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Haves
vs. Have Nots
Brian
Trumbore
President/Editor, StocksandNews.com
Fed Chairman Bernanke
On
Feb. 6, 2007, Ben Bernanke gave a speech to the Greater
Omaha Chamber of Commerce, Omaha, Nebraska, titled
"The Level and Distribution of Economic Well-Being."
Following are some excerpts from what is an important
address concerning the broad issue of the haves vs.
the have nots; one that promises to be a leading one
during the 2008 political campaign.
---
Chairman
Bernanke:
A
bedrock American principle is the idea that all individuals
should have the opportunity to succeed on the basis
of their own effort, skill, and ingenuity. Equality
of economic opportunity appeals to our sense of fairness,
certainly, but it also strengthens our economy. If
each person is free to develop and apply his or her
talents to the greatest extent possible, then both
the individual and the economy benefit.
Although
we Americans strive to provide equality of economic
opportunity, we do not guarantee equality of economic
outcomes, nor should we. Indeed, without the possibility
of unequal outcomes tied to differences in effort
and skill, the economic incentive for productive behavior
would be eliminated, and our market-based economy
- which encourages productive activity primarily through
the promise of financial reward - would function far
less effectively.
That
said, we also believe that no one should be allowed
to slip too far down the economic ladder, especially
for reasons beyond his or her control. Like equality
of opportunity, this general principle is grounded
in economic practicality as well as our sense of fairness?.
But
this very dynamism sometimes creates painful dislocations,
as when a shift in consumer demand, the advent of
new technology, or new competition leads to the closing
of a factory or causes a worker's skills to become
obsolete. If we did not place limits on the downside
risks to individuals affected by economic change,
the public at large might become less willing to accept
the dynamism that is so essential to economic progress.
Thus,
these three principles seem to be broadly accepted
in our society: that economic opportunity should be
as widely distributed and as equal as possible; that
economic outcomes need not be equal but should be
linked to the contributions each person makes to the
economy; and that people should receive some insurance
against the most adverse economic outcomes, especially
those arising from events largely outside the person's
control.
Trends
in the Level and Distribution of Economic Well-Being
On
average, and by almost any measure, Americans have
gained ground economically over time. For example,
since 1947, the real (that is, inflation adjusted)
hourly compensation of workers in the U.S. nonfarm
business sector (a measure that includes both earnings
and benefits) has increased more than 200 percent.
In other words, the real reward for an hour of work
has more than tripled over the past sixty years. Over
the same period, real disposable income per capita
has increased almost 270 percent, real consumption
per capita has increased almost 280 percent, and real
wealth per capita has risen 310 percent. We have also
seen significant gains in other indicators of living
standards, such as health and educational attainment.
Thus, in absolute terms, the well-being of most Americans
compares quite favorably with that of earlier generations
and, indeed, with the well-being of most people in
the world today.
The
Sources of Changes in the Level and Dispersion of
Economic Well-Being
What
are the underlying sources of these long-tem trends
in wages, incomes, and other measures of economic
well-being? Economists have established that, over
longer periods, increases in average living standards
are closely linked to the growth rate of productively
- the quantity of goods and services that can be produced
per worker or per hour of work. Since 1947, hourly
labor productivity in the U.S. nonfarm business sector
has increased a robust 2 ? percent per year, and productivity
growth has been close to or above that figure in most
of the past ten years. This sustained productivity
growth has resulted in large and broad-based improvements
in the standard of living. When discussing inequality,
we should not lose sight of the fact that the great
majority of Americans today enjoy a level of material
abundance - including the benefits of many technological
advances, from air conditioning to computers to advanced
medical treatments - that earlier generations would
envy.
That
being said, understanding the sources of the long-term
tendency toward greater inequality remains a major
challenge for economists and policymakers. A key observation
is that, over the past few decades, the real wages
of workers with more years of formal education have
increased more quickly than those of workers with
fewer years of formal education. For example, in 1979,
median weekly earnings for workers with a bachelor's
(or higher) degree were 38 percent more than those
of high-school graduates with no college experience;
last year, that differential was 75 percent. Similarly,
over the same period, the gap in median earnings between
those completing high school and those with less than
a high-school education increased from 19 percent
to 42 percent. To a significant extent, to explain
increasing inequality we must explain why the economic
return to education and to the development of skills
more generally has continued to rise?.
Another
challenge for the hypothesis of skill-based technical
change, at least in its basic formulation, is to explain
the especially large wage gains seen at the top of
the distribution. A possible link between technological
change and the substantial increases in the wages
of the best-paid workers is that some advances, such
as those that have swept the communications industry,
may have contributed to the rise of so-called 'superstars'
- a small number of the most-gifted individuals in
each field who are now better able to apply their
talents in what has increasingly become a global marketplace.
For example, two decades ago, the highest-paid player
for the Boston Red Sox baseball team (and in the American
League), Jim Rice, earned (in inflation-adjusted terms)
just over $3 million. In 2004, the highest-paid player
on the Red Sox (and in all of major-league baseball)
was Manny Ramirez, who received $22.5 million for
the season. [Ed. I'd have to go back and research
Alex Rodriguez's contract terms?it being generally
accepted he earns approx. $25 million per over his
current agreement.] The number of fans who can fit
into Fenway Park has not increased much since Jim
Rice's day. But presumably the Red Sox owners believed
that Ramirez's higher salary was justified by the
increases in broadcast and merchandising revenues
he might generate as a result of the confluence of
new distribution channels (such as Internet-based
broadcasts of games) and a larger and wealthier potential
global audience. The earnings potentials of superstar
entertainers, investment bankers, lawyers, and various
other professionals have likewise risen sharply as
technological innovations and globalization have helped
them leverage their talents over a wider sphere?.
Some
Policy Implications
What,
if anything, should policymakers do about the trend
of increasing economic inequality? As I noted at the
beginning of my remarks, answering this question inevitably
involves some difficult value judgments that are beyond
the realm of objective economic analysis-judgments,
for example, about the right tradeoff between allowing
strong market-based incentives and providing social
insurance against economic risks. Such tradeoffs are,
of course, at the heart of decisions about tax and
transfer policies that affect the distribution of
income as well as countless other policy debates?.
As
the larger return to education and skill is likely
the single greatest source of the long-term increase
in inequality, policies that boost our national investment
in education and training can help reduce inequality
while expanding economic opportunity?.
In
assessing the potential of education and training
to moderate inequality, one should keep in mind that
the economically relevant concept of education is
much broader than the traditional course of schooling
from kindergarten through high school and into college.
Indeed, substantial economic benefits may result from
any form of training that helps individuals acquire
economically and socially useful skills, including
not only K-12 education, college, and graduate work
but also on-the- job training, coursework at community
colleges and vocational schools, extension courses,
online education, and training in financial literacy.
The market incentives for individuals to invest in
their own skills are strong, and the expanding array
of educational offerings available today allows such
investment to be as occupationally focused as desired
and to take place at any point in an individual's
life.
Although
education and the acquisition of skills is a lifelong
process, starting early in life is crucial. Recent
research?has documented the high returns that early
childhood programs can pay in terms of subsequent
educational attainment and in lower rates of social
problems, such as teenage pregnancy and welfare dependency.
The most successful early childhood programs appear
to be those that cultivate both cognitive and noncognitive
skills and that engage families in stimulating learning
at home.
To
return to the themes I raised at the beginning, the
challenge for policy is not to eliminate inequality
per se but rather to spread economic opportunity as
widely as possible. Policies that focus on education,
job training, and skills and that facilitate job search
and job mobility seem to me to be a promising means
for moving toward that goal. By increasing opportunity
and capability, we help individuals and families while
strengthening the nation's economy as well.
Source:
Federalreserve.gov
*Moral
to the story? STAY IN SCHOOL!!!!
---
Wall
Street History will return next week.
Brian
Trumbore
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