of the success was catch-up of suppressed desires from World War II and so on. That said, the recent performance is not very good, and the part of it that I want to emphasize—this sounds slightly technical, but it’s not—is the difference between the performance at the mean and at the median—the average American versus the American in the middle. At first blush, those two sound the same. But they’re not, because the income distribution is very skewed; there’s a lot more income near the top than there is at the bottom. So the median family or person always has a lower income than the average. After all, Bill Gates and Warren Buffet count in the average. But the big story of the last 30-plus years now is that growth at the mean, the average, has been pulled up by how well people near the top are doing. But little of that growth has trickled down to people in the middle—the median.

 

HUBBARD I think it’s a couple of factors. First, there are general macro factors like technological advance and globalization that have suppressed some income growth that middle-income workers experienced when the U.S. had a lot of monopoly power in the global economy. Another factor is health care costs. If health care costs are rising very rapidly, that really comes out of earnings. Indeed, from a policy perspective, one of the best things you can do to improve consumable earnings of every American would be to bring down the rate of growth of health care costs.

NJ We know from many studies that income is growing much faster for fam­ilies at the top of the income distribution than for those in the middle or the bottom. Has this widening divergence contributed to the slowdown in economic progress for people in the middle?

HUBBARD What to do about rising income inequality depends on why you think the inequality is there. My own reading of the economic research is, the principal drivers have to do with technological change and globalization. So that individuals at the top, with the most marketable skills, [are seeing] their market incomes rise. That’s not necessarily a story that is hurting middle-income people.

That’s not to say inequality isn’t a problem, but it’s not a problem so much of one group against another. Therefore, what we’d need to do is focus on policies that would really help middle-income earnings grow. Taxing people who do well and redistributing the proceeds is less desirable than a policy that would improve the labor prospects of people in the middle.

 

BLINDER [These diverging incomes] are connected in a mathematical way, and I think the mechanisms are probably connected as well. The mathematical way is the main reason for the widening out of the income distribution: The rich have been pulling away from everybody else.

Why? Although the answers we have are not complete, for many years economists basically pointed to one thing, which is—in the jargon—skill-biased technological progress. That means the technology of production has been requiring more and more “skill,” which we usually measure by education. So the people higher up in the educational/skill hierarchy have been adapting better to, and doing better in, the new economy. And the people that don’t have those skills are doing less well relative to the others. That’s clear, and it’s understandable.

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