You are on page 1of 3

The vicious cycle of economic inequality

By: Joseph E. Stiglitz June 11, 2012 09:39 PM EDT

Americas growing inequality is likely to play an important role in this election and rightly so. Americans see that something is happening to our society: We have become increasingly divided. We may all be in the same boat but some are traveling steerage and others first class. Inequality is now far higher than just 30 years ago. The top 1 percent today gets around 20 percent of the nations income twice what it did two decades ago. The top 0.1 percents share has almost tripled. Disparities in wealth are even greater. Some on the right argue that this is the politics of envy. They say what matters is not the share of the pie but the size of the slice. But inequality, especially of the U.S. variety, is bad for growth. The country grew faster in the decades after World War II when it was also growing together, with all groups seeing increases in income. But those at the bottom were growing the most. By comparison, growth since 1980 has been slower, as the share of the bottom and middle has diminished. That means that those in the middle, ordinary Americans who work for a living, let alone those at the bottom, are getting a smaller slice of a pie that is smaller than if we had continued growing as we did postwar. The net result is disheartening: Most Americans are worse off today than they were 15 years ago. Some on the right also assert that those at the top deserve their higher incomes. They earned it, conservatives say. Their riches were due to their greater contribution to society, from which all benefit. I wish that were true but its not. Those at the top arent the true innovators people who provided the intellectual foundations of the computer, for example, or the Internet. Or those who invented the transistor or the laser; or, like James Watson and Francis Crick, who unraveled the genetic code laying the foundations of so much of modern medicine. Much of the top-most wealth instead comes because of successful rent seeking. Economists use the term rents for income derived from owning an asset, rather than from effort. Rent seeking refers to attempts to garner a larger share of the economic pie, rather than making the pie larger. Monopolists, for example, gain their wealth through restricting production which makes the size of the pie smaller. When we look at divided societies abroad, like so many of the dysfunctional oil-rich countries, we diagnose their problem as an infliction of excessive rent seeking too much of societys resources go to attempts to grab a larger share of the oil wealth, too little to expanding the economy. What we dont realize is the extent to

which the United States, too, has become a rent-seeking society. Market forces do, of course, play a role in creating inequality. They have been particularly important in the hollowing out of the middle class. But market forces alone cant explain why the U.S. has more inequality than any of the other advanced industrial countries in which similar forces are at play. Market forces dont exist in the abstract. They are shaped by laws and regulations. And those in the U.S. shape markets in ways that enrich the top but dont necessarily enhance growth and efficiency. Bankruptcy provisions, for example, that protect derivatives encourage these risky products. They also contribute to making the financial sector more bloated and enrich the bankers coffers. Bankruptcy code provisions that say student debts cannot be discharged even in bankruptcy, even when the for-profit schools do not deliver on their promises encourage these schools and lenders to target the least sophisticated and educated. These schools exploit their students hopes and aspirations, their desires to join the rapidly disappearing American middle class. In all this, there is both hope and despair: Hope because the inequality in the U.S. is not inevitable. There are countries that, even with the same market forces at play, have managed to grow with less inequality. There are countries that have managed even to diminish the level of inequality. Indeed, the U.S. has not only more inequality but less inequality of opportunity than any of the advanced industrial countries for which there are data. An American childs prospects are more dependent on the income and education of his or her parents than in any of these other countries. There are economic reforms that would generate more growth, greater efficiency, more opportunity and lower inequality. These include more effective enforcement of and stronger competition laws; better corporate governance laws, so that CEOs cant get as large a slice of corporate revenues; an end of the giveaways to corporations of corporate welfare in all of its guises, including preferential tax provisions, giveaways of our countrys natural resources at less than fair market value and drug procurement at prices far higher than fair market value. There is, however, also a sense of despair because it will most likely be so hard to get these reforms passed. Just as our laws and regulations shape market forces to serve the interests of the top, our political system shapes our democracy so that it serves the same interests. Our system would increasingly be better described as one dollar, one vote rather than one person, one vote as the effects of campaign contributions, lobbying, revolving doors and disenfranchisement all take their toll. Our democracy is put in peril, as confidence in the political system erodes. This was demonstrated so strongly in the 2010 elections, in which only 20 percent of the young

bothered to vote. Too many thought the system is so stacked against them that the outcome would make no difference. Economic inequality feeds into inequalities of political power, leading to still more economic inequality. The U.S. is headed down the path that so many dysfunctional societies have traveled divided societies in which the rich and poor live in different worlds. The rich residing in gated communities, with their own parks and schools. We know what happens to these societies. Its not something to which we should aspire. There is an alternative. But will our politics allow it? Will those at the top come to realize that a house divided against itself cannot stand that this level of inequality is not in their enlightened self-interest? Or will the vast majority of Americans finally realize that they have been sold a bill of goods trickle-down economics has never worked and is especially not working today. In other periods of our history, when inequalities and injustices grew to the breaking point, America changed course. The question is: Will we do so again? Joseph E. Stiglitz is the winner of the Nobel Memorial Prize in Economics and former chairman of President Bill Clintons Council of Economic Advisers and chief economist of the World Bank. His new book is The Price of Inequality: How Todays Divided Society Endangers Our Future, out this month.