good afternoon again ladies and gentlemen i will make a very brief uh uh introduction we'll give the photo professor catholic author uh you you can read uh his uh very long resume uh in the booklet he uh was and is a professor at many universities in the us he is at present at boston university he worked for many financial institutions such as the world bank and also with the bank of italy well i think that the uh key element to be considered uh that can well illustrate the title of this lecture is that professor catliker is really at the center in terms of themes of this festival he is i think the top expert or rather he is the inventor of the idea of the generational accounting uh that uh was a book of 1993 even if uh his uh studies are at the center of his work as an economist his first studies date back to the end of the 80s that means he has been you know thinking and processing the different ideas and theories for more than 25 years the key subject for him in in very simple words is how much we download to uh future generations in what we spend to generate a deficit today in european systems like in italy in the course of welfare state which in our country is partially responsible for the high deficits and the increase of debt is well the health care system this is an additional inequality if you followed the multiple discussions uh of the festival of trento you'll be uh well aware of the inequalities which can be found in the field of health care that means accumulating inequalities for the future and to the detriment of future generations this is something which usually at the center of the italian political and public debate professor kotlikov will tell us how to measure inequalities indeed uh his work as a scholar produced an economic model which he will illustrate the model highlights the major gaps existing in the economic and macroeconomic theory and also in the language that we use to manage fiscal gaps budget gaps which are there a very final uh comment because i endeavored to be brief is uh something to which we are all sensitive in 2012 uh professor kotlikov had decided uh to uh start fighting um at that time the leadership of trump and he was a candidate as an independent which is something possible in the u.s something which is something different from the traditional democratic party and the no longer traditional republican party so they can have independent candidates it's a very complex mechanism but um i if i understood correctly he had to give give up that a very important project of major political commitment uh because he could not find the presidential ticket sorry for simplifying things but this is what i gathered maybe you can enlighten me later during the discussion you have the floor thank you thank you thank you very much and antonella it's a great pleasure to be here in trento and uh it's lovely to be in italy it's a beautiful country my wife and i have been spending some time near florence for the last week and you're you have a very special country and it's got a very big place in my my heart um i want to talk to you today about inequality i'll just mention briefly uh that i was a candidate for a president in the last election but i was a write-in candidate and unfortunately unlike france where someone like macron can come out of the blue and get a lot of press attention i came out and got very little press attention so uh i'm not president the president we we now have um is not someone that i think think uh should be president i don't think that he represents our country very well i don't think he represents his party very well i don't think he represents the people of the world very well which uh america needs to do because we're the most powerful militarily and uh economically uh speaking country in the world so um and i know that you're all very uh probably concerned about what just happened with our pulling out of the climate climb the paris climate accord i think everyone should understand that this is a decision by a small minority of well it's a decision of trump and he doesn't have all the power in the world in our country or anywhere else and there's a very strong commitment as a result of his decision by the private sector by the by the companies by the cities by the states to abide by the paris accord so i think in many way it may be that what he did was actually a good thing for the paris accord indirectly but uh it's clear that the climate is changing and consequently i'm going to take off my coat so as antonella indicated i've been working over the years with uh on my own and with other economists primarily alan auerbach at berkeley on something called uh intergenerational accounting which is to try and understand how different generations are going to be treated through time based on the fiscal policies being run in particular countries so the that's one aspect of inequality and this talk is about a little bit about that but it's uh mostly about inequality within generations intra-generational inequality so there's intergenerational across generations in equality but there's also within generation inequality and we've allen and i have been studying that recently the and the idea of this talk is to try and talk is to try and indicate how these types of inequality should be measured because most of the measurement that we're seeing uh being done by uh by economists unfortunately i don't think is connected to our economic theory i don't think it's theoretically appropriate analysis and that we need to do we need to basically stick with our theory to figure out how much inequality there is and and will be in terms of future generations being affected but whether it's climate change or health care whatever um or nuclear proliferation there's many many threats to future generations but regardless regardless we need to uh consider inequality uh appropriately we need to study it uh correctly so um inequality comes down to differences in expected lifetime utility um so how many people here are economists not everybody okay so we economists have a um a notion that people have uh are happy that their happiness derives from two major things one is how much they get to relax how much leisure they get to have and also how much they get to consume and so we measure their happiness in terms of gee how much do they get to consume and how much leisure do they get to have this year and next year and the year after every year in the future and how how happy will they be as a result of their consumption and leisure and what we assume which seems absolutely uh obvious when you think about it is that people have diminishing happiness from consuming more and more at a point in time so for example if um i had a thousand steaks here a thousand pieces of meat i would if i tried to eat them all at once i would get very quickly satiated i would get very tired of eating even florentine beef so so what i'm naturally going to do is try and spread my consumption and also my leisure over time and that's called consumption smoothing so uh and then one of the concerns that comes into play with expected utility has to do with risk if i know for sure that i'm going to get to consume 20 steaks every year or let's say 2 000 steaks every year that's one thing but if i am living in a situation where i get to consume uh zero stakes in some years and a thousand stakes in other years then uh or uh in other uh kind of events uh situations then i'm facing a situation where in some states of the world i'm very happy and i really have more stakes than i really want to eat in other states of the world i'm i'm very unhappy so that's risk that's economic risk and when we're talking about inequality we need to talk about not just the level on average of consumption that people get to do and not just the level on average of leisure that people get to enjoy but also the risks that people will perhaps have to work much longer than they expected or get to consume much less than they had hoped for when it comes to health care there's also how happy can you be if you're if you're ill and you're not being you know you may have an illness which is um not in any way cannot be fixed by modern medicine but you may also have an illness that can be addressed with modern medicine and the in this framework expected utility uh can can incorporate all these issues including the key issue of this conference which is health care inequality so now leisure is hard to measure i don't know whether i'm having actually enjoying leisure right now or whether i'm working right now it's it's a great pleasure i think it's more leisure than work at this moment so it's very hard to measure leisure so economists have been focusing more on consumption and what they've done is to try and focus on the resources the just the inequality in the resources that are used to pay for consumption so we have people focused on income inequality and then we have other people focused on labor earnings inequality because because income includes labor income plus income from assets and then we have some people some economists focused on wealth inequality but ultimately we really want to focus on consumption and equality and we also want to think about the risks that people are being exposed to and these risks again go beyond just consumption and leisure if the climate change that everyone except donald trump believes is happening will lead to the sea level rising by six feet by the end of the century and maybe a hundred feet by the end of the next century that will put large fraction of the world's population at risk and uh this is what uh today's top scientists really believe that unless we change course we will have that kind of a situation it's not we actually it's our children and grandchildren great grandchildren they will face these kinds of threats so it's not just about consumption and leisure but i want to focus today more on consumption because again we can't measure leisure very well but i want to talk to you about consumption because i think we need to start to measure inequality with consumption and consumption correctly and then start developing other methodologies to to measure inequality from from risk and governments can generate inequality they can also reduce inequal sorry they can generate risk and they can also reduce risks i think president trump's recent decision uh is an example of a government that's producing trying to produce more risk for future generation that's something real that can be measured the the loss of happiness or expected happiness as a result of that policy that can be measured so we can't really use our economic tools to get at these issues but again today i'm going to focus more on something that we can more easily measure which is consumption and uh just to summarize again there are these two types of inequality there's intergenerational and then there's intra-generational so intergenerational is saying well look if you take somebody like myself who's i'm 66 over my lifetime how much did i get to consume out of my resources i earned a certain amount of money maybe i inherited some money these are my lifetime resources the difference between those resources and my consumption really represents what the government took away from me or gave back to me on net so so we want to look at different generations showing up over time and ask if they earn you know what we project them to earn what if we uh if they have the lifetime earnings that we measure let's say as of age 18 we measure all their earnings into the future we project those earnings and we value it as of the age that as of the year that they turn age 18 okay so we say okay this is their lifetime income and then how much will they have to pay in lifetime taxes net of any transfers they receive and we take the ratio of that second lifetime net tax payment to the first number which is lifetime income and that's their lifetime tax rate net tax rate and that's really generational accounting uh and what in the u.s we are on a path to produce lifetime net tax rates for future americans which are roughly twice as high as those that my generation i'm in the baby boom generation they're roughly twice as high as my my generation has has and will experience now why is that well we have um some official debt you know italy has a bigger debt to gdp ratio than the us something like maybe 120 120 percent of gdp in the u.s it's about 70 percent of gdp but we have a lot of other obligations that are kept off the books like our paying for our pension plans our social security system our health care benefits to older people to poor people our defense spending these all represent obligations out into the future and they have and they can and have been projected so we can figure out okay the government has to pay for these things these obligations through time they have a certain value in the present so we can value when i say a value in the present what i'm saying is uh a dollar that's uh going to be uh received or paid to uh let's say to me in 20 years it has a certain value today i can put aside perhaps 80 cents today invest it and end up with a dollar in 20 years so the present value of that dollar in 20 years is 80 cents today so all these um payments that are going to be made to me and other people that are in the future can be valued in the present and we can ask um also how much taxes will i and other people be paying and we can then see whether the expenditures that the government projects and i'm not just talking about servicing the official debt paying interest and principle on the official debt but making all these other expenditures like paying for the president's lunch taking the president to um to mar-a-lago every two days to play golf all those are expenditures into the future that have a value and then there are also taxes that are projected and in the us we have this difference between these projected spending expenditures and taxes which is called the fiscal gap so if you project out through the end of time the present value of all the projected spending and subtract the present value of all the projected taxes you end up with what's called the fiscal gap in the us our fiscal gap is 206 trillion dollars today that's an enormous number our gdp is about 20 trillion dollars so we're talking about a fiscal gap that's about 10 times annual gdp our official debt is about 20 trillion dollars as well so most of our obligations are off the books have been kept off the books by by members by politicians who have hired economists to help them cons to help them hide the truth so the accounting that is being done in washington about our fiscal situation is uh far worse than anything that enron corporation did they remember they kept all their obligations many of their obligations off the books until was discovered and um and then they had to put some of the heads of enron into jail well many members of congress should be in jail today but but it's not just from one party it's both parties and it's going back for the last six decades going back to eisenhower um the policy has been to take from young people call the money that you take from them taxes give it to old people you guys are the young people i take money from you i give it to you old people and i tell you young people don't worry when you're old well i'm going to take from the next set of young people and give to you and that obligation to pay you benefits when you're old when you're sitting over here is kept off the books because of my choice of language if i said that i was borrowing the money from you then it would be on the books if i say that i'm taxing you the money i'm going to make you a transfer payment rather than make you principal plus interest payments on the borrowing just that choice of language keeps these obligations off the books so one of the main things i've been pushing in my writings is a problem of deficit delusion that we should not be focused on the official debt or deficits to try and measure how we're treating future generations because those numbers are a result of how i call things what language i use so we don't want a measure of generational inequality to to depend on whether i use one set of words or another set of words whether i discuss the problem in french or italian or german or russian it's the same problem and economics says that the only way to measure things appropriately when it comes to generational burdens is to do this fiscal gap accounting and then figure out what it means for young generations and what it means in our country is that if we don't get current generations to pay more or take less from the government future generations will have to pay out of their lifetime labor income twice the tax rates than the current generations pay their net taxes measured as a present value and divided by their present value their labor income will be twice as high as the as what my generation will end up paying so our country is um bankrupt and we have a course of policy that we're running that is uh jeopardizing the well-being of future generations and this is before we even discuss uh the failure you know the health care issues that we face the the problems with uh north korea and nuclear proliferation that we face those risks and before we discuss climate okay i'm talking about generational inequality uh based just on consumption what our kids will be able to consume now italy it turns out is in much better long-term fiscal shape than the us because you have much better control of your health care spending your defense spending is not as high as the share of gdp as president trump has been reminding you and in addition you have had major pension reforms i think two or three major pension reforms we have not had any pension reform in the us we have just in our pension system an unfunded liability of 32 trillion dollars so if you just forget everything else and just look at our social security system the present value of all this projected social security benefits uh minus the present value of all the social security taxes that are projected that equals 32 trillion dollars that's far bigger than the official debt which is 20 trillion dollars that's more than a year's gdp which is again 20 trillion dollars so so you can see we have major problems of generational inequity in our country but i mostly want to talk today about intra-generational inequality so what i'm saying in both cases is that we're measuring both things the wrong way by and large in every country around the world and the imf at the world bank at the oecd the focus is on official deficits and debts and that's missing the true fiscal gap that um countries are facing and uh and describing it in terms of the implications for future generations so we're basically doing um intergenerational inequality analysis the wrong way now there has been some progress the european commission puts out something called the s2 indicator which has been calculating uh fiscal gaps for eu members and uh again on this basis italy turns out to look very good the but the us does not but basically that's not the key measure of inequality when it comes to generations the key measure is still the official debt and deficit and that's what's discussed by the politicians and that's highly misleading because by choosing the right words you can produce any time path of deficits or debts you like you can have the deficit rise to the debt rise to infinity or declines is to negative infinity you can have it fluctuate through time anything you want you can create just with language this is very similar to what's going on in physics when it comes to measuring distance and time the ethereal relativity tells us that how we our frame of reference our language what direction we are moving through space and at what speed determines how we measure things so there's no unique time no unique measure of time and no unique measure of the length of this table there are an infinite number of measures none of which actually tell you anything because there are too many measures so the debt and the deficit is one of those kinds of problems it's a measure in search of a concept it's a meaningless measure so whenever you hear someone use the word deficit in debt whether it's your professor or whether it's some economist or whether it's a politician tell them i have no idea what you mean because you cannot have any idea they cannot have any idea what they mean either because they're just talking about their choice of words they're not really talking about the underlying economy but now today i want to talk really about intra-generational inequity inequality and here what we do is we look at people at a given age so for example i'm going to tell you about 40 year olds in the u.s primarily today and i want to compare people that are poor and rich and middle class among 40 year olds and i want to look at their uh remaining lifetime resources their wealth plus their human wealth how much they're going to earn measured in present value and i want to line them up from the the richest to the poorest so the ones with the highest resources the top one percent to the ones with the lowest resources i'm just going to look at 40 year olds and the reason i need to look at one age group at a time is that it doesn't make a lot of sense to compare somebody who's let's say 40 with somebody who's 80 because someone who is 80 has already paid their taxes and received benefits in the past and somebody who is 40 is going to pay a lot more taxes in the future and receive benefits in the future so it's like comparing apples and oranges so to do intra-generational uh inequality analysis you have to look within a generation within that's what the intra means within a generation and you have to focus on the key thing which is lifetime spending how much if you take somebody uh some the top one percent of 40 year olds based on the resources they have their labor income measured in present their lifetime remaining lifetime labor income and their uh their net wealth well if you just look at that they may the picture of inequality may be very different than if you look at their spending at the present value what they get to spend over the rest of their life because the government may be involved in taking resources from the wealthy from the rich and giving it to the poor so imagine that you're the 40 year olds and some of you are really rich and some of you are very poor and i'm the government and i take all your resources every single penny every cent of your resources and then i hand it out to you evenly back to you as transfer payments i tax it all away and give it all back to you you'll you will all end up spending the same amount right so we can't analyze inequality without looking at what the government is actually doing and uh if you look at um some of the work that's been done recently uh for example thomas picketty wrote a book that you're probably familiar with about wealth inequality well there's no discussion in the in that book of inequality in fiscal treatment it could be that uh you know we can't really study inequality and wealth without thinking about whether the government actually redistributes the wealth from the rich to the poor so that's what economics tells us to do to look not to look at the bottom line to look at spending inequality because that's the bottom line of what you get to uh to consume and uh i've done this in a study with uh alan auerbach and a uh another uh software engineer from my company named daryl gold kohler and um this study which i'll show you results of in a second is very different from conventional inequality analysis because conventional inequality analysis for example the piketty book is comparing 80 year olds wealth with that of 20 year olds well we know from the life cycle theory of saving the people when they're 20 they don't have a lot of money right unless they inherited some money but apart from that they're going to be saving as they age for their retirement so it doesn't make a whole lot of sense to look at inequality and wealth and compare 80 year olds with 20 year olds 20 year olds have not yet had a chance to accumulate wealth and 80 year olds have so it just doesn't make any economic sense but that's what he did and other people are studying inequality and labor income or or total income and again they're comparing old people with young people this to me and i think the economic theory is just uh wrong-headed it's just not appropriate because people's we're ultimately trying to get at people's expected remaining expected lifetime utility and that depends on their consumption and leisure and risk for the rest of their life and so somebody who's got maybe 20 years at most to live and somebody who has 80 years left to live you really can't compare these two sets of people so it's important to compare within each generation so let's uh let's just do that i'm going to show you some intergenerational accounting in one second but i want to tell you how we actually how the methodology works so we have a data from the federal reserve survey consumer finances it's a it's a cross-section national survey and uh what it does is it goes to different households and ask them a lot of questions and it over samples very rich people so that it doesn't miss the super rich and it has population weights so i could come to you your name is andrea i can come to you on the survey surveyor and i can ask you about your labor income and uh and about your wealth and about your retirement accounts and about your household composition your wife and her earnings and how much you're paying in mortgages you know mortgage payments i could look at i collect all this information from you and then what we do in this study is we take that data and we run it through a financial planning program which calculates how much you you will spend every year in the future assuming you want to keep spending the same amount through time adjusted for your family composition for example you may have some young children so you're going to want to spend more when the kids are at home so everybody has the same living standard but then when the kids leave you can spend less because you have fewer mouths to feed so this program is something i developed through a software company that i started in 1993. so we take the 6000 or so observations from the survey consumer finances and we take each cohort so we'll take let's say 40 year olds take all the 40 year olds run them through the program and then we figure out for each household you're a 40 year old household how much you're going to be spending every year and the assumption of the program is that you're trying to have a smooth living standard that you want you don't want to have um spend uh you know consume a thousand steaks today and very few steaks when you're 50 and you're 80. 80 but you want to have a smooth ride a smooth living standard and this is a a proposition called the life cycle theory of saving who knows who got the nobel prize for the life cycle theory of saving modigliani one of your most famous economists ever along with a number of other uh famous italian economists and franco was a good friend of mine unfortunately passed away but a great economist but even going back a hundred years we have to think about irving fisher who developed the theory of saving and inner temple consumption smoothing this really goes back to fishers and that we now have software that can actually make this operational you can take the data run it in there and a half a second later i can see your whole spending path and i can make different you know i the the program incorporates borrowing constraints cash constraints so if you have very low income right now but are going to have higher income later maybe you have a big mortgage right now to pay so your just discretionary spending has to be lower as a result right and the program takes that into account so it does uh you economists here will recall the term uh or know the the technique called dynamic programming it's a mathematical technique that's used to solve these kinds of uh problems that was developed in the 50s by a fellow named richard bellman and we have a our program can do a dynamic program for your household in a half a second maybe 25 a quarter of a second actually so it works very quickly uh and uh uh even though it's a pretty complicated dynamic program we've figured out how to get it to work really fast and then you can check to make sure everything lines up all the budgets are satisfied so you can that the consumption is actually smoothed apart from these cash constraints so then you can see that the program is working so it's like getting into a a ferrari and stepping on the maybe you don't know what kind of car it is but if you step on the gas you know it's a ferrari right or a maserati you know it's an italian car that works well it's the same thing here you can without knowing all the inside of this program you can see the results uh are correct everything lines up so so um this is what we did we took the survey consumer finances we take the 40 year olds and the 30 year olds and the 20 year olds we process them each separately and we figure out gee in present value how much do you get to spend and how much you get to spend all the 40 year olds and what's the inequality in spending and we're incorporating in this program all the taxes that the federal government levies and all the taxes that the state government's levy and also all the transfer benefits that are provided to by the federal government like social security benefits and health care benefits like medicare and medicaid and also the benefits that the state governments are providing they also provide some of the medicaid there's also food stamps and transfer welfare payments so we took about three years to put together this program so that it would incorporate all the fiscal policy of the country the entire country so it's the first comprehensive you're going to see in one in about a uh about five seconds you are going to see the first real picture of u.s inequality that's ever been generated because to do it right you have to do it within cohort and you have to incorporate all the taxes all the transfers and you have to incorporate not just one year's income but all your future earnings and uh and your wealth you have to incorporate everything over the rest of your life because utility is about the rest of your life it's not just about a point in time so this is what economic theory says to do and oops so we're not going to do it so um just to be clear the lifetime budget constraint just a little bit of the algebra here c is lifetime consumption r is lifetime resources t is lifetime net taxes and uh so lifetime resources is human wealth which is the present value of your labor income human wealth and uh w is uh your net wealth like your stocks your bonds your retirement accounts your assets and uh also the equity you have in your home that's part of net worth so what we're trying to do is look at inequality and see not just inequality in w or or inequality in r but inequality ultimately in c because the t can um is important so uh this is what thomas picketty's book was about the fact that the top one percent of 40 year olds have nineteen percent of the wealth so their share of the wealth is nineteen times larger than their share of the population they're the richest one percent but their share of the spending is only eleven 11.5 percent as so that's because the fiscal system is very progressive in our country i don't want to try and i'm not trying to suggest that there's no inequality in our country all you have to do is look at donald trump's yacht to know and how people are living and poor the poor sections of any u.s city to know there's massive inequality and it's massive inequality and spending but we need then to measure things correctly and then we have to think about whether we want to go beyond the progressivity of the current fiscal system to make it more progressive to uh to elim to make things less unequal so you can see here that uh the top one percent are consuming a whole lot less than their share of wealth the top the lowest 20 percent uh their share of the wealth is only 2.5 but their share of the spending is 6.3 and this has to do with the redistribution from the from the government so you see that redistribution in this picture right here which is um the lifetime net tax rates of different um uh 40 year olds so the top one percent uh if you take their remaining uh resources put that in the denominator of a ratio tax rate and then take the present value their taxes net of their transfers then you can form a lifetime remaining uh net tax rate so let's say that in present value i'm a rich person i'm a 40 year old i have a million dollars in resources either labor income has a present value and my net wealth together is a million dollars and out of that the program says that i i will be handing over in present value two hundred thousand dollars in taxes net of transfers i receive so my lifetime net tax rate will be twenty percent so what this is saying is that um the top one percent their lifetime net tax rate is 34 their average tax rate and for the poorest 20 it's minus 52.7 it's it's negative because they're receiving more than their pain so you can see that the us fiscal system is very progressive whether that's progressive or not or enough is you know i don't think it's progressive enough because i i see huge inequality in living standards in our country but that's really my value judgment my job as an economist is not to inject my values is to really just discover economic realities and let society at large decide what to do about them and also to suggest reforms that might help things but if you look at uh inequal if you look at tax rates based on current income so if you just take this year's taxes net of any transfer payments this year and divide by this year's income labor income plus asset income you get average tax rates which look very different so this is what these orange bars are very different especially at the bottom you can see that the the fiscal system looks much less progressive on an annual basis than it does on a lifetime basis and uh there's no economic rationale for doing things on an annual basis except that that's what's hap you know there's no rationale for it in terms of our economic theory but that's what we're doing down in washington the think tanks and congress they're all measuring inequality and fiscal progressivity based on these orange bars and they should be using the blue bars to see what's going on again it doesn't make sense to compare an 80 year old with a 20 year old and assume that people are going to live for just one year that's what's going on down in washington and also probably in your country in other countries when it comes to this kind of analysis so uh why is uh why are things so uh more progressive than you might have thought well the um the top one percent are paying a disproportionate share of taxes and uh the poorest 20 percent they're not paying 20 of the taxes they're paying much less they're getting more than 20 percent of the transfer payments of the benefits of the top one percent are getting a small share of the benefits so that's where the progressivity is coming from the tax transfer system when you incorporate all the the factors there's also labor income which is this orange bar and that's more equally distributed than net wealth and financial wealth and and home equity so so this is uh what we need to look at now here's a different way to look at progressivity which is like marginal tax rates the other was average tax rates here the question is um if i give you um let's say i come to your name susanna okay susanna if i give you another thousand dollars you're a survey participant from in this federal reserve survey and i give you a thousand dollars it um i i run your your um your data through the program but then i increase this year's labor income by a thousand dollars and i ask how much will you get to spend in present value over the rest of your life based on that extra thousand dollars if it turns out that you can get to spend um seven hundred dollars in present value then you're facing a 30 percent tax at the margin a marginal tax rate of 30 percent so this is uh so our machinery can be used to figure out people's incentives to work and we have in our country as you have in your country many different fiscal programs we have about 20 major fiscal programs and each of these programs has their own little tax system well obviously there's a federal income tax but then there's things called for example food stamps if you're poor you get food stamps you get the government sends you a piece of paper that says you can buy food and with this with the stamp it's like dollar you know but if you earn more money you lose those food stamps you lose about 24 cents on the dollar if i earn an extra dollar i can lose 24 cents in food stamps if i earn an extra dollar i can learn you lose 22 cents in the earned income tax credit which is part of the federal income tax i could lose my welfare benefits i could lose possibly i could lose all of my medicaid benefits so we have to so the program incorporates all these programs so it can figure out the comprehensively what the marginal effective tax rate is and you can see that they're very high for for all the different groups here and these are median uh figures so there's people above and below half the people are above and half the people are below so if you look at the top one percent they're at a very high median marginal tax rate except 51 percent why is that so high well if you earn money and you save a good part of it which the rich would likely do then they're going to have to pay taxes on their asset income into the in the future so i earned an extra thousand dollars some of it i consume now obviously some i pay some taxes on right now my labor my current income taxes but then next year i'll have more assets because some of this money i'll save and that will produce more asset income and that will produce more taxes on that asset income right so these taxes this is called double taxation and they add up so it turns out that half of the people in this top one percent are facing marginal tax rates above one percent that's pretty high marginal taxes but if you look at the the lowest uh quintile the poorest 20 their median tax rate is 37 percent that's also quite high some of these people have marginal tax rates well above 100 well above 10 000 because if they earn another dollar or an extra thousand dollars they will lose eligibility for certain programs so our fiscal system is not well designed it's not just that our country is going broke and endangering our future generations we also have these uh very major disincentives for half the population not to work and you know i'm not particularly worried about the top one percent i think they like to work just because they like to work it's probably not going to affect their labor supply if elon musk has to pay uh 80 at the margin he's still going to go work he loves his job he gets to build uh cool looking cars test drive them himself build spacecrafts spacecraft all these things that he gets to do the poor poorest people are the ones we need to think about if we've got half the people above a 37 percent marginal tax rate what that is doing is locking a lot of people into poverty so the republicans in our country are concerned about the government the reason that trump was elected i think has a lot to do you know a lot of factors part of it was hillary was not such a great candidate she didn't seem to have many new ideas the russians were helping trump lots of reasons right but there's also this issue of do we have a system that's actually uh kind of focused on the future on our children are we doing what we need to do to make sure that our kids are are not going to be facing massive obligations tax obligations that these were themes of the republicans but there's also marginal taxes that's another concern of the republicans and you you know in the debate right now about tax reform you hear some members of congress talking about on the republican side talking about the high marginal taxes that people are facing and they certainly are facing them so uh so this is um you know before you can fix a problem you need to understand it and so this is about understanding the the problem uh i just want to show you um that the story about wealth inequality these are 20 year olds wealth versus uh spending inequality being very different is true for 20 year olds at the top end at the bottom end and here's a 60 year olds again they have a much smaller share of spending than they do of of wealth so we have to um i think we're now at a point in terms of our technology in economics where we can actually do things the way economics does to do it when it comes to measuring things but um and i just a couple more slides and then we'll see if there's some well maybe a minute or two for questions if you look at people uh ranked by their lifetime resources and you rank them by their current income you get uh big differences for example the uh the 20 the um the third quintile those people that have um of 40 year olds that have um uh they're in the third uh 20 group that's what a quintile is they've got kind of like the the third highest level of uh of income current income you might think that they would also have uh they'd be in the 20 the third quintile when it comes to their lifetime resources but only 57 are in that quintile so using current income as a proxy for remaining lifetime resources is not appropriate because it's misclassifying people very significantly so a last uh point is about risk we need to um to try and incorporate the risks we're imposing and also taking away from people when we provide health insurance or we get rid of health insurance for example that's affecting people's risks of having very high you know having their their diseases cured or not and this kind of analysis uh is good for certain purposes but it's not going to handle that problem it's not going to study how expected lifetime utility for a cohort is distributed taking into account the risk that people face the probability that that in 10 years they're going to be very sick with the disease which could be cured but they're not going to get the cure because the government has set up the health care system this way rather than than that way so i think the way we're going to have to study that is with computer simulation and i've been uh during my career been developing computer simulation models that can that are much more stylized abstract than actually going and looking at the data and really just processing the data but these data are not the whole picture they're part of the picture they're an important part of the picture but we need to to do uh in effect monte carlo simulations simulate all the outcomes that different uh generations will face and also different groups within a generation will face over the rest of their life and trying to understand the dispersion the inequality in expected lifetime utility uh from the from the risk as well as kind of the average level of spending that they get to do so let me stop there and thank you so much for coming thank you very much i'm very sorry people are leaving just because your presentation is over but i think that we should take advantage of this opportunity to raise questions so after this uh lecture we are given the opportunity to uh raise questions by the way i'd like to thank both the professor and susana kamufo as well so you developed a model that measures inequalities something that would otherwise uh be impossible do we have questions from the floor i had a couple of questions to raise but i see that somebody is ready uh to ask a question can you please teach your name what policies do you suggest to offset the issues that you um raised i did it in a very different way which is i i sat down and spent um about four months writing a 157 page book about what to do to fix these kinds of problems and for example on the healthcare you know we have um the president we have about we had about 50 million people without any health insurance in our country before president obama took office we're now down to about 30 million people without health insurance if president trump has his way we'll go back to 50 million people without health insurance my view is that we need to give everybody in our country an identical health insurance plan a basic plan paid for by the government but it's one in which uh it would be a system where the government would pay the insurance company that you choose based on your expected cost under the basic coverages so if you had diabetes you would get and you chose this particular insurance company called let's say kaiser permanente their big insurance company in the u.s and you have diabetes you would the government would send kaiser a very big check to cover you for the year and then the government is out of the picture now they have to take care of you for the year a year later if you're healthier what you're whatever your condition is you would choose either kaiser again or some other company and again the government would send a check to whichever company so there would be competition among the companies and the government would be able to figure out or determine what is covered it might be that these particular drugs are covered but those other drugs are too expensive for the whole country to to afford and they're not going to be included in the basic cover and the basic plan now the other important thing is this paying the insurance companies a different amount based on each person's pre-existing condition their expected cost that gets rid of the entire problem with competition in the health care sector because the health insurance companies will no longer have an incentive to leave the people with diabetes out of the picture and just try and get people that are healthy instead of doing that cherry picking that's you know choosing the good cherries and not choosing the bad cherries instead of that they'll realize that the diabetic patient is coming with a much bigger payment so we need to understand you know the basics basic market failure in the health insurance industry and just address it directly and now if we had everybody having a an identical basic plan and i'm talking about spending 10 11 of gdp which is pretty much what italy spends on gdp on health care we currently spend about 18 in our country but i think if we spend 10 11 percent of our gdp on a basic plan for everybody we would have a much less unequal society i'm also proposing a a a very different tax reform a tax system than we now have i would get rid of the federal income tax the corporate income tax the estate and gift tax and all that sounds very republican but i would replace those with a value-added tax a progressive consumption tax that that kicks in after a hundred thousand dollars of consumption an inheritance tax that would kick in after you receive five million dollars of inheritance at a twenty percent rate i'd give everybody a 20 a 2 000 per person payment a demogram i'd also have a carbon tax so about 80 dollars per um per a metric ton of co2 emissions so that was my plat part of my platform was fixing the health care system fixing the tax system also fixing the social security system with a brand new uh social security system at the margin freeze the old system pay off what you owe under the old system and set up a new system that's modern for young people younger workers that is not unfunded is fully funded so there are ways that economics can help but i don't see the public you know we're not having that debate because we have politicians who are kind of trapped in their language even if they wanted to uh you know we're supportive of what i'm proposing they'd be too afraid because it would alienate some members of their party if they were to say you know use words that they're not used to hearing that the party members are not used to hearing we're very much trapped in our language and uh that's where somebody from the outside can make a difference it's not uh unfortunately it's not did it well i'm sorry i wasn't elected president i'm sure you're sorry i wasn't as well but um that's the situation so we're going to have to make the best of president trump and i think there are members of congress especially in the senate republican senators who are grown-ups who are adults who are going to make sure that if we end up with a new health care system it's not an abomination that we don't have 24 million people uninsured more people uninsured than today and i think they're going to probably do a tax reform that makes some economic sense so uh the um yeah the picture i think is probably better than many people fear any any other questions okay see my name is piero professor i have a question not on policies but on what's happening for real you've been very clear in explaining that measuring measurements of inequality are inaccurate because they do not consider the difference in different age cohorts so my question is how can we consider life expectancy so if you're correct for life expectancy i wanted to understand whether well distribution in the u.s is fair uh or less fair is more or less uh unequal what is your feeling thinking about uh the inequalities in european countries uh if compared to the us and what do you think is the impact of the aging what do you think that aging what what role does aging play in that on inequalities in the us and in other european countries that was an excellent question um about the importance of life expectancy that the poor the lowest 20 percent certainly die at younger ages on average than the rich and that's become increasingly the case we have new evidence from the national science foundation study that mike one of my co-authors was actually working on uh al nauerbach on in developing these data which show that the poor dying younger and the rich are dying later so this is uh perhaps for the first time in u.s history that we have uh poor people dying at younger age their life expecting to see is actually declining so in our study i i've neglected to tell you but in our study we took very careful uh paid very careful attention to differences in life expectancy because we what we did is we we could figure out the lifetime labor income of these different uh people in the sample and then using the data that was generated by the national science foundation we were able to look at all the survivor paths of each household so for example if i take antonella's uh as a sample observation she's let's say 40 years old she has a husband well it could be that she passes away in three years and her husband lives for 20 years for 20 years or he dies in five years and she lives uh to 90. these are all the different these are all different survivor paths so what we did in our calculation is we weighted each of these survivor paths by the probability of their occurring and we took into account the fact that her probabilities of dying and her husbands were based on their on how rich they were so i think we've you know done a a very careful job on that it took the study took about three years to complete and a large part of it was dedicated to making sure we dealt with that problem and also when people die in our study we treat their the money that they leave as part of their spending so it's not like we're leaving out some of the spending that the rich do which we're counting that as part of the spending of the rich the the quest that they leave and also any estate and gift taxes they have to pay at the end that's also incorporated as part of their net taxes so we tried to be really uh thoughtful about about that issue of uh life expectancy any other it's been a long guys are probably pretty hot and had enough economics for the day that's just fine you have a question back here i see somebody with a hand partly do you have a question yeah there's a question back there no we're the other side c hello i guess i just had a question about italian please because the other no italian english fantastic sorry i tried but i don't know if i just i just actually wanted um if you could just go over again your results so what you're saying was that actually because what we've been hearing for the last few years is that um wealth and equality and other forms of health inequality quality life expectancies in the us are huge um and you're saying that that's lower um than we think it actually is and that um in terms of tax um the u.s is very fiscally progressive is that what yeah yeah i think the answer is that we need to look at the actual facts and the facts are that spending inequality is much less than wealth inequality but it's still very big you know if the one percent get to spend top one percent get to spend 11 times their share of um of uh of resources of their share of the population and the low bottom twenty percent only get to spend six point five percent of they should be spending at least 20 you know 20 to be equal they're only getting their share of spending is only 6.5 there's still a lot of inequality it's just that it's much less than some people have made out we need to look at spending inequality and then the other thing i think you're raising is have things gotten worse over time in the u.s have we become more unequal this is one of the propositions of piketty that things are becoming and also emmanuel siaz from berkeley that inequality is increasing well i think it could be true but it may not be true it's um we need to look at the inequality and spending over time so we need to go back perhaps to like the 1960s and do the whole study for 1960 there is data from 1960 the survey consumer finances goes back to 1962 to 60 i think 64. so potentially we could actually do a cross-time comparison of of look at 40 year olds today their inequality in spending and look at them back in 1962 and see whether things have gotten much less equal back in 1962 we had a top marginal tax rate of not i think 90 or 70 in our federal income tax so it's possible that things um you know we had a more progressive fiscal you know it could be that spending inequality is is bigger now than it was uh but i can't say for sure without doing the analysis so it's kind of like let the facts talk but develop facts that actually connect to the theory don't just focus on numbers that are kind of make a good headline but don't actually tell you that much about what's really going on or don't tell you everything that's really going on let me put it that way yeah i have some questions yes another question actually i had two questions i have more of a theoretical question perhaps question one lauren summers and yourself uh had a controversy with franco modeliani lauren summers is the theoretician of a stagnation so i was wondering whether you believe that there's stagnation of the world because there's too much saving this is my first question is there stagnation because of too much saving is there stagnation because of too much saving i don't think so i mean if you look in the u.s we have a very low saving rate if you measure saving properly our national saving rate is about four percent right now it was not it was about 15 in the 1950s so it's gone downhill decade after decade there's been some job movements but it's basically going downhill our domestic investment rate has pretty much followed our saving rate so our domestic investment rate net domestic investment as a share of net national income is five percent it used to be 15 as well so countries that um save tend to be countries that grow they also be our countries that invest if you look at china right now they're saving at a tremendously high rate they're investing at a very high rate they're growing at a very high rate if you look at japan in the 1950s and 60s and 70s same thing they were very high savers very high investors very high growers so i think the correlation uh i think our problem in the us is that we're consuming too much uh we're not saving and investing enough and what we're doing you know when i'm the if i'm the us government and i take from young people money and i give it to old people as transfer payments and i tell young people don't worry you'll get to expropriate your children when you're older what do you do with the extra money well you spend it we don't have any a lot of altruism in our country it's not like older people are taking the money and giving it back to their kids and trying to protect their kids from this fiscal problem that they're facing instead the data show very clearly that the old people are consuming as if they had no children as if they're not related to anybody else and so we've been able to test what's called intergenerational altruism and it's very clear that um there's very little evidence of it in the u.s i would say there's no evidence of it so our saving rate is very much connected with our transferring from the young to the old this again goes to the issue of generational uh equality or equity uh we have been taking we've been engaged in a take as you go policy take from the young gift to the old take from the next it's really a ponzi scheme there's another famous italian economist right we've been running a ponzi scheme in our country for six decades and keeping it off the books that's the definition of a ponzi scheme which is to engage in a financial uh machination where you just where you don't disclose what you're doing that's what madoff did that's what ponzi did that's what enron did these were all ponzi schemes in their own way so i don't think that saving is our problem i think our i think the low savings our problem we're not we're not saving too much we're saving too little we're investing too little but i think the other big issue we have to worry about is robots because robots are taking over people's jobs left right and center and a lot of people would say well you know if you look at agriculture we had about half of the workforce in agriculture back a hundred years ago now it's only two percent and people still have jobs but my response to that is look at the horses we had about 20 million horses about a century ago we may have a half a million horses now we did actually put the horse out of business and the concern i have with uh with robots is that they will put so many people out of jobs or out of good jobs that people will not be able to afford what the robots make so there's a kind of a general equilibrium problem here as we call it in economics where uh the all these guys uh you know these tech ceos at amazon or at uh google who want to have drones drop our packages and have trucks that have no drivers deliver things well seven percent of our workforce in the us is involved in transportation so if all this happens as they plan it to happen and they're working very hard to make it happen well what are those seven percent of people gonna do uh it's not like we you know so i'm very concerned about automation and what that means for the next generation and how that's going to work out because you can write down theoretical models where everybody in the future ends up worse off you have technological improvements but because of this problem of people losing their jobs or losing their wages they're not able to buy the goods that are being are able to be produced in some ways more cheaply with better technology and then through time you end up in the long run with everybody worse off so there's a paper on my website which is called kotlikoff.net that's the website and it's called robots or us it's really about the fact that we are producing uh kind of intelligence in the form of software programs that is that are really taking over our jobs so these robots that we've created are really uh former versions of us you know our uh we're competing with uh with with dead humans in effect dead engineers uh engineers who produce things in the past so we we have to be very concerned about inequality in the context of automation because you can show theoretically that this can be bad for everybody in the long run everybody can be worse off the the way to respond to that in terms of policy is to make sure that the winners uh pay the losers along the path so that means that a mark zuckerberg or elon musk or the the heads of google they have to pay enough of their of their uh their newfound wealth to other people so that these other people can afford to buy the products that they're selling that's really important uh so that you know that's one of my big concerns uh about the future shall we uh so as there are no further questions i think that we can uh draw a close to this meeting and you will be dealing of the into the intergenerational gap for robots in a few years you'll have to deal with the intergenerational gap for uh the robot i'd like to thank professor kathleekv and uh welcome to italy thank you very much for your lecture you