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Brooks Wilson's Economics Blog: Murphy on Inequality and Economic Growth

Tuesday, June 30, 2009

Murphy on Inequality and Economic Growth

(HT Mankiw). Kevin Murphy of the University of Chicago was interviewed by Douglas Clement, the editor of The Region, which is published by the Federal Reserve Bank of Minneapolis. The interview is divided into about ten sections. I will probably post on several. Clement first describes Murphy's qualifications.

Murphy is one of the world's finest economists. In 1997, he received the John Bates Clark medal, awarded to the most promising economist under the age of 40. A year later he was elected to the American Academy of Arts & Sciences, rare for an economist so young.

In 2005, the MacArthur Foundation gave Murphy one of its so-called genius grants in recognition of his research on "seemingly intractable economic questions, placing them on a sound empirical and theoretical footing." And in 2007, he won the prestigious Kenneth J. Arrow award for work on the economic value of health and longevity. "He's brilliant, very brilliant, and I don't use that term often," said Nobel laureate Gary Becker in 2006. "He is at the top ranks in economics."

The first topic is inequality and economic growth. As many have noted, inequality has grown over the last thirty years. Murphy explains that the return on education has increase, resulting in increased inequality.

First, you have to think about the growth of inequality and where it’s come from, and probably the easiest place to start is education and the return that people get on their education. Over the decade of the 1980s and continuing though the 1990s, we saw growth in the premium for going to college. This can be seen best by comparing the average amount earned by college graduates to the average amount earned by high school graduates. In the late 1970s, the ratio of the two averages was about 1.35, saying that college graduates earned on average about 35 percent more than high school graduates.

By the time we get to the late 1990s, that number is more like 1.7, meaning that by the late 1990s, the average college graduate earned 70 percent more than the average high school graduate. Thus, between the late ’70s and the late ’90s, the return to going to college roughly doubled. If you look at the return to going to graduate school compared to stopping after high school, that gap increased even more.

On the one hand, you could say, well, that means there’s more inequality. College graduates used to earn more than high school graduates. Now the gap is even bigger than before. That’s sort of the downside, and I think that’s one of the first reactions people have.

Of course, the other side of the equation is that the return to going to college—that is, the return on your investment, if you invest the time, money and effort to go to college—is higher today than it’s probably been in half a century. That’s a good thing. When we say we have a higher return on investment, whether you earn more on your stock market investment or on your college investment, we think that that’s a good thing. It means there’s greater opportunity out there for individuals and society as a whole to increase our incomes by increasing our investment in people, by investing more in their education.
Many people believe that increasing inequality within society is bad and that the "rich" should be taxed at a higher rate to pay for government services to be given to the "poor."  I put rich and poor in quotation marks because few ever define where poor ends and rich begins.  Knowing that much of the increase in inequality is a result of a better return to education, do you believe that the economic system is flawed, or that the better educated (the rich) should be taxed at a higher rate to pay for services for the uneducated (the poor)?


  1. Based on the fact that the wealth inequality is mainly determined by a person’s educational level, I do believe that our current system of taxing the wealthy at a higher rate to support the poor is flawed. In our society today, the opportunity is available for most people to obtain a higher education level. There are all kinds of grants and loans available for individuals wanting to attend college. Also, many communities have junior colleges where a student can take the basic classes at a cheaper tuition rate. Many of these classes are offered at night so that the student can also work to earn money for expenses. While some people definitely need government assistance to survive (such as the handicapped), many others rely on government assistance rather than putting forth the effort to increase their education level and to obtain a self-supporting job. Why should the rich pay extra taxes to support people who are capable of supporting themselves? Also, some inequality always has to exist as society could not function without the jobs performed by the ‘lower class’. In America, we pride ourselves as being a land of opportunity. As long people have the opportunity to better themselves and improve their livelihood, then ‘rich’ people shouldn’t have to pay for their choices that led them to their current lifestyle.

    On a related thought, if the tax rate continues to increase on the educated, there will be less incentive to attain higher education. Also, there is more of an incentive to work fewer hours to drop themselves to a lower tax bracket, thereby increasing their net wage/hour. An acquaintance of mine is a relatively new pharmacist and is still overcoming the shock of how much she pays in taxes. She calculated that she could work 10 fewer hours a week and only lose $5,000 a year because she would be bumped to a lower tax bracket. Needless to say, this is tempting for her.

    Student - Candis Massingill

  2. It almost seems as though the people who are choosing to become more educated are being punished for doing so. In most cases, the higher level of education that you receive, the higher your income. When one states that the "rich" are going to be highly taxed due to the fact that they make a fair amount of money, it is like saying you have to pay because you worked hard. It is a blasphemous idea, and supports the lazy people who don't wish to go through the extra school to become successful.

    Student- James Hodges

  3. Cameron Blenden6/7/09 12:03 AM

    I agree that the idea of taxing rich people more money is definately an outrage because they worked hard breaking their own back through sweat and pain to earn their money just to see it get taxed alot more for working hard than the poor. I agree that people should attend more highher education and not be punised for many years of education and hard work. I know there is certn circumstances where a family would be greatly poor but most of th time its their fault they are poor so the rich hard working class shouldn't be txed a greater amount to cover for the poor.

  4. I disagree with the idea of "richer" people being taxed higher to help pay for services for the "poorer" people. The u.S. is the land of equal opportunities and I fully believe that everyone is cabable of overcoming social obstacles in order to pursue any level of education. Financial aid, scholarships, and many other opportunities make it possible for someone with a lower income to still acheive higher education and be just as successful as someone that comes from a wealthier society. Given equal opportunities, I agree that the income received should be based on the level of education and experience in that area.

    Student - Preethi Rajaratnam

  5. Derreck Maxey6/7/09 2:41 PM

    In my opinion, I believe the American tax system is flawed. In America, everyone is focused on equality- racial equality, gender equality, etc. If we are so focused on equality in these other matters, I believe the tax system should be equal as well. Some of the poorest families in the United States only have to pay 5.5% of their income in taxes compared to the 26.3% that some of the more wealthy taxpayers do. I think the regressive system of taxation is flawed. I believe that if we are focusing on equality, we should switch to more of a proportional income tax where everyone pays the same percentage.

    Student - Derreck Maxey

  6. I do not believe the rich should be taxed at a higher rate to pay for services of the poor. In the United States everyone has equal opportunity and there are options for the poor to obtain a higher education. When it comes to education, I believe everyone should put forth effort to reach their educational goals and use the resources available to them. The rich should not be "punished" just because they make more money. Everyone has an opportunity for higher education which should enable all to achieve their educational goals.