here at brookings. tonight's discussion will offer a transatlantic perspective on making growth more inclusive. economic growth has been at the heart of the post-cold war era period. we know the broad picture against the backdrop of a broad piece between the powers. between 1990 and 2013, over a billion of people moved out of poverty and roughly the same amount into the middle class, especially in asia. some people benefited tremendously from this growth. the west, in particular, benefited tremendously from this growth and the international economic order that underpinned it. the globalization's race forward and has raised questions on the impact on american and european societies. we face increased evidence that the gains have not been for all. in the wake of the global financial crisis, related discontent has enabled nationalists and populist movements that have advanced in europe and the united states. to my eye, even amidst growing tension between the united states and china, russian aggression in eastern europe, this crisis is the greatest challenge we confront in the liberal international order. the transatlantic community is the heart of that order. if we turn our back on the system that has kept us prosperous and safe, it will slip away. we have let that happen before, and history tells us how it unfolds. international order is abandoned eyes -- as protectionist measures rise, and the global other becomes the enemy. these de-globalizing moments are precarious and dangerous. we are on the cusp of such a moment, although we're not there yet. through positive dialogue like tonight, we can hopefully push

back against that trend. the lesson from history that we should reflect on tonight is that those who believe in the merits of an open international order should fight for it when it is under challenge. and that is the context, in my mind, that we are debating this and related issues tonight. we are delighted again to present the philippe aghion lecture. this forum has become the leading forum for debate on the transatlantic relationship and how the transatlantic relationship tackles broader global issues like globalization. it is a special honor for us tonight to add another chapter to the series and pay tribute to aghion's legacy and host to notable economic scholars and authors who will address the issue of how to make earth more equitable. philippe aghion and heather boushey. i would also like to mention how fortunate we are and grateful i am to have our brookings colleague, david wessel, joining

hutchins center on fiscal and monetary policy to moderate the discussion. to conclude, i would like to thank those who have contributed to making this event a success and possible. the embassy of france for the collaboration and support. and i want to particularly recognize the ambassador with us here today and thank the french foreign ministry and the policy planning team. so now, i will turn the floor over to philippe le corre to do a more formal introduction of our two speakers. philippe: thank you very much. welcome, everybody. i am delighted to be introducing professor philippe aghion. who i had the pleasure to host in the harvard club of france four years ago. the professor is an unusual french academic who has spent most of his career on this side of the atlantic, obtaining his phd in economics at harvard in

1987, taught at m.i.t. before becoming a professor at the university college of london, and then at harvard, where he was made the robert wagner professor of economics in 2002. philippe aghion analyzed the design of growth policies. much of the work is summarized in the books that he co-authored in 1998. "indigenous growth theory." growth."osition and he was elected a fellow of the economic society in 1991. and a fellow of the academy of arts and sciences. this is the 13th lecture. we always try to find a link with the great 20th century french intellectual who was everything we like at workings. a political scientist, prolific author and writer, journalist, but also an engaged intellectual

, who joined the free french forces in world war ii. and a man who was never afraid to go against the waves when expressing his view. remember his major works such as the "opium of the intellectual," a true assault on the french intelligentsia, or the critical essay he wrote on the u.s., "imperial republic, the united states 1945-1973." he was also a sociology professor himself. i want to use this opportunity to say a few words about this extraordinary institution, which was founded in 1630 under king francis the first. it is still located in the heart of paris in the latin quarter. one particular aspect i want to underline is that it does not grant degrees. everyone can attend lectures by some of the world's best

professors in science and humanities. professors are lectured by their peers. the motto of this school is "it teaches everything." so if you don't live in paris, which i suspect is the case for most of you, i highly recommend you go online and watch some of the hundreds of podcasts available on itunes in french, english, and even chinese. bouqeout,tch avon, and aghion. the subjects that we at the center on the united states and europe, part of foreign policy, is run by bruce here, is highly relevant at this critical moment. let me also say we are very fortunate to have with us dr.

heather boushey, who is the executive director and chief economist for the washington center for equitable growth. heather boushey received her phd in economics from the new school for social research and became an economist with the center for economic policy institute, and the united states congress joint economic committee. her research focuses on economic inequality and public policy, specifically employment, social policy, and family economic well-being. her latest book, "finding time: the economics of work-life conflicts" was published this year by harvard press. let me now welcome professor philippe aghion for his lecture. thank you. [applause] dr. aghion: it is a great honor to be here.

thanks so much for inviting me. and you were way too generous in your introductory word, philippe. so i would like to start with with the following quote from raymond aron. here i have a picture of raymond aron. and i like this one because there is light coming out of him. [laughter] so in french, it is -- [speaking french] i tried to translate it. i translated something like this -- "men are those who write history, but they don't know which history they are writing." this is particularly true of recent economic history. we did not obviously right the recent financial crisis, but we did not anticipate the effects

of globalization and the effects of the recent technological revolution, and we were not adequately prepared to deal with some negative secondary effects, increasing inequality and populism we see now. so therefore, that motivates the question, how can you make growth and innovation-led growth more inclusive? and i will try also to say a few things on what can europe learn from the u.s. and vice versa. what can we learn, the u.s. and europe, from each other's experience on how to make growth more inclusive and to avoid or stop the rise of populism that we see now? aron is a giant, and i would never dare to compare myself to him. we have points in common. we are both french jews.

another point we have in common is that i discovered -- i didn't know that, actually, but going through google and all that -- that he knew marx very well. shame on me. i also studied marx a lot. in fact, we would have made ours the following quote, which is to say that "marx is too good to be left to the marxist." but in fact, that quote was made myself.er aron or shumpeter. you can see how he took a lot from volume three from capital, das kapital. i could go on, but i won't do that. so what i have done over the past 30 years with my colleagues

and others is to develop a theory based on some schumpeterian ideas. when i started growth, the model of fashion was the solo model . he did a very eloquent model with only two equations to describe everything. it is very elegant and very helpful, but that model, the purpose of the model was to say without economic progress, you cannot have growth. you cannot rely on capital accumulation to grow forever. with only capital accumulation, you run out of steam and cannot have long-run growth. it was a growth model to explain to us that we cannot have long-run growth if we don't have technical progress. but the model of solo would not explain where technical progress comes from. so you needed to find something else, but there was no such

model. in fact, you would hear about schumpeter, schumpeter with a very interesting ideas, but there was no model and empirical analysis. so we did is take some ideas from schumpeter and try to build a model around those ideas and see how we can dialogue between the model and the empiric to learn something about the growth process. sorry but the model, and now it is called the schumpeter growth theory and it revolves around , three ideas. the first idea is that long-run growth is driven by innovation. the second idea is that innovations result from entrepreneurial activities that are motivated by the prospect of innovation rents. this is very important, because it tells you that institutions and policies impact on growth. -- affect ofinfect

incentives to do r&d and other activities. i am in a country where i am expropriated, i will not do innovation, because i know the rents from my innovation will be appropriated. if i am in a place with hyperinflation, i will not engage in any innovation, because i know that all of the rents of my innovation will be expropriated from the inflation tax. so the policies and institutions shape the growth process, because they impact the incentives. the second sentence tells you that you can talk about policies and institutions of growth. there are institutions that are good for innovation and growth and institutions and policies that are bad for innovation and growth. and the sentence is creative third destruction, new innovation, particularly frontier innovation, they displace all technologies. that is a very important sentence, because it means that growth is a conflictual process . it is a conflict between the old and the new. you can talk about the political

economy of growth. in the important thing about growth -- and that will be important when i talk about inclusiveness -- is that the innovators of yesterday tend to become the entrenching incumbents of today, who try to prevent new innovators from coming in. so you need to have a system that at the same time rewards innovation, but not to an extent that the innovator could use reward to prevent subsequent innovation, and that is the kind of squaring the circle problem with innovation. some countries are better than others at dealing with this dilemma. that is the political economy of growth. there is a book entirely based on this. there are countries that deal well with it. they call them inclusive. there are countries that don't deal well with it. they call them extractive. so that is the introduction. that is the framework we have used. with this framework, we can talk about enigmas of growth.

let me go through some enigmas. and then i will go into what can europe and u.s. learn from each other on making growth more inclusive. so the first enigma is the growth enigma. the first enigma is the middle income trap. i will take a glass of water. so i can hydrate myself. it was very bad because i went , to harvard, and you see the first, middle income trap, looks like mit, which is not fair. it was not any bad intention. [laughter] ok. so, they are our friend and competitors. so you want to understand. this is the per capita gdp of argentina compared to the u.s. you can see that between 1870

and 1930, argentina was only 0.4% of the per capita gdp u.s., so growing as fast as u.s., but after 1930, they grow less than the u.s. do you see what i mean? that is a country that started doing well, and then when they reached middle income or whatever they stopped doing that , well. and now china is obsessed by the same problem. they say we grew vast, we grew through catching up and now we , don't know if we can grow through innovating so much. they are obsessed by the middle income trap. that is their obsession. they want to make sure they avoid the argentina scenario. so the way to explain it was the schumpeterian framework is to say you have two ways to generate productivity growth. one is to catch up with the leading edge. you catch up with what we call the technology frontier and the other is to innovate yourself. if i was a country like china

was in the late 1970's, you want to catch up. that is the main source of growth. but if you are already an advanced country, you need mostly to innovate on to yourself. and it turns out that what makes you catch up are different policies than those that induce innovating at the frontier. if you are in the business of catching up, it is no big deal to have limited competition on the product markets. you have big firms that catch up. it is no big deal to not have much labor market flexibility. you can have the same people working in the same firms forever. it is no big deal to have graduate schools, because you need primary, secondary, undergraduate. it is no big deal to have big equity financing. you need to have banks and government subsidies. when you want to do frontier innovation, it is important to have competition. you need a flexible labor market , because you need to be able to

hire quickly. you see what i mean? so, equity financing is important. venture capital, private equity to finance various undertakings. the policies that enhance innovation are not the same for developed nations as they are for frontier nations. if you want to advance growth in advanced countries, you need to invest in high education and have a flexible labor markets. this represents the effect on growth of a higher entry rate as a measure of competition on u.k. firms. the blue firms are the firms of the frontier. on them, more competition induces them to innovate to escape the competition from foreign entrants. when you are a red firm, you are lagging in the sector, you are already discouraged by the

leaders, and more competition from foreigners will discourage you more. we can see right away that competition tends to enhance innovation for those already doing very well and discourages innovation from those who are behind. the more advanced the country is, the more you have blue firms compared to red firms. the more advanced a country is, the more growth enhancing it needs to have to liberalize the product market and have more liberalized competition. that is an example, but it is true also for the labor market and higher education. whereas, if you are an emerging market economy, what you want is essentially like china did. they forced their technology transfers, they relocated their -- and production, and a they improved management practices. here is a diagram due to my friends that shows the management practices for various

countries. you see that the u.s. has very good management scores. compared to japan, germany, sweden, and you can see latin america and central europe below. you see south america and then you see africa at the bottom. so, you have scores for management practices. the idea is that when you are the catching up country, you can improve through improving your management practice. that is a big margin on which we can improve. explain to middle income trap -- explaining it in a very simple way, you have countries that started to grow because they were not catching up. at some moment, they should have switched to policies that favor frontier innovation. but they did not because you have incumbent interest.

in korea, we have the big firms that grew during the catching up period of korea. bigapan, you have these conglomerates that grew very big period of catching up japan, and they somehow slow down innovation. so that is something that you would explain to middle income, japanese high income. that may explain the transition from imitation days to innovation days. france had the same kind of problem. we were very good, and we were catching up. but now the problem of france is to have institutions of a more innovation-based economy. we are dragging our feet in making that transition. the second enigma is that there

is a debate on secular stagnation. so here comes robert gordon, who i respect. that -- canto say you hear me from their? you have the first with their, and then you have the second wave of productivity and chemistry. then you have the wave of the innovation communication. each of these waves got smaller. innovations which we call general, public technology -- it is like fruit on a tree. you climb higher to get other fruit, and the fruits you get

are not so good. it can be a bit bitter. innovations are like fruits. the best ones are the ones you get first, and then they get worse and worse. in 1820, with the english revolution, and now essentially it is almost finished. it will be no more. i disagree with this view. first off, there is the idea that the revolution not only transferred technology to goods and services it also challenged technology to produce ideas. now, when i work on a paper, ype every day with my colleagues, and we can collaborate much better than we could before. the technology to produce ideas has never been as good as it is

today thanks to the i.t. revolution. the second thing is that the run to innovation has never been as big as it is now. now, you have the whole world thanks to globalization. innovationeed for such as in european energies. we would like to see the day where maybe we can do 3-d thing of a liver and then replace my old liver with a new i do not itw if that will happen, but would be a very big revolution on health. believe in this innovation? how can you predict when the new innovation will happen? but you see, you can pick when it will happen. you know exactly when it will happen. the second objection is missing

growth. i am doing some work with a leader on growth today, and what we do with it is to say we do not know how to measure growth. why don't we know how to measure growth? the problem is that we know the value in dollars. we know good in dollars and you can compare dollars to dollars. but the problem is there is inflation and real growth. we do not know how much is in inflation and how much is in real growth. it is worth much more than yesterday. we do not know how much of it was due to inflation, and how much of it was real growth adjustment. if it is the same good yesterday

and today, we know it is inflation. if it is good but slightly improved, we know by how much we improved. but when you have a new product, -- a new product that is replacing an old product, you do not know. so what you do is, most of the time, you impute the growth brought about by the real good. you replace it with existing goods. in europe, they conduct extrapolation. whether one or the other, you essentially use the existing to infer what the new would bring to the old. you see what i mean? because of that, we calculated that you are missing one percentage point of productivity growth. you see what i mean? if they say growth is 1.5 in the u.s., then it is really 2.5. i do not call that stagnation.

the finance minister said that 0% was good news in france. but 2.5% is great news, i believe. i would not call that stagnation. that is my second argument. there is a third argument. europe, we have the advantages of our drawbacks. the drawback is that we are far behind the frontier. look at sweden. sweden is here. sweden is growing at 0.7%. thecan see that after 90's,s in the early japan haswhere as growth going down -- you see

that? ok? other countries -- the netherlands, there are big reforms, in 1983, in the early 1980's. they multiplied growth by three. canada, they multiplied by almost four that year. sweden by almost five. so, by reforming -- and what do you mean by reforms? by doing structural reform, you can increase growth. the thing with sweden is that they did it while preserving the social model. you have growth but it is inclusive. in sweden you have to do that. education is totally free, and you have market policy, and poverty rates are very low. social mobility has not gone down in sweden. it is a very good thing that sweden has done that without reducing social mobility or access to public services.

growth, you i call see? that is my second enigma. my third enigma -- it shows the evolution of the shared income earned by the top 1% in the u.s. what you see is that since the early 1980's, it has gone up. it has been rising sharply. it is also true for the top 0.1% of income earners. there, we can all agree. is why.tion how do you explain that? one thing i want to point out is this figure. this figure is showing the share of income -- again, i show the

red is the share of income at the top 1%. you see the acceleration in the increase in the share of income. of gray curve is the curve patterns. that is of course no proof of relation. i just show that the two curves move together. in recent work, we have reached -- we have done studies in -- one of ourd colleagues is getting awarded a big predictor of the nobel prize. in the work with them, we showed the causality from innovation to income inequality.

when you make innovation, you make friends. those friends take you to the top. with individual data, when ever , you are very likely to be taken to the top income bracket. that is no surprise. sweden now man in invented skype. skype did not exist 20 years ago. so, you have the face-off of income inequality. so, i have colleagues and friends who believe that innovation does not exist. that the only source of income is because you have rent. you have the hotel and monopoly , and you become rich.

that is not true. because why is innovation from other sources of income inequality. first, income innovation generates growth. that is what we can show, and that is what we do in this paper. we show that innovation -- you show a causal link between innovation and income inequality. we show that innovation enhances social mobility. i told you that the new replaces the old. can enhance social mobility. the third thing is that innovation does not necessarily increase income inequality. we look at various stages of the u.s. over the past 30 years, and we look year-by-year at how inequality shows income in that state was determined by

innovation in that state. the first thing we showed was that -- here, i have the pattern size. different states have different curves. when you are here, you have low innovation flow. when you are here, you have high innovation flow. show -- and that is a causal regression -- you show that, in fact, the more innovation you are the higher the share of income. there is a clear causality between innovation and shares of income. curve shows the goal is old -- global measure of inequality. there is no impact

on innovation in the growth inequality. it is true that innovation can income inequality, but it does not increase inequality as a whole. another paper found the same thing actually on u.s. data. it is a very robust finding. so that is the thing. now, here in social mobility, i have -- in social mobility, which i measure, we start to reach the income of the children which is not correlated with income of the parents. so, i measure this by the ability of the child making it into the top or bottom income size. so here, i do the analysis on

cross commuting zones. i show that the commuting zones which are more innovation also show mobility. it is typically shown by entrance innovation -- innovation by new people and not by old people who have been around for a long time. you see, that is what i call carlos slim. in mexico, the richest man is carlos slim. he may have been an innovator in his youth, but the the carlos slim i know, they get much richer -- i was married with a mexican. whenever i would talk with her on the phone in mexico, it cost me 10 times more than anywhere else where. you know, that is the source of income. yeah, you become the head owner of a lightly regulated but not , then thatd monopoly

is a way to make money, ok? but carlos slim is not the same thing. and so we look at lobbying and the effect of lobbying on the various measures of the -- of innovation. lobbying reduces excess productivity growth, because -- also we showed that lobbying increases income inequality. it increases inequality at large and reduces social mobility. you have two sources of soft income. lobbying on one hand and innovation on the other hand. both are a source of income, but they do not have the same effect on social mobility and growth inequality. that system should not read those the same way. that is my difference from others. in their world, carlos slim's position does not exist.

when they think of taxation, innovation does not exist. in sweden, they did a tax reform in the early 90's. they used a tax system that today,-- france has would you do not want to have it -- have. what they did is, it remained where they said in order to finance the innovation of education and everything. it became more inclusive of innovation. -- inducive of innovation. now, i see -- philippe, you seem to be worried. you did it in a very subtle way. [laughter]

-- cant can your blue the u.s. and europe learn from each other? first, what can europe learn from the u.s.? it is true that the europe we know, the european economy is less resilient than the u.s. following the crisis, the u.s. recovered growth, whereas europe, none. people ask why is it that europe has not recovered growth? the first type of reason was given by one of my friends. he said it is true the sequence of policies following the crisis in the u.s. was not great. but they did in the u.s. was a stress test, but at the same time they did it while accommodating monetary policy. so, it did not lead to a bigger recession. they avoided a bigger recession. you see what i mean?

on, they reduced the stop raisingt and interest rate. in europe, the sequencing was very different. right away, they did not deal with the banking problem. -- they very was quickly said, "no, we have to deal with the budget deficit." so they imposed already in 2011 the very tough budgetary rules, which caused sarkozy and friends to increase taxes. it was already started with sarkozy in 2011. he already had a knife to his throat and said you had to do it. only later with the bad loan problem in the stress test on the banks. so, you're did not follow the exact same processes as the u.s.

also, the other reason is that the u.s. has a more flexible economy memo we have -- than what we have in france. you have the more proactive microeconomic policy. europe came later. draghi came to it later. the macro economy has to accommodate it. we lack both. we do not have flexible markets in europe, and we do not have as accommodating monetary policy as you have in the u.s. showsoing work now that out, and draghi

spoke in this way, if you look what youowth benefits do more quantitative easing and you look at the effect it has on the growth of a sector, you can see the growth in the sector is much bigger then the sectors that are more liberalized -- when you have more competition. have low interest rate, the low euro, and we shall -- and the low price of oil, and we should have grown very fast. you can have all the macroeconomic policy you want, but none of the structural reform. in that respect, he is right. maybe other people are right. to say that you should have more investment in infrastructure, or whatever. both are complementary.

you have both in the u.s. much more than you have in europe. i think it is a problem with trust. the germans do not trust the french, because the french so far have not been any reasonable response. you remain very tough on macroeconomic policy. why should we ever reform our labor market? we should have a new growth pattern. doeurope, they say they structural reforms, but because they do that it affects economic policy. it is something we can learn from the u.s. together. first, that trade is good. do not go against nafta. do not try to reduce trade, because we know that single

markets are good for innovation. i have done work for 10 years. we saw the enormous effect with the single market and the effect of the brexit thing. growth effects of the single market in the u.k. or for any european economy -- it starts with innovation. trade creates a bigger market for innovation. also trade increases competition, and that forces incentive to innovate. for that reason, trade is good for innovation and growth. do not try to break up the mutual agreements against trade -- on trade, because trade is good for growth. do not throw the baby with the bathwater, ok? growth and trade

because you have inequality. you need systems that can manage the inequality. we know that to become more inclusive, you need more education. brexit?d for we need education. you need to educate people. it is very important to see the innovation process. france, they should know that -- that you should not only reimburse for the bigger operations, but you should reimburse on a number of operations. if you have bronchitis, your productivity goes down a lot. there are a whole range of things that make you much less productive and much less innovation. investing in health is investing in human capital as much as you as investingcation

in human capital. the very important thing is security of the labor market. understoodries have that if you say to someone who becomes unemployed, you need a good training system and we will help you find a new job. it not only creates a good safety net, but it can manage the creative destruction much better and much more efficient. it is also good for growth, because you know that people will rebound into a new job. that is very good. i want to address two things here. this is based on the work on social mobility. they look at social mobility across cross commuting zones in

the u.s.. on the horizontal axis, you have schooling. on the vertical axis, you have probability of the child reaching the top income sector if the parents started in the lowest. what is most interesting is this one that shows on the vertical the differences in outcome between a child of the rich and a child of the poor. i have job creation and job destruction. cross using the data on commuting zones, you can see that when you have more job market turn it over, you have more social mobility. why is there hope for more inclusive

we know that innovation base growth needs education and flexible labor markets. if you do the labor markets the way the danish do, serious retraining, generous benefits, and helping people find a job. there is help for more inclusive growth if you're able to do that everybody can feel part of the process and no one is left out. then you can reconcile. people will not be afraid of globalization, they will not be afraid of trade liberalization and they will move into the 21st century because they know they are not left out of the system. the conclusion is that inclusive growth is the best vaccine against populism. copy the u.s.

second, the u.s. should emulate northern europe in a making gross more inclusive. learn from the trump victory, and come up with more ways. i want to finish here, in 185 this group said the following, i cannot help hearing man may reach a point where they go to innovationheory and may problem, and they refuse to move at all for fear of being carried. my hope is that they can learn from each other's experience by

showing the way to more sustanable growth patterns. my hope is that the lessons the europe and u.s. will dispel this apprehension by showing the way to a more inclusive and sustainable growth path." thank you very much. [applause] >> thank you for an engaging discussion. i will not even attempt to be as witty or wave my hands around as much as you did. maybe i will, because i have been inspired. thank you. i also fear that i may be a little less optimistic. i've been trying to get out of my dour mood for 6-8 weeks now, and i think a lot of my talk today reflects that. my sense is that what we are

seeing in the united states is not a country or a population in thrall to with the creative destructive process because too many people feel they are being left behind, and their communities are part of what is being destroyed. not to start off on a downer, but i think a lot of that is -- as i was listening, i realized my remarks are moving in quite a different direction. there is one statistic that i have come to time and time again that is sticking with me. i think a lot of us should be thinking about this. hillary clinton one in the communities, i don't remember what the unit of analysis was, but in places where the economy was growing. donald trump won in places where it was not. we think about the economy in what we are supposed to be doing as economist in terms of

economic policy, and the most important thing to most people out there in the united states is that the economy provides them with a good job, and that allows them to have affordable housing, health care, and excess to opportunities for self betterment. this is a part of the american dream and the idea that your children will do better than you do. this all hinges on that good job. for too many people in the united states, even though we have fairly strong growth, even though we have fairly low unemployment, for too many people we are failing to meet those objectives. even for those who are not poor, because i know there has been a lot of talk since the election, that a lot of folks voted for donald trump were poor, but there is a sense that part of what is happening in terms of our economy and why we need inclusive growth is that we are not doing as well as we think we should. i want to lay out a few comments and hopefully dialogue with what we have already heard and

hopefully we can have an interesting conversation. i have two findings i want to start my remarks with. the first comes from ross chatty, they've been looking at absolute income mobility. the probability that your child does better than you, or you do better than your parents. what they have found, looking back to children born in 1940, there is a sharp decline in economic mobility. there has been a downward slope since the postwar era. of children born in 1940's, 92% earned more than their parents adjusted for inflation. in 1980, only 50% did. that is a remarkable decline.

the people for whom this is been the most not true for our the middle class. those living in the rust belt, and men. men are the ones who have experienced the largest declines. that seems like an important thing we need to be thinking about as we are thinking about how we will have an inclusive economy. what is behind this mobility? in the analysis, they find that what is behind the lower mobility is higher inequality and the unequal distribution of economic growth. they find that higher growth alone is not going to solve the problem. in fact, the bigger issue is actually high inequality. even if some of those high wages the people are earning is because they are extremely talented and innovative, there is something pernicious going on

in terms of the level of inequality in the united states, at least in terms of affecting overall mobility. is i think is at the core and heart of economics or should be. it has been reverberating through politics. for a long time, economists and policymakers that we advise believed that the economy -- as the economy grows, gates will be -- gains will be distributed across society and we know now that has not happened. we used to believe this because of studies done in the twentieth century, where it was postulated that as the economy grew, there would be a period as you had higher inequality but it would dissipate. after reaching a certain level of development, that things would become more equal and we did not want to worry about equality. perhaps inequality is because of a good cause, and so we also don't need to worry about it.

yet, we know, and i think the data causes us to bring into question, we need to rethink the dynamic between inequality and growth. this leads me to the second finding, also from new research from a week ago by thomas and his colleagues. they combined date from -- data from a variety of sources, they have told a new theory on the distribution of national income. picture gdp growth data that comes out every quarter. they have matched that information about information happening across families so you can account for all of the income. their data shows that the bottom half of the income distribution in the united states has been completely shut out from economic growth. it is striking. from 1980 until 2014, the

average national income per adult grew by 61%, yet the average pretax income of the bottom 50% after adjusted for inflation, grew by 1%. in contrast, income skyrocketed at the top, benefiting the top 10% and top 1%. incomes rising very much at the top. other groups are doing similar analysis, and this new way of looking at growth is one thing i hope policymakers will start considering in future years. adding this to our national statistics. i'm concerned we will be moving in the opposite direction. you talked about the bls data in your remarks, and one thing president elect trump has talked about on twitter is his disdain for the bls and the work it does. i have a lot of concern about

the measurement we will be having about these issues. adding information on income distribution to our national income data would be a good place for us to start. these two new findings i think require we focused new attention on what we know about the optimal growth path. and thinking about, looking at the role of inequality as -- in our society. a key question we have to answer is do we need inequality for an economy to grow? you heard an argument whether there might be some good things about making sure that folks in the top, that it is about innovation. there are a lot of mechanisms we can pinpoint. but the story isn't that simple. the kind of inequality that is

skyrocketing is curtailing the ability of families to have strong economic growth. thinking about the mechanisms to which inequality could affect the economy and society, there are some big buckets. debt and consumption, human capital, entrepreneurship and its effect on our institution. let me walk you briefly through the first three, starting with the macro view. you have to pardon me, i'm getting over a cold. let's start with the macro view. many economists believe the united states is experiencing secular stagnation. they find the income inequality plays a role. in the short run, inequality lowers consumption and economic output, in the long run it can leading to stagnation. there is another story in terms

of the distribution of debt. one of the books that are important from the past few years is one that showed the rapid increase in debt and the rise of the financial crisis, that the distribution of household debt across families amplified the collapse of consumption after the housing bubble, and that both exacerbated in extended the recession and slowed the recovery. inequality and wealth, inequality and access to the kinds of credit families had access to, had direct effect on economic stability. shifting to some microeconomic factors along the lines of how increasing income and wealth inequality contribute to economic growth, i point to the work of a sociologist that show that the gap between children of the rich and showed an of the poor has exploded.

this is due to a rising correlation between inequality and education, and the differences matter. that says something about the effect of inequality on our society. it affects the potential for people to grow up and become entrepreneurs. one of the things we know about the united states is that traditionally our entrepreneurs come from the middle class. they have not been very poor nor very rich. you had economic stability, may be good start a business in the garage, you had economic stability to do something that you had a little bit desire to make something of yourself. one of the things you know is that alongside rising inequality, the potential for young people to grow up and be entrepreneurs has been declining.

there was some really interesting research showing, they looked at schoolchildren, looked at their test scores and the probability of getting patents later in life. the children with high test scores from lower income families, i may say this slightly wrong, it was not so much the test scores that predicted whether or not they got patents, it was also the income of their parents. smart kids from poor families, not growing up to be this kind of innovators because they don't have the same opportunity. that is an enormous loss of wealth and talent in our society. finally, and most important for our conversation today and what we need to be thinking about in terms of inclusive growth going forward is the effect of inequality on our institutions. i think as economist too often we tend to forget about the

important institution and norms and think about the messy reality of them. we've been looking a lot at the political science literature and scientists were looking at the implications of inequality a political decision-making and democratic accountability. for example, work that found that in the united states, the likelihood that legislation becomes law is highly correlated with the wealthy support of that legislation. so if a policy preference aligns with the rest of society, there is a mutual benefit, that if it does not, in their findings, it does not happen. that is a problem. it means that -- it poses enormous challenges for our democracy and the ideas are going to the top. the kinds of conversations we have here. the effects of inequality on our institutions go far beyond this kind of retail politics.

we need to think about how, one of the things we've seen over the past few months, we are for decades that americans have had a decreasing trust in government. we've seen how this played out over the election cycle and i have a lot of questions about what trusting government is going to look like moving forward with the next administration. scholars are concerned about the high levels of inequality and how they erode social bonds and norms. these challenges to which inequality affects economic growth and stability means not only is the growth we are seeing now not fairly distributed, but it could impact working-class lives even further. what can you do and what is possible in the current political climate? i think that on the whole, we have tended to think about

post-market gap, addressing, using the tax and transfer system for redistribution rather than thinking about what we do before we get to those market outcomes. but it want to give you ideas that focus on what we could call pre-distribution, focusing on pre-market outcomes. i want to focus on three areas. thinking about how we look at inequality and growth, not just at the bottom or top, but looking at all three. what are things begin do at the bottom, middle and top. in each of them, i'll will make a few comments about what i think about the politics. first, i think it is important that we start by talking about raising the bargaining power of labor to increase access to collective bargaining. that is something we lost in this country and it is something that has been talked about in written about. increasing worker representation would help to ensure people have a voice at the table.

i am under no delusion that this congress and administration are huge fans of labor rights, but i think putting that at the forefront of our thinking, especially in thinking about the implications of this for labor enforcement and what it means for people to earn a decent wage is an important thing to keep on our mind. for families at the bottom, we need to be very focused on anything we can do to boost wages. the federal minimum wage has not been increased in a number of years and purchasing power has declined. but even in the 2016 election we saw four states, arizona, colorado, maine and washington, has ballot measures to raise the minimum wage. this is not the first election in recent years we saw at the federal ticket level, the election going to republicans but by ballot initiatives, the people of the state voting to raise the minimum wage. there is an important message there for how people in those communities are thinking about

what is good for their economy. we also need to think about how we can make sure that their policies that help people get to work and stay at work. we need policies that help caregivers manage the responsibilities. paid family leave, paid sick days. during the presidential campaign, donald trump's daughter encouraged her father to focus on paid maternity leave, which was quite exciting for those who entered the about this for some time. i heard through the grapevine she wants to make this one of the president-elect's priorities. i don't know if it will happen, i don't how much power shall she'll have or if we will see that, but given what we know about family economic stability, ensuring that fathers as well as those caring for aged loved ones is important. ground that in the evidence we know from the fours tates that have this policy.

moving to the top, we need to talk about a tax policy in the united states that encourages investment and discourages rent seeking. conventional logic is that higher taxes on the wealthy will discourage them from investing, however researchers have been finding something very different. here i point to findings that a large share of the high pay of those in the top is not productivity enhancing, meaning low taxes for the very rich is discouraging growth and encouraging people to engage in tax avoidance or paying a lot of lawyers, which is not a creative, growth enhancing thing. to pay lawyers to figure out ways to avoid taxes. or they pay themselves more.

i am under no delusion that this current congress and administration are moving in that direction. they said that one of the number one priorities is to not only not raise taxes but to further lower taxes enormously for those at the top of the income spectrum and do things like eliminate the state and gift tax. but if they actually care about the economy, i strongly encourage people on both sides of the aisle to take a look at this research and try to understand what it is that low taxes at the very top are actually doing to our economy, investments and society. i want to close with a couple of more remarks and then i will stop. as economists, i think we are heavily invested in models of how the economy works. the messiness of the real world and how economic outcomes shaped in the shape the institutions that set the rules for how our market works, that is how government works, how institutions within the community work, that is not

really what we, that is not what our discipline does and does not necessarily top of mind. it is exciting to see people start to think about that. i think in many of the economic trends i've highlighted, and in this recent election, should push us to better understand the role of institutions and trust in institutions and how this affects, how inequality affects them and how that in turn affects economic growth and stability. one thing is that while our model predicts, we can compensate losers in the economy. we can say that if we have a trade deal that is good overall for the economy and promotes growth and will be good for the united states, but some communities are devastated by it, we think as economists, you can compensate those folks, you

can give them money or retraining. the hard part is that that hasn't happened in the real world. those families are not compensated to the extent of what they have lost. i was at an event in north carolina a number of years ago where a nice man stood up and talked about how his job had been lost in his community to some sort of trade something or other, and he got some retraining and he was excited about that, but whatever he'd been retrained for, that was also leaving his community. what he was worried about was not just himself, because he could move, but the community he lived in and all of the other people there. i think we haven't spent nearly enough time understanding the massive dislocation that millions of people in america feel from the kind of economic growth we've seen. it is one thing to say we can give people a couple thousand dollars in trade adjustments, give them some unemployment insurance, but that does not rebuild their community and does not create economic vitality.

the only alternative i think for us is to say, just move, and that is what a lot of the best and brightest and youngest do and that leaves the community without that talent and vitality. i think we have to take more seriously what does inclusive growth mean. what does inequality mean, and how are we actually come in the real world, not in the model, how are we actually going to deal with the consequences of some communities benefiting from economic growth and others not? [applause] >> i think we learned a number of things. first of all, it is apparently possible to get an aerobic exercise while doing an economic

lecture. there is a lot of talk about how academics are getting obese because they don't get enough exercise, so i want to commend you, you have been a role model for all of us. the second thing i am reminded that you can always boil be things down to simple observations, and one of them is that we in america want all of the good parts of the european economy and none of the bad parts. and europeans similarly won the good parts of the american economy and not the bad parts. the third thing is, you have to be in awe of the work raj chetti has done. we're going to have a short discussion and i will leave time for a few questions at the end. i want to start with something heather said, she argued that the amount of inequality we have

in the united states is now an impediment to the kind of innovation and growth you would like to see. do you agree? >> absolutely. i think the problem -- i think france, for example, and the u.s. do not have the same starting point. you should probably raise minimum wage, probably you should raise bargaining power and negotiations, and probably you should raise the tax rates. in france, we have a different situation because capital is overtaxed in france. some people have 144 rates on their income. and also a can be extremely high. that has prevented growth did not give us more social mobility. you have less social mobility in france than neighboring countries. minimum wage is another thing you mentioned.

i'm sure you need to raise it here. in france, the problem is the minimum wage has gone up faster than productivity. the problem is that, if you were to draw a curve or you have on the horizontal axis minimum wage and on the vertical axis social mobility, beyond a certain level of minimum wage, you discourage hirings. that reduces social mobility. you need other things. in france, we have the minimum income, you have other instruments to complete the minimum wage when it reaches a certain level. we could discuss those things, but you see -- i agree. you mention education, of course compared to sweden and canadians, there is very interesting work showing that the gap has gone up.

unaffordable tuitions has exacerbated the increasing wage inequality in the u.s. >> your argument is we have too much inequality and healing -- you agree it is an impediment to growth? >> i agree. it comes to a point where mobility is impaired. >> there was a pretty compelling case that if we focus too much on reducing inequality, we may have a more equal society but we will lose some of the growth that will have more goods and services to share. you emphasize very much all the things you thought we should do to reduce inequality. are you at all concerned -- when we be better off with more inclusion and growth?

will we get more growth if we set as our only goal reducing inequality? >> yes, i think would be great to have both. it is a matter of degrees. you need a little bit of inequality, but too much is a bad thing. i think you're in the united states, we have tipped over the edge where you have less economic mobility and you have very high inequality. a lot of very high incomes are more about rent seeking. >> wouldn't we be better off with a faster growth rate even if we didn't -- didn't have less inequality? >> i take seriously the new data just released. i do not think it is acceptable to have the united states going

1% ofd the bottom getting that. why do we have growth? what is the point? isn't the point of having an economy so that people can -- >> when they talk about any inequality i think we need to be clear. there are measures of inequality. referenced, there are several measures of inequality. , that bold, the ration is one measure. bold, static inequality. there is another statistical measure of inequality, a surety -- a share of the top 1%. then you have social mobility. they have a relationship between them. for example, we know that where you have more social mobility, you tend to have less inequality.

that is the great gatsby curve. you can find it. it was very surprising is that in areas of u.s. were you have more sociable ability and less inequality, you have a higher share of the top 1%. you compare a place in california to some place in alabama, you have more social mobility. but also the share of the top income is higher. you talk about inequality, i think we need to be clear, which one am i concerned about. it doesn't bother me if someone is very rich. that is not a problem for me. what is important is that reform boosts growth. i think even if it might increase top income inequality.

the only worry i have is the guy who has top income may use it to prevent future innovation, and then we go into the -- but then you deal with taxation and competition policy. with other things, when they decided that companies could finance with no limit, that was very bad. >> you made a very appealing point in your presentation that we should come up with some tax system that did not penalize new jobs or other innovators but did penalize make it less likely to just going to people who capitalize. how are you going to do that? >> there are various ways. special tax for real estate, for example. that is different from other things.

i don't -- donald trump would not like it. i don't present here -- i would not pretend to redo the review in one second. certainly ways, you have r&d tax credits, or you may have ways that you can distinguish. i want to say, we do a lot of work on tax innovation, there was a paper, came out recently. they showed that the maximum marginal tax rate has an impact

on the mobility of inventors. so you have to be careful. when in sweden, they reduced the maximum amount of tax, they lowered it to 57, and they put income tax at a flat 30%, it was a boost. and it maintained the social model. maybe if you can increase the marginal tax rate, you would get some innovation, but if you go directly to where you are to where sweden was before 1990, you will have bigger tax there. >> you want to respond to any of the 50 things he just said? [laughter] >> please don't respond to all 50. >> i think that -- yes, i've seen that study.

where we are in the united states is much lower marginal tax rates at the top. i think we always have to ground this in the reality of where we are now, which is -- would you say that taxes and france were at 140% per capital, that is ridiculous. we do not want to go from where we are to their so quickly. that does not change the fact that you could increase taxes at the top and you could also be thinking about how you could conceive of a tax that rewarded innovation. there are many credits that do not. you could start by thinking about property and estate and gift taxes, they are all about social mobility. united states was first in the developed world put together those kind of taxes in the early part of the 20th century and that is something that has completely reversed. there are calls now to

eliminate them all together. that is not a recipe for innovation, that is a recipe for allowing a small number of american families to not only have the wealth that to keep it in perpetuity. >> it seems to me, asking economist to talk about policy -- politics is somewhere between dangerous and foolish, but you had a wonderful line, felipe -- phillipe. you said inclusive growth is the greatest vaccine to populism. another way to look at it is is a recipe for more distribution and more innovation and more competition, all of that seems to be very unsettling to people. creative destruction is not welcome if you are being destroyed. it does not seem to be politically popular in a democracy to have the kind of reforms either of your talking about.

no one could be against more innovation and a greater distribution of the prosperity that innovation brings, but how do you respond to the rise of marie le pen, the rise of donald trump, brexit, the republicans have complete control the congress. what both of you are enunciating do not seem to be sellable to democracies in advanced economies. so now what? >> even though they remain popular, if you look at polls, policies like raising taxes on the very wealthiest or making it harder for companies to ship their jobs overseas through the tax code, these are things that americans want. there was one candidate who had an inclusive growth policy agenda and then there was donald trump, and most people voted for

her but donald trump won. so i think your question is out. -- is apt. i don't have a good answer yet. >> i think -- i think there are various things. i won't talk about germany or holland, but they have different things. certainly say everybody goes to a very good school. in finland, on -- they have done very good work on the quality of teachers. teacher quality is very important. in finland, to be a teacher, you need to go to high school and then five years in university in 18 months of training and you are regularly retrained. they invest enormous amounts and very well in education. you have very high quality education.

then you have a lobor -- labor market where you have a retraining system in the labor market that works. you have a security system. you have this basic education where you learn how to learn. on top of that, you put a very good system where when you lose your job, you get id percent of your salary. 90% of your salary. you are always in contract with someone. you leave the thing very differently. >> you've had a conservative government and a socialist government -- >> in france, they don't listen to anything they have said. they screwed up. [laughter] >> they did not do it. where they did it, in denmark

and other -- my hope is that we can sell those. >> neither of you mentioned the word immigration once. is immigration a good way to get innovation to end monopolies? is it a good way to spread the productivity? is it a good way to reduce inequality? or is it not. >> at all depends on how you do it. it can be both. in this country, we have a lot of people who are here because of the right to work. it makes it impossible for them to have good jobs and they are not secure in their rights as workers. labor laws are not enforced in those cases. that pulls apart inequality. we know that when communities

have influxes of immigrants, it is growth enhancing. they bring a lot of good ideas, and that can be a good thing. there are many people with talent that like to go to different places. it is how you deal with the dislocation and the rules of whether or not someone can actually work. if are not going to let them work. immegration, no you condemn yourself. in japan, they have an aging population. you have an aging population, and it makes it hard to change the structure. immigration brings you new blood and new ideas. in france, the big celebrities of france, many of them came from other countries. my mother created a film in france. they came with ideas from abroad.

came from big names. many people came from -- the whole thing is to manage it. you need to have a policy to manage. there is working immigration, human rights immigration, to integrate them properly. >> do we have a mic? i will take three questions. there is a gentleman here. doctor sam hancock, one topic is innovation and

renewable energy. then also, green agriculture, that is where many of the jobs are. >> david asked a question about how the tax system could be improved. in this country, we have a property tax, but it is on privately created value and public value. some communities have reduced on private value. wonderful incentives

for job growth. >> independent consultant. inclusive growth, meaning, how would you evaluate the basic minimum income? versus the dollar for training, which is much harder to calibrate specifically. >> should we take one more from the back? the guy right there. >> i am with the federal reserve. this question was for phillippe. i like how heather mentioned the book where they talk about the creative destruction process, where they focus on the time in which during a financial crisis defaulters take on the entirety of the risk in a debt contract. i wanted to find your thoughts on the proposition of an index

contingent debt contract, whether that would provide for a better equality in that process. >> why don't we start with the trade-off between universal basic income and spending money on social programs like trading in education. >> i think it is an interesting conversation. i have two initial reactions. one is that firms better know than we do what they want us to know how to do. i find it is a sad statistic that firms do less training internally over the decreasing amount over time. community colleges and individuals have a hard time getting information there. if we were going to do something, i would like to encourage firms to do more training. that is a different agenda. and then around the basic income, i do think the most important thing is that we

provide for people who do not have jobs now, but also keep our eyes on the prize. most people want to work. and we do not get too enamored with this. there was so much excitement about it right now. i want to make sure we are focusing on making sure every job is a good job. so we are thinking about the earned income tax credit alongside that. >> income contingent or? philippe: i agree. i think it is a very good proposal. i am fond of where they work. i fully agree with what they propose, so i have nothing to comment because i think i cannot do better, so i am publicly in the same direction. someone asked me about renewable energy. we are doing work on that. this is all, you know, -- we work with each other. >> it is very incestuous.

[laughter] i have not heard about that. [laughter] >> next week i will work with them. we did an interesting study where we showed data we -- we had data on clean and dirty data in the auto industry. those who have done innovation in the past and keep doing what they used to do, you tend to keep doing -- that is what we call past dependence. you need the law of the state to redirect the progress. we did not talk about so far, the rule of the state, by the way. that is a very important question and i will come back to that. you need the state to redirect it. you can do it partly with government. because you have two externalities, one is a knowledge externality. it is always good when you have

two externalities so you have more than one instrument to deal with them. we saw that it is the combination of a carbon tax and direct subsidies to bring in innovation. it is a very important thing because the thing is, when you factor in innovation, even when you debate, i don't want to bother people on this, that the bottom line is when you factor in innovation, even with a discount rate, you want to do what makes sense. if you don't act now, not only do you pollute, but you make the dirty technologies go even more ahead of the clean technologies and it would become more costly to redirect progress. it is like if you wait to go to the dentist, you get a cavity becomes bigger. you want to deal with it. when you factor in innovation,

you need to act now even with a discount rate because not only you create bad production externalities, but you induce more dirty innovation in the future. there is a role of research there, but also innovation. when you know believe in innovation, you are in a bad world. the only way to reduce pollution is to stop growing. when you have innovation in your world, you need to direct innovation towards clean innovation. you need to have the rule of the state beyond law and order. in france, we have a debate. there are those who are attached to the old way of state. there are those who believe you should only have the state in charge of lawn order and we drop from everything. but just to give you an example that you need the state whenever you have external these to deal with the climate.

you need to go beyond that. >> with that, please thank join me in thanking both philippe and heather. [applause] >> brookings was very appreciative of the french government helping to make this possible and when you leave, there are coffee cups and papers at your feet, you would make our maintenance staff happy and reduce inequality of happiness at brookings. [laughter] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] [captions copyright national cable satellite corp. 2016] >> sunday, january 1 in-depth moving to a live discussion on the presidency of barack obama we take your phone calls tweets and emails and facebook questions during the program. our panel includes a white house course pond and for american