Oct 22, 2014, 6:04 PM ETFireside Chat, Panel

Milken Institute Review Live: Jason Furman

Median income for the bottom 90% rose strongly in the 1950s–60s but has flattened since the 1970s in the US and later in countries like Ireland.
Productivity growth slowed starting around 1970 in the US and generally declined in Europe over the last 70 years following a post-WWII burst.
A disconnect between productivity growth and bottom 90% income began earlier in the US than in the UK or France, a trend now spreading to other nations.
The US experienced a temporary productivity and income rebound in the 1990s due to the "new economy," followed by a more severe rise in inequality.
The typical household's income would have been $35,000 higher in the current year if 1948–1973 productivity trends had continued, even with current inequality levels.
If slow productivity growth had been shared equally rather than unequally, typical household income would have been $10,000 higher last year.

Inequality stems from three sources: within-labor income (e.g., manager vs. worker), within-capital income, and the shifting share of national income between labor and capital.
For the top 10%, 84% of the inequality increase over the last 40 years is attributed to labor income inequality.
For the top 1%, 68% of the increase is due to labor income, though capital plays a significant role.
For the top 0.1%, the cause is split 50/50 between labor and capital income over the last 40 years.
Capital income has become an increasingly dominant driver of inequality for the top 0.1% in the last 20 years.
Unionization decline contributed significantly to earnings spreads for the bottom 90%, while globalization and technology impacted the top 1%.
The erosion of the minimum wage's purchasing power is a key factor in the stagnation of the bottom 10% earnings.
Executive compensation is a major factor, with 60% of top 1% income growth driven by managers, not just CEOs.

Thomas Piketty argues that since the return on capital ($r$) exceeds economic growth ($g$), inequality will inevitably grow indefinitely over the next 200 years.
The speaker disputes Piketty's long-term forecast, noting that slower workforce growth will reduce overall economic growth ($g$).
As capital accumulates relative to labor, the marginal productivity of capital is expected to fall, potentially lowering the rate of return on capital.
Increased life expectancy leading to higher savings rates also exerts downward pressure on the rate of return to capital.
The "secular stagnation" theory, which posits a structural decline in the rate of return to capital, is presented as an alternative to Piketty's "doomsday" scenario.
The two theories are mutually exclusive; one cannot simultaneously hold that returns will stay high while the economy stagnates due to low returns.

Pre-tax inequality is hard to measure via direct intervention, but post-tax inequality was reduced by specific administration policies.
Tax expansion at the bottom included the Earned Income Tax Credit, child tax credit refundability, and college tax credits, benefiting 25 million households by an average of $1,000 each.
Tax rates at the top increased, restoring top marginal rates to Clinton-era levels and raising capital gains/dividend rates from 15% to 23.8%.
These tax changes reduced the Gini index by 0.5 to 0.6 points, undoing half a decade of pre-tax inequality growth.
The Affordable Care Act is projected to reduce inequality even more significantly, potentially undoing more than a decade of inequality increase.
The President proposed increasing the estate tax rate from 35% to 40%, with a budget proposal aiming for 45%.
A proposed "automatic IRA" program aims to expand savings for the middle class by making retirement accounts default opt-outs.
The administration is reviewing fiduciary rules for the IRA market to address high fees and low returns caused by conflicts of interest.

Historical cross-country data (1998) could not confirm a negative correlation between inequality and growth, but cannot rule out large positive effects.
IMF data from a later period found that higher levels of inequality are actually harmful to economic growth.
Inequality hinders growth by limiting access to quality education, reducing risk-taking due to lack of a safety floor, and undermining social trust required for markets.
Extreme inequality can lead to political instability that undermines the market institutions necessary for economic growth.
Evidence suggests the minimum wage has little to no negative effect on employment, citing studies on reduced turnover and increased productivity.
A Congressional Budget Office analysis found minimum wage hikes would raise 24 million people's wages with negligible job losses, equating to a net gain of $150 billion over a decade.
Early childhood education (preschool) is identified as a high-return investment hampered by capital market failures where families cannot borrow against future earnings.
Carbon pricing with revenue recycling (e.g., cap-and-trade proceeds for low-income weatherization) is proposed as a win-win policy for efficiency and income equality.

While inequality has risen within most individual nations, global inequality has decreased as populations in China and India have moved up.
Trade agreements like the Trans-Pacific Partnership are being designed with strong labor and environmental standards to mitigate inequality in both trading partners.
The decline in US labor force participation is driven 50% by population aging, 1/6th by the business cycle, and the rest by structural trends.
Structural challenges in labor participation disproportionately affect young men, particularly men of color, requiring policies like expanded earned income tax credits.
Policies to increase workforce inclusion include paid leave, workplace flexibility, and programs to reintegrate young men into the workforce.
The speaker rejects the premise that market efficiency and equity are mutually exclusive, arguing for policies that expand opportunity and access to capital for the broader population.
Potential productivity gains are expected from energy and health sectors, avoiding the "dismal" outlook regarding US growth potential.
The "accredited investor" rules restricting small business investment are being addressed via the Jobs Act to balance opportunity with investor protection.