Episode 1

How Does Monetary Policy Impact Income Inequality?

Transcript

Speaker1: Welcome to the Q Talks podcast from Loyola University's Quinlan School of Business. This season, we'll be exploring issues surrounding the impact of wealth inequality, its ramifications for business and any ethical arguments or other anomalies that are a result of the inequality that currently permeates American society. Join us as we unpack important issues present in our country and our world. 

Rick Sindt: Welcome to Q talks. I'm the host, Rick Sindt. And in today's episode, we are going to talk about the impact of monetary policy in our series on wealth inequality. To do this, I'm joined by Tassos Malliaris, who holds both a PhD in economics and mathematics. He is the Walter F Melodie senior professor and chair of the economics department at Quinlan. Tassos, thank you for joining us today. 

Tassos Malliaris: It's my pleasure to be with you and with all the listeners. As a teacher and as a faculty at Loyola, it gives me pleasure to share some of my interests and research with people who might benefit from these ideas. 

Rick Sindt: Thank you for joining us. Overall, we're talking about income and wealth inequality today and in this series, and I think it's a phrase that's used quite often, so much so that maybe a definition is kind of like lost or vague. So I was hoping we could start with you giving us your definition of income inequality and how you explain it to others. 

Tassos Malliaris: Wonderful. I'll be happy to do it. You mentioned two types of inequalities. First of all is the income inequality. And income, of course, refers to how much each of one of us by being employed or working, how much income he or she earns. Income inequality is not as bad or as difficult as wealth inequality, because wealth is how much people have accumulated. And usually, wealth goes a little bit with age because you can imagine a young person who graduates from Loyola, gets a job, is making 60,000, making maybe a little more, a little less, but doesn't really have any wealth. On the other hand, people who may be 60 years old have been working for many, many years and they have accumulated a home and investments. And the amazing thing is that income inequality is not as unequal, so to speak,  as well. Why? Because in the United States, we have approximately 160 million people employed. And on the median income to just the people who make above and the people who make below is around 60,000. Now. If we look at this group of 160 and divide it into Quintiles, 20%, 20%, 20%. The 20% bottom people making an average of 30,000. And then the very wealthy at the very top where you get the Bill Gates and the super-wealthy entrepreneurs that we all care about, Zuckerburg and the rest of them are making huge amounts. So there is a big difference between the bottom people and the very successful people. To the range of 1 to 20. So in the poorest income earners, we get about 35,000. In the very wealthy top 20%, we get approximately 600,000. But when it comes to wealth, you hear those incredible things that the top 1% have about 20 or 30, and so the wealth is much more unequal than income. 

Rick Sindt: And today you wanted to focus on income. So what are some of the causes of the income inequality we're seeing today? 

Tassos Malliaris: This is a wonderful question and it has many, many answers because, for instance, education plays a very important role. So if you look at a person who just has a high school degree and is working, for instance, as a bus driver or as a guard, and then you have people who have a great deal of education, let's say they're lawyers, they're doctors, they're CPAs, computers, scientists, programmers. They make significantly, much more. So education is important. How well the economy does is an important role because we know, for instance, we experience from COVID that something like 30 million people last March lost their jobs. Who were they? People related with hospitals and restaurants and the airlines. And there are jobs that are vulnerable, more vulnerable than other jobs. Globalization plays an important role. And we've been hearing for many, many years that all the furniture and light manufacturing businesses and leather and shoemaking and clothing businesses went to China so globalization is important. The level of technology is important because a great deal of technology displaces workers. And for instance, we heard recently that Amazon is hiring 100,000 workers to drive trucks and deliver. What if all those trucks become automated and you need no driver? So the situation in terms of inequality, income inequality is really complex. And it is affected by many, many factors. But when we discuss it, particularly in terms of what the future would be like, rather than the people who currently are more or less constrained by all those conditions. What really matters is providing to young men and women equal opportunity so that they all receive a good education and good training and prepare themselves for good positions in the future. 

Rick Sindt: Recent Gallup polls show that Americans largely are concerned with income inequality in the United States. Why do you think this is coming to the forefront now? 

Tassos Malliaris: Well, any time you have an economic crisis, any time that you have a recession, or any time that you have trade wars with other countries, all of these create conditions that bring labor job difficulties. And the people in, for instance, suppose that I'm a hard-working pilot was flying the airplanes and doing very, very well. All of a sudden the situation happens that there is no demand for travel. I'm a Steward, I'm in the hotel business. When a crisis occurs and people lose their jobs and they lose their income, they are very, very vulnerable. And immediately they say, why, what? What is the country going to do for me? I did my very best. I had a good job. And I lost my income. What do we do? So politically, for the past couple of years. This issue of unemployment has been very, very central. First of all, during the presidential debates, because both parties tried to address it, because they were talking to voters. And let me hear make an obvious remark politically, we are all equal. My vote is equal to the vote of Bill Gates. However, my income is not equal to his income. So people politically somehow feel empowered that we are equal to one another. But when it comes to our income, there is a vast discrepancy. So during political years, during years of economic crisis and recessions, the issue of income inequality becomes very, very central and Gallup is essentially recording that approximately 70% of the Americans are not happy, they're upset, they are concerned about income inequality. And the consequence of that is that if you have a country where people do not trust the system and they do not trust their fellow citizens to support them, to help them like the crisis that we're experiencing right now, we had something like 30 million unemployed, became unemployed very, very quickly, and suddenly these people ask and say, what are my fellow Americans trying to do it? I'm unemployed not because I do not like the work. I, I had a good job. I worked hard. I was doing all of those things. I lost it. But what can you do? So the issue of social trust becomes very, very important. And particularly for us as a Jesuit school, we are constantly reminded that a nation to do well and to prosper needs values, and social justice is an important value. What do we mean by social justice? That everyone feels that he or she is an important, valuable member of society and we support one another. Trust is important and trust is the result of the social values that come from the cohesiveness of the society, play an important role. 

Rick Sindt: You talked a little bit ago about how your vote has the same voting power as someone like Bill Gates or Mark Zuckerberg or Jeff Bezos. But I believe there is an argument some would make that says that because of things that have happened like Citizens United. Their political power is far greater than yours, and they're able to have more influence on the political atmosphere. So I wonder if you would share your thoughts on that. Perhaps our voting power is equal, but maybe our political power is not because of the discrepancy in our wealth or income. 

Tassos Malliaris: Well, no, you're absolutely right. And I'm not naive to believe that people who have politically and theoretically one vote, simply remain quiet and just exercise that one vote. People usually try to influence what is going on and they do it in a variety of ways. So we come back then to the issue that even if theoretically. We all have one vote, income inequality comes back indirectly to influence and instead of having the theory and the ideal of all being equal, go from politics into economics, we have economics again reversing and influencing the political situation. So if we then recognize that there is a great deal of interference between economics and politics and, of course, ideologies and beliefs. And, of course, we have people communicate ideas and philosophies and trying to influence one another. If we try at all levels of society to keep some balance. This would be an ideal society because if the range of discrepancies or inequalities is very, very moderate, then the society can function very, very well. With all the challenges that we have in the United States, we are not really a country of extremes because when it comes to income inequality, for instance, South Africa is significantly worse. The worst one of the worst countries in the world. Why? Because of the concentration of incomes, because you have a very large number of people who are not very well educated and they're not entrepreneurial and they're not participating in important jobs. So their income inequality is much bigger than we are. So we do not want to ignore the fact that income inequality could also interfere with politics. And it does. 

Rick Sindt: So far, we've talked a lot about how the pandemic we're going through right now has caused more inequality or exacerbated things that existed in the past, and I'm wondering if you could shed a little more light on the pre-existing causes of income inequality. Yes, right now, the hospitality worker may not be able to work because of the pandemic, and that's causing them to lose money and assets. But also before the pandemic, when they were able to work, they were they weren't raking in a lot of money, and that can cause problems of its own. So what are some other contributing factors you see? 

Tassos Malliaris: What I'm excited about and I would like to share is that the inequality, obviously, today is not as severe as it was, let's say. 50 to 100 years ago, because remember that we started collecting income data and GDP and all this wonderful stuff that we teach in economics after the Great Depression. Before that, we knew very, very little and at that time, probably 70, 80% of the people were farmers. It's amazing how well the society has done and agriculture has done because now with 3% of the people employed as farmers, we have enough food for the rest of us. So over time, a society should be progressing and providing better opportunities to its labor force, and to achieve that, you need more or less. Several factors to be working all together. You need progress in the United States, and also progress in the rest of the world so that we can trade with one another and do what we do best. We need progress in terms of science so that if I'm a professor and instead of having a small class of 20 in a nice environment, I can teach a little more people, there is a limit, I don't want to go to a million. Although with Zoom this may also be an opportunity for higher productivity. 

Tassos Malliaris: So as a result of the difficulties that we had with COVID, I'm very excited that the Federal Reserve sometime last August, August 2020, has made a very critical big switch change, a change in terms of its policies, because for the past 20, 30 years, the emphasis has been on inflation to make sure that the society has low inflation so that we do not create confusion in terms of businesses and consumption and investments. In view of the fact that this goal has been sustained, substantially successful. And in view of the fact that the pandemic created high unemployment, remember before the pandemic, unemployment had reached as low as 3.5%. So people had jobs. Yes, some jobs paid much more than others. But when the economy is doing well, there is always hope that the minimum wage would keep growing and obviously, it grew from four or $5.15, 20 years ago to close to ten, 12, 14 now or 15. So you want economic growth to continue. And the Federal Reserve then indicated that its emphasis is now going to be quite substantially on issues of unemployment. And in view of the fact that I mean, currently, we are at the level where unemployment has not returned back to close to 4%. The Federal Reserve is making a pledge that for the next couple of years, interest rates will remain very, very close to zero to support the return and the rapid return of the economy to full employment. And this is a new initiative in terms of income inequality. The Federal Reserve, in the past, was indirectly pursuing growth and good incomes but now it has become an explicit goal. And particularly with Yellen at the Treasury of the new administration and the Federal Reserve, I see here two very powerful economic institutions, the Treasury and the Federal Reserve both coordinating their effort to generate jobs and to promote income equality or income growth. So we said a lot, we talked about the problem in general, and we underscore that it is a challenging problem because it has many, many causes. But if we currently try to generate more jobs and at the same time very dynamically create conditions where the future generations could be better equipped in terms of their education, since we are in a global environment competing with China and with Europe and with any and every other country. Then the future of income inequality may not really disappear. Inequalities are very, very difficult to disappear, but we could moderate them to the point that on average we do better than we are currently experiencing. 

Rick Sindt: Do you have any ideas about what actions the Treasury and the Federal Reserve will take as a consequence of this realignment? What do you expect them to do? 

Tassos Malliaris: Well, the big talk is people who currently are not satisfied in their jobs or do not have good jobs, how could they quickly be employed? So there is a great deal of discussions in terms of infrastructures and fixing homes and bridges and maybe some construction, helping people go back to school and receiving certain training, helping people with education loans. There is a very big issue. Should we forgive past loans? It's a very difficult challenge because those who paid are very upset. They said we try to be very responsible and they passed out that others. So it is not an easy, simple formula but at least to have those two institutions who recognize the importance of reducing income inequality and training the US labor force for the future and putting emphasis on all of these. And this is of course very exciting for a place like Loyola because we participate both in terms of training students in the university, but we also believe that we should provide opportunities in terms of what we do at the Arupe college, which is a remarkable institution and if we if it could be duplicated in many, many more universities, you could see easily how a person who would have been stuck without a college education all their lives versus receiving a good education and having new opportunities and new horizons to do even further education, maybe go to a graduate school. It could really help things. 

Rick Sindt: So taking the long view. How do you feel about the future? Do you think income inequality is going to continue to be a large problem we face as a society? 

Tassos Malliaris: Well, I believe that we know enough right now to moderate the recent difficulties. I've been teaching economics for approximately 40 years and I have seen phases and cycles in terms of importance. In the seventies, the big issue was on inflation. No one cared about income inequality or even wealth inequality because all the baby boomers were very young, and didn't have any money. They started making it later. So in a society at any given moment from a dozen basic challenging issues, one or two emerge as absolutely critical. So we went through phases of inflation and then we had difficulty with our foreign policy and we were in the Middle East and terrorism and September 11, but the last 15 years have been very difficult in terms of economics. Why? Because, first of all, we had a great financial crisis that hit not only United States, but it hit Europe. In Europe, it started as a crisis, and then it became a sovereign debt crisis because countries like Italy, and Greece, and Portugal didn't have enough to worry about their budgets and their own government deficits. So when you have a crisis and you have countries that cannot afford to make payments in terms of Social Security, I don't have to remind you that in Greece, a country of 10 million, something like two and a half million people on retirement, on Social Security, got their monthly payments cut in half because the country went bankrupt. They do not have the money. So situations like that cause income inequality to become a very tough issue. So as the global economy heals after 15 years of major difficulties- a financial crisis, and then COVID- we hope we hope that the next issue to become very, very central is how do we restore fiscal and monetary conditions so that our nation could continue prospering in a stable fashion. And my conclusion of this little discussion is that if the next two or three years employment is restored and there will be a certain introduction of taxes in a progressive way to make the extreme inequality at the very high levels a little lesser. I can put all these things together to conclude that we will be successful as a nation in addressing the severity of income inequality. We may not be able to resolve it completely, but we hope to make progress. 

Rick Sindt: There's a faction of people who believe that. The solution to creating the stability that you mentioned so that we can continue to be prosperous is something like universal basic income. And I'm wondering if you could share with me your thoughts on universal basic income. 

Tassos Malliaris: And I have not thought in great detail because being an economist, I always feel economics is driven by how much you want and how much you can have. Because what we want is usually much more than what is somehow available. For instance, in my case, as an example, being a little older, I make more than I need. So if somebody wants to take it and give it to somebody else, that's okay. The issue is how many people in society exist who have much more than they need. And if we take what these people have, would this be enough for everybody else? And somehow the reason that it is a very challenging issue is that we need to generate it but the rules nowadays from the time that--don't forget up until we complete college, we take essentially from our parents or from society what it is that we need. A kid needs an education, the education is there. A kid needs a playground, the playground is there. So at what point do we take this? In other words, to create the rule is I would reward you according to what you contribute. Is that consistent with the philosophy work? Because you're excited about your job and it doesn't matter what you get. Let me make a very simple illustration. When I was finishing my undergraduate in economics in Greece. And my group, my class in economics decided to visit, as a celebration of graduation for one week, the monastery in Mount Athos in the northern part of Greece. This is a true monastery with 100 monks. Those monasteries have been there for 1000 years. The first ones were built in 950. And when you go there and we told them that we are economists. The chief pastor said economics does not work here. We, in that monastery where we are, have no income. We work 8 hours a week. We have our cows and we have our vineyards. They had lovely wine. And in case you think Greek monks don't drink wine, they do drink wine and olive trees. And they said, we pray for 4 hours and anyone who needs clothing we buy for him or shoes and food and we don't need any economics. And so there are systems that if you put the value of "I received pleasure from joy", if we create new values that instead of saying I work for myself, you believe and you cherish and you are excited in working for others and do it joyfully, and don't forget, Buffet says, "I make all those millions. I will not keep them. I do it for others". Then the system could be done. To be enforced is a challenge. But societies have existed that they work in those under those circumstances. And I believe if the abracadabra in our own mind, we elevate this appreciation or camaraderie because I'll tell you I was married with a wife and two kids and my younger brother, several years younger, who was single. He said, "Brother, I'm shocked when I see that we go to a movie and you buy four tickets. We go to have a hamburger. You buy four hamburgers. I don't care for anybody else. How do you do it?" I said, "I love it." It never occurred to me to say to my four and two-year old kids. "You know, kids? You buy your own hamburger". So it is an issue of emotional and spiritual values. What do I want? And maybe we should start slowly. You know, we don't have to give everybody a guarantee. But how about taking 15, 20, or 30 million people and helping them? Why not? 

Rick Sindt: I think that's kind of a nice question to end on. 

Tassos Malliaris: Yes. Yes. And it is tough because you see, it forces you. It is a challenge because if you say "What do I do? Do I work for me or do I work for somebody else?" And the truth is, for instance, why is teaching exciting? If I have an idea and I give it to you, I do not lose it. Right. If I go to a doctor and he says, You have a problem with your eye, I'll fix it. It doesn't have the trouble for me and goes to him. But in economics, if we take it from one and take it to the other, the person then says, "If that person doesn't appreciate it and I get hurt working and losing." Unless you have a reason to celebrate the gift that you give. Then it breaks down. 

Rick Sindt: Yeah. 

Tassos Malliaris: And you see how many people at Loyola when we have about Parkinson or I mean I'm reading in today's news how we're having the Schreiber scholars. Here is a man who says, I'm going to take ten students and pay for their tuition and celebrate that they are great scholars because when I was 18 years old, Loyola gave me a scholarship. And had I not received a scholarship, I would not be the person I am. He does it because it's a pleasure and joy that comes from the goodness of his heart. So values and beliefs precede economic decision-making. 

Rick Sindt: Well, Tasos, thank you for joining us today. This was a lovely conversation. 

Speaker1: This has been an episode of the Q Talks podcast where we seek to marry the wisdom of the Quinlan community with the issues of today. Special thanks to our guests as well as Dean Kevin Stevens for his generous support of this podcast. Matt Shelley, our student producer for editing this episode, as well as Loyola School of Communication and WW for their continued collaboration. Before you leave, take a minute to support us by sharing with friends or rating and reviewing our episodes to help expand our reach. Thanks for listening. Hope you join us next time.