Episode #17 – Income and Wealth Inequality, Part 2

We’re back for part 2, and we’re just going to jump right in.  Here’s the episode if you missed it:

Income and Education


In the last thirty years in the US, the number of college-educated people living in poverty has doubled from 3% to 6%, which is bad! And then consider that during the same period of time, the number of people living in poverty with a high school degree has risen from 6% to a whopping 22%.

Crash Course jumps from discussing the causes of income inequality (see part 1) to the statistical results.  I assume this is to imply that technology is widening the income gap so fast that even college graduates are living in poverty.

These numbers are designed to be shocking, and they are.  Aren’t schools supposed to give students skills to be successful in real life?  And shouldn’t colleges do this to a greater extent, considering students are spending tens of thousands of dollars on it?

If you’ve been to college (or high school for that matter) in the past 10 years, you already know the answer to this: High Schools and Colleges, with some exceptions, are not teaching students the skills they need to survive in the modern economy.  Crash Course implicitly blames the number of high school and college graduates in poverty on technology (and other causes they cite which we’ll also get to), while there is no responsibility placed on the failings of these educational institutions.

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Over the last fifty years, the salary of college graduates has continued to grow while, after adjusting for inflation, high school graduates’ incomes have actually dropped. It’s a good reason to stay in school!

Crash Course’s argument here implies that going to college will give you steady salary growth because college classes give you the skills to get a higher paying job.

This (again with some exceptions) is not necessarily true.  High-paying employers might discriminate against those who haven’t graduated from college, which would also explain the statistics.  Many employers see a college degree one of the few ways to judge a candidates ability, since they often shy away from real skills-testing for job applicant since it might be considered an illegal form of discrimination.

This is not to say that someone couldn’t learn marketable skills in college.  There are many areas (engineering and computer science come to mind) which actually give students the skills they need for the job market.  It’s no surprise that these majors are also the highest paying for college graduates.  But the majority of college students do not choose these skills-based majors.

Other Causes of the Income Gap

There are other reasons the income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and the fact that somehow it’s okay for CEOs to make salaries many, many times greater than those of their employees.

Let’s look at each of these in turn:


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Unions, by themselves, are collective bargaining groups for employees that generally demand higher wages from the employer.  Originally, they served as a centralized mouthpiece for a large group of workers whose individual voices might not be heard.  Their greatest power is the threat of striking if their needs are not met.

In economic theory, unions would help the employer and employees identify the market rate (what the employer is willing to pay and the employees are willing to work for), but it wouldn’t necessarily reduce income inequality.  Let me give you two simplified examples:

In scenario 1 there is a company with 10 employees and 1 employer.  Employees demand a $1/hour raise or they will strike, and the employer obliges, taking the money from either his own salary (which is rare) or from investor equity.  The workers are paid more and there is less income inequality between the employees and employer.

In scenario 2, the workers demand $5/hour more.  The company cannot afford this price and remain profitable, so they invest in machinery that will reduce the number of employees needed to 3.   The remaining employees might get that $5/hour raise, or the employer might look outside of the union for employees, since it’s now easier to fill the fewer positions available.  In scenario two, 7 or more employees are now being paid $0/hour, which widens the income gap.

Unions today, due to abundant legislation related to them, are not the unions of economic theory, and they if they were, they do not necessarily narrow income inequality.  Although people might show you a graph of union membership next to a graph of income inequality, one can only speculate that this correlation equals causation.

Tax Policies That Favor the Wealthy

As Mr. Clifford points out later in the video, the United States has a progressive tax system, meaning that the rich pay a greater share of their income above a certain level to taxes.  Occasionally, the rich may receive a tax cut.  For example, the Bush Tax Cuts lowered the taxes on income over 400k from 39.6% to 35%.  In this case, Mr. Clifford is 100% correct, since higher taxes on the rich (absent everything else) does reduce income inequality as a whole.

“Somehow It’s Okay for CEOs to Make a Lot More Money Than Employees”

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How about the framing of this sentence?  It may not seem “okay” for someone to make more money than someone else, but as economists, the Crash Course hosts should know that wages are not decided by comparing them to other people in the company.  We’ve talked about this before on this blog, but wages are decided by the amount of value you produce to the company (as a wage ceiling), as well as how much the employer (in this case the board of directors) and the prospective CEO negotiate for.

I am incredibly surprised that Crash Course implicitly argues that it’s not okay for two people to negotiate a salary irrespective of two other people negotiating a salary for a completely different position in the same company.  How did this script make it passed the editors on Crash Course?  Isn’t someone there an economist?

I think Mr. Clifford gets it, since later in the video he says:

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When different jobs have different incomes, people have incentive to become a doctor or an entrepreneur or a YouTube star – you know, the jobs society really values.

This doesn’t really talk about how wages are determined, but I’ll take it.

Wow guys.  There is still a lot more to say, so we’re going to have to make this a three-parter.  Thanks for reading and look forward to part three soon (Sunday hopefully)!

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Crash Course Episode #8, Fiscal Policy and Stimulus, Part 1

Crash Course’s most recent video on Fiscal Policy and Stimulus has its ups and downs.  The show’s hosts acknowledge the controversy surrounding Keynesian economics, but not before treating the ideas favorably.  The show equates free market economics with antiquated (and wrong) medical science, and presents only two (both government-centered) economic policies as the potential solutions to national recessions.  Let’s start from the beginning:

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Recessions vs. Unemployment

Crash Course spends the first few minutes of the video talking about what it means when a country is in a recession, followed by a brief history of recessions in post-WWII United States.

The episode notes that dips in the economy correspond with rising unemployment, and unemployment is linked to a number of other negative societal factors: namely suicide, domestic violence, and social upheaval.

Fortunately, Crash Course also mentions that unemployment is not the only potential monster to the economy.  The show gives equal time to discussing the problems with inflation:

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High inflation can be just as bad.  Rising costs wipe out savings and have been the root of protests and riots around the world…

…Many economists argue that policymakers should intervene in the macroeconomy in order to promote full-employment or reduce inflation.

Without directly saying so (at least not yet), the show implies that large-scale unemployment and inflation happen naturally, and government policy may be necessary to fix these problems.

As I wrote about in last week’s episode on inflation, inflation doesn’t just happen naturally in the market.  Widespread price increases happen from new money being created and flowing through the economy.  When Crash Course says “many economists argue that policymakers should intervene in the macroeconomy,” they should also clarify that government monetary intervention has already occurred, and now people are considering if fiscal economic intervention is necessary.


To give them credit however, they are correct that unemployment would still occur in a free market.  All schools of economic thought would agree that as industries are constantly growing and shrinking, and people get laid off when their industry shrinks.  The real question between schools of thought is how a very high unemployment rate occurs, and whether government intervention prevents this from occurring (or causes it to occur).

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Expansionary/Contractionary Policy

Before mentioning that what they are about to explain is debated between schools of economic thought, Crash Course explains Keynesian fiscal policy as generally agreed upon by economists.  They later use examples from the 2008 recession to illustrate how this method of thinking is practiced in the United States, explaining away common objections to their example:

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In 2009 the US government launched a huge stimulus program in response to the financial crisis.  Despite that, employment and GDP both fell.  That sounds like a failure, but the majority of economists think that the situation would have been far far worse without that stimulus.

I mentioned this in a previous post, but if a scientist declares his hypothesis to be true, and then despite their own contrary experimental results, still declares his hypothesis to be true, there’s no use trying to convince him.  They will declare themselves the winner regardless.

Keynesian fiscal theory is based on two main assumptions: decreasing taxes and increasing government spending help the economy (and the reverse hurts the economy).  Their own admitted problem is that helping the economy in this way requires the government to increase their debt, which will be paid back in better economic times.

Taxes hurt the economy.  This is agreed upon by all economic schools of thought, even the communists.  When you take away wealth from a people, what is left is worse off than before.

Government spending helps the economy. Freemarketeers may disagree with me here, but hear me out: government spending, per se, generally helps the economy.  The problem is that government spending necessitates taxes in one form or another.  Free market theory argues that money is better spent in the market than by governments, not that government spending (again, per se), doesn’t do anything good for anyone.


The problem is, you can’t have government spending without taxes, and while Keynesian expansionary policy may seem like you can have your cake and eat it too, issuing debt in the present is the same as taxing the future.  Keynesian economic policy taxes the future for government spending and lower taxes in the present.

Since the increase in present government spending has to come from somewhere, this policy shifts spending from the future market to the current government.  Since freemarketeers argue that any shift from the market (present or future) to government necessarily makes the economy worse off, freemarketeers oppose Keynesian fiscal policy.

So what’s up with the video’s comments on Austerity and the Multiplier Effect?  Stay tuned for Part 2.


Like what I wrote?  Hate it?  Drop your feedback in the comments.

The Circular Flow of Products, Resources, and Money

How do goods, money, and resources circulate between individuals, business, and government? Crash Course explains it and uses this graph to represent the circular flow:

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Notice anything strange in this illustration?

Both households and businesses give and receive in the cycle, since people receive money (which are used to buy goods) for their labor, and businesses receive labor for the money the pay to their employees.

Government, however, only gives money in this graph.  Since government does not create wealth (it only takes and redistributes it), the graph is missing the arrows of money going from households and businesses to the government (i.e. taxes).

I’m not the only one who noticed the error in this graph.  Josh, a fan and commenter of CCC, mentioned this in the comments of the previous article:

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Nice catch Josh.

To be fair, Crash Course does mention taxation when explaining the graph, however:

Screen shot 2015-08-08 at 4.11.00 PMWhere does the government get the money?  Well, they get some of it from taxing households and businesses, and they get some of it from borrowing, but we’ll talk about that later.

Maybe because the government gets its money from both taxation and borrowing, they did not want to include any representation of the inflow of money before explaining borrowing.  This is the only explanation I can think of.

While Crash Course’s illustration does contain a clear error, it is not as crude as economist Paul Krugman’s illustration, which he presented to his Econ 348 students at Princeton:

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In Krugman’s example, people just pass money back and forth to each other.  The exchange element is completely missing.