0: Jacob: Welcome to Crash Course Economics, I'm Jacob Clifford...

2: Adriene: ...and I'm Adriene Hill. The world is full of inequality. There's racial inequality,

7: gender inequality, health, education, political inequality, and of course, economic inequality.

14: Some people are rich, and some people are poor, and it can seem pretty impossible to fix.

18: Jacob: Well, maybe not.

20: [Theme Music]

28: Jacob: So there are two main types of economic inequality: wealth inequality and income inequality.

34: Wealth is accumulated assets, minus liabilities so it's the value of stuff like savings, pensions,

39: real estate, and stocks. When we talk about wealth inequality, we're basically talking

43: about how assets are distributed. Income is the new earnings that are constantly being

47: added to that pile of wealth. So when we talk about income inequality, we're talking about

51: how that new stuff is getting distributed. Point is, they're not the same. Let's go to the Thought Bubble.

55: Adriene: Let's look at both types of inequality at the global level. Global wealth today is

60: estimated at about 260 trillion dollars, and is not distributed equally. One study shows

66: that North America and Europe, while they have less than 20% of the world's population,

71: have 67% of the world's wealth. China, which has more people than North America and Europe

77: combined, has only about 8% of the wealth. India and Africa together make up almost 30%

83: of the population, but only share about 2% of the world's wealth. We're teaching economics,

89: so we can focus on income inequality. These ten people represent everyone on the planet,

94: and they're lined up according to income. Poorest over here and richest over here. This

98: group represents the poorest 20%, this is the second poorest 20%, the middle 20%, and

104: so on. If we distributed a hundred dollars based on current income trends, this group

110: would get about 83 of those dollars, the next richest would get 10 dollars, the middle gets

115: four, the second poorest group would get two dollars and the poorest 20% of humans would get one dollar.

121: Branko Milanovic, an economist that specializes in inequality, explained all this by describing

127: an "economic big bang" - "At first, countries' incomes were all bunched together, but with

132: the Industrial Revolution the differences exploded. It pushed some countries forward

137: onto the path to higher incomes while others stayed where they had been for millennia."

142: According to Milanovic, in 1820, the richest countries in the world - Great Britain and

147: the Netherlands - were only three times richer than the poorest, like India and China. Today,

153: the gap between the richest and poorest nations is like 100:1. The gaps are getting bigger and bigger.

159: Thanks, Thought Bubble. The Industrial Revolution created a lot of inequality between countries but today

166: globalization and international trade are accelerating it. Most economists agree that globalization has

172: helped the world's poorest people, but it's also helped the rich a lot more. Harvard economist

178: Richard Freeman noted, "The triumph of globalization and market capitalism has improved living

184: standards for billions while concentrating billions among the few." So, it's kind of

190: a mixed bag. The very poor are doing a little better, but the very rich are now a lot richer than everybody else.

197: There are other reasons inequality is growing. Economists point to something called "skill-biased

201: technological change." The jobs created in modernized economies are more technology-based,

207: generally requiring new skills. Workers that have the education and skills to do those

211: jobs thrive, while others are left behind. So, in a way, technology's become a complement

216: for skilled workers but a replacement for many unskilled workers. The end result is

221: an ever widening gap between not just the poor and the rich, but also the poor and the

226: working class. As economies develop and as manufacturing jobs move overseas, low skill

231: low pay and high skill high pay work are the only jobs left. People with few skills fall

237: behind in terms of income. In the last thirty years in the US, the number of college-educated

243: people living in poverty has doubled from 3% to 6%, which is bad! And then consider

249: that during the same period of time, the number of people living in poverty with a high school

254: degree has risen from 6% to a whopping 22%. Over the last fifty years, the salary of college

261: graduates has continued to grow while, after adjusting for inflation, high school graduates'

266: incomes have actually dropped. It's a good reason to stay in school!

270: There are other reasons the income gap is widening. The reduced influence of unions,

275: tax policies that favor the wealthy, and the fact that somehow it's okay for CEOs to make

279: salaries many, many times greater than those of their employees. Also, race and gender

285: and other forms of inequality can exacerbate income equality.

288: Jacob: Let's dive into the data for the United States. We'll start by mentioning Max Lorenz,

292: who created a graph to show income inequality. Along the bottom we have the percent of households

297: from 0-100% and along the side we have the percent share of income. By the way, we're

301: using households rather than just looking at individuals because many households have

305: two income earners. So this straight line right here represents perfect income equality.

310: So every household earns the same income. And while perfect income equality might look

314: nice on the surface, it's not really the goal. When different jobs have different incomes,

319: people have incentive to become a doctor or an entrepreneur or a YouTube star - you know,

323: the jobs society really values. So this graph, called the Lorenz curve, helps visualize the depth of inequality.

328: Now, for 2010, the US Census Bureau found that the poorest 20% of Americans made 3.3%

334: of the income. And the richest 20% made over 50% of the income. So that's pretty unequal

339: but has it always been like this? Well, in 1970, the bottom group earned 4.1% of the

343: income and the top earned 43.3%. By 1990, things were even less equal so the 2010 numbers

349: are just a continuation of the trend. And it isn't just the poorest group that's losing

353: ground. Over those 40 years, each of the bottom groups or 80% households earned smaller and

358: smaller shares of the total income.

360: Now, from the Lorenz curve we can calculate the most commonly used measure of income equality

364: - the GINI Index. Now without jumping into too much of the math, it's basically the size

369: of the gap between the equal distribution of income and the actual distribution. Now,

372: 0 represents complete equality and 100 represents complete inequality. Now, you might be surprised

377: to learn the US doesn't have the highest income inequality, but it does have the highest among

382: Western industrialized nations. The UK has the highest in the EU.

385: Adriene: The debate over income equality isn't about whether it exists. It obviously does.

390: The fight is over whether it's a problem and what should be done about it. Let's start

394: with those who don't think it's a big deal. They tell you that the data suggests that

398: the rich are getting richer and the poor are getting poorer, but that might not be the

401: case. Instead, it could be that all the groups are making more money but the rich's share

406: is just growing faster. Like, let's say you own an apple tree and we pick 10 apples. You

410: keep 6 and give me 4. A week later we pick 20 apples, you take 15 and give me 5. So my

417: share of the total went down from 40% to 25% but each of us still got more apples. So it's

425: true that people in the lowest income bracket have earned a little more money in the last 40 years, but in

430: the last 20 years, that average income has been falling. Meanwhile, the rich have continually gotten richer.

438: So, what's the richest guy on earth have to say about it? Bill Gates said, "Yes, some

443: level of inequality is built in to capitalism. It's inherent to the system. The question

448: is, what level of inequality is acceptable? And when does inequality start doing more

454: harm than good?" There's a growing group of economists who believe income inequality in

459: the US today is doing more harm. They argue that greater income inequality is associated

465: with a lot of problems. They point to studies that show countries with more inequality have

469: more violence, drug abuse and incarcerations. Income inequality also dilutes political equality,

476: since the rich have a disproportionate say in what policies move forward, and the rich

481: have an incentive to promote policies that benefit the rich.

484: So, how do we address this inequality? There's not a lot of agreement on this. Some argue

488: that education is the key to reducing the gap. Basically, workers with more and better

493: education tend to have the skills that earn higher income. Some economists push for an

498: increased minimum wage, which we're going to talk about in another episode. There's

501: even an argument that access to affordable, high quality childcare would go a long way.

507: And some think governments should do more to provide a social safety net, focus on getting

511: more people to work and adjust the tax code to redistribute income.

515: Jacob: Some economists call for the government to increase income taxes and capital gains

519: taxes on the rich. Income taxes in the US are already somewhat progressive, which means

524: that there are tax brackets that require the rich to pay a higher percent of income. Right

528: now, it peaks at around 40% but some economists call for increases up to 50 or 60%. One idea

534: is to fix loopholes that the rich use to avoid paying taxes. Other economists argue that taxing

539: the rich won't be as effective as reducing regulation and bureaucratic red tape. It's unclear which path

544: we're going to take but extreme income inequality at the national and global level needs to be addressed.

549: Motivation to improve income inequality may come from a genuine desire to help people and level the

555: playing field, or the fear of Hunger Games-style social upheaval. But either way, the issue can't be ignored.

561: Adriene: Even Adam Smith, the most classical of classical economists, said, "No society

567: can surely be flourishing and happy of which the far greater part of the members are poor

573: and miserable." Thanks for watching, we'll see you next week.

577: Jacob: Thanks for watching Crash Course Economics. It was made with the help of all of these

580: nice people. You can help keep Crash Course free for everyone forever by supporting the

585: show at Patreon. Patreon is a voluntary subscription service where you can support the show with

590: monthly contributions. We'd like to thank our High Chancellor of Learning, Dr. Brett

593: Henderson and our Headmaster of Learning, Linnea Boyev, and Crash Course Vice Principal

599: Cathy and Kim Philip. Thanks for watching, DFTBA.