The Price of Inequality

The Price of Inequality

By Joseph Stiglitz
Common Dreams
June 06, 2012

America likes to think of itself as a land of opportunity, and others
view it in much the same light.

But, while we can all think of examples of Americans who rose
to the top on their own, what really matters are the statistics:
to what extent do an individual’s life chances depend on the
income and education of his or her parents?

Nowadays, these numbers show that the American dream is a myth.

There is less equality of opportunity in the United States today than
there is in Europe – or, indeed, in any advanced industrial country
for which there are data.

This is one of the reasons that America has the highest level of
inequality of any of the advanced countries – and its gap with the
rest has been widening.

In the “recovery” of 2009-2010, the top 1% of US income earners
captured 93% of the income growth.

Other inequality indicators – like wealth, health, and life
expectancy – are as bad or even worse.

The clear trend is one of concentration of income and wealth at
the top, the hollowing out of the middle, and increasing poverty
at the bottom.

It would be one thing if the high incomes of those at the top were
the result of greater contributions to society, but the Great
Recession showed otherwise: even bankers who had led the global
economy, as well as their own firms, to the brink of ruin, received
outsize bonuses.

A closer look at those at the top reveals a disproportionate role
for rent-seeking: some have obtained their wealth by exercising
monopoly power; others are CEOs who have taken advantage of
deficiencies in corporate governance to extract for themselves an
excessive share of corporate earnings; and still others have used
political connections to benefit from government munificence –
either excessively high prices for what the government buys
(drugs), or excessively low prices for what the government sells
(mineral rights).

Likewise, part of the wealth of those in finance comes from
exploiting the poor, through predatory lending and abusive
credit-card practices.

Those at the top, in such cases, are enriched at the direct
expense of those at the bottom.

It might not be so bad if there were even a grain of truth to
trickle-down economics – the quaint notion that everyone benefits
from enriching those at the top.

But most Americans today are worse off – with lower real
(inflation-adjusted) incomes – than they were in 1997, a
decade and a half ago.

All of the benefits of growth have gone to the top.

Defenders of America’s inequality argue that the poor and those
in the middle shouldn’t complain.

While they may be getting a smaller share of the pie than they did
in the past, the pie is growing so much, thanks to the contributions
of the rich and superrich, that the size of their slice is actually
larger.

The evidence, again, flatly contradicts this.

Indeed, America grew far faster in the decades after World War II,
when it was growing together, than it has since 1980, when it began
growing apart.

This shouldn’t come as a surprise, once one understands the
sources of inequality. Rent-seeking distorts the economy.

Market forces, of course, play a role, too, but markets are
shaped by politics; and, in America, with its quasi-corrupt
system of campaign finance and its revolving doors between
government and industry, politics is shaped by money.

For example, a bankruptcy law that privileges derivatives over
all else, but does not allow the discharge of student debt, no
matter how inadequate the education provided, enriches bankers
and impoverishes many at the bottom.

In a country where money trumps democracy, such legislation
has become predictably frequent. But growing inequality is not
inevitable.

There are market economies that are doing better, both in terms of
both GDP growth and rising living standards for most citizens. Some
are even reducing inequalities.

America is paying a high price for continuing in the opposite
direction. Inequality leads to lower growth and less efficiency.

Lack of opportunity means that its most valuable asset – its people
– is not being fully used.

Many at the bottom, or even in the middle, are not living up to
their potential, because the rich, needing few public services
and worried that a strong government might redistribute income,
use their political influence to cut taxes and curtail government
spending.

This leads to underinvestment in infrastructure, education, and
technology, impeding the engines of growth.

The Great Recession has exacerbated inequality, with cutbacks
in basic social expenditures and with high unemployment putting
downward pressure on wages.

Moreover, the United Nations Commission of Experts on Reforms
of the International Monetary and Financial System, investigating
the causes of the Great Recession, and the International Monetary
Fund have both warned that inequality leads to economic instability.

But, most importantly, America’s inequality is undermining its
values and identity.

With inequality reaching such extremes, it is not surprising that its
effects are manifest in every public decision, from the conduct of
monetary policy to budgetary allocations.

America has become a country not “with justice for all,” but
rather with favoritism for the rich and justice for those who
can afford it – so evident in the foreclosure crisis, in which
the big banks believed that they were too big not only to fail,
but also to be held accountable.

America can no longer regard itself as the land of opportunity
that it once was.

But it does not have to be this way: it is not too late for the
American dream to be restored.


Joseph E. Stiglitz, is a Nobel laureate in economics, and he
has pioneered pathbreaking theories in the fields of economic
information, taxation, development, trade, and technical change.
He is currently a professor at Columbia University, and has taught
at Stanford, Yale, Princeton, and Oxford.

http://www.commondreams.org/view/2012/06/06-6