Wall Street History

---

Wall Street History

02/23/2007

Haves vs. Have Nots

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

---