Original Link: http://www.project-syndicate.org/commentary/the-price-of-inequality
By Joseph E. Stiglitz
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
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
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.
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
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.