Stiglitz: Of the 1%, by the 1%, for the 1%
mobbsey at gn.apc.org
Sat Oct 22 09:05:01 BST 2011
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Of the 1%, by the 1%, for the 1%
Americans have been watching protests against oppressive regimes that
concentrate massive wealth in the hands of an elite few. Yet in our own
democracy, 1 percent of the people take nearly a quarter of the nation’s
income -- an inequality even the wealthy will come to regret.
Joseph E. Stiglitz, Vanity Fair, May 2011
I t’s no use pretending that what has obviously happened has not in fact
happened. The upper 1 percent of Americans are now taking in nearly a quarter
of the nation’s income every year. In terms of wealth rather than income, the
top 1 percent control 40 percent. Their lot in life has improved considerably.
Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.
One response might be to celebrate the ingenuity and drive that brought good
fortune to these people, and to contend that a rising tide lifts all boats.
That response would be misguided. While the top 1 percent have seen their
incomes rise 18 percent over the past decade, those in the middle have
actually seen their incomes fall. For men with only high-school degrees, the
decline has been precipitous -- 12 percent in the last quarter-century alone.
All the growth in recent decades -- and more -- has gone to those at the top.
In terms of income equality, America lags behind any country in the old,
ossified Europe that President George W. Bush used to deride. Among our closest
counterparts are Russia with its oligarchs and Iran. While many of the old
centers of inequality in Latin America, such as Brazil, have been striving in
recent years, rather successfully, to improve the plight of the poor and
reduce gaps in income, America has allowed inequality to grow.
Economists long ago tried to justify the vast inequalities that seemed so
troubling in the mid-19th century -- inequalities that are but a pale shadow
of what we are seeing in America today. The justification they came up with was
called “marginal-productivity theory.” In a nutshell, this theory associated
higher incomes with higher productivity and a greater contribution to society.
It is a theory that has always been cherished by the rich. Evidence for its
validity, however, remains thin. The corporate executives who helped bring on
the recession of the past three years -- whose contribution to our society,
and to their own companies, has been massively negative -- went on to receive
large bonuses. In some cases, companies were so embarrassed about calling such
rewards “performance bonuses” that they felt compelled to change the name to
“retention bonuses” (even if the only thing being retained was bad
performance). Those who have contributed great positive innovations to our
society, from the pioneers of genetic understanding to the pioneers of the
Information Age, have received a pittance compared with those responsible for
the financial innovations that brought our global economy to the brink of ruin.
S ome people look at income inequality and shrug their shoulders. So what if
this person gains and that person loses? What matters, they argue, is not how
the pie is divided but the size of the pie. That argument is fundamentally
wrong. An economy in which most citizens are doing worse year after year -- an
economy like America’s -- is not likely to do well over the long haul. There
are several reasons for this.
First, growing inequality is the flip side of something else: shrinking
opportunity. Whenever we diminish equality of opportunity, it means that we
are not using some of our most valuable assets -- our people -- in the most
productive way possible. Second, many of the distortions that lead to
inequality -- such as those associated with monopoly power and preferential
tax treatment for special interests -- undermine the efficiency of the economy.
This new inequality goes on to create new distortions, undermining efficiency
even further. To give just one example, far too many of our most talented
young people, seeing the astronomical rewards, have gone into finance rather
than into fields that would lead to a more productive and healthy economy.
Third, and perhaps most important, a modern economy requires “collective
action” -- it needs government to invest in infrastructure, education, and
technology. The United States and the world have benefited greatly from
government-sponsored research that led to the Internet, to advances in public
health, and so on. But America has long suffered from an under-investment in
infrastructure (look at the condition of our highways and bridges, our
railroads and airports), in basic research, and in education at all levels.
Further cutbacks in these areas lie ahead.
None of this should come as a surprise -- it is simply what happens when a
society’s wealth distribution becomes lopsided. The more divided a society
becomes in terms of wealth, the more reluctant the wealthy become to spend
money on common needs. The rich don’t need to rely on government for parks or
education or medical care or personal security -- they can buy all these
things for themselves. In the process, they become more distant from ordinary
people, losing whatever empathy they may once have had. They also worry about
strong government -- one that could use its powers to adjust the balance, take
some of their wealth, and invest it for the common good. The top 1 percent may
complain about the kind of government we have in America, but in truth they
like it just fine: too gridlocked to re-distribute, too divided to do anything
but lower taxes.
E conomists are not sure how to fully explain the growing inequality in
America. The ordinary dynamics of supply and demand have certainly played a
role: laborsaving technologies have reduced the demand for many “good” middle-
class, blue-collar jobs. Globalization has created a worldwide marketplace,
pitting expensive unskilled workers in America against cheap unskilled workers
overseas. Social changes have also played a role -- for instance, the decline
of unions, which once represented a third of American workers and now
represent about 12 percent.
But one big part of the reason we have so much inequality is that the top 1
percent want it that way. The most obvious example involves tax policy.
Lowering tax rates on capital gains, which is how the rich receive a large
portion of their income, has given the wealthiest Americans close to a free
ride. Monopolies and near monopolies have always been a source of economic
power -- from John D. Rockefeller at the beginning of the last century to Bill
Gates at the end. Lax enforcement of anti-trust laws, especially during
Republican administrations, has been a godsend to the top 1 percent. Much of
today’s inequality is due to manipulation of the financial system, enabled by
changes in the rules that have been bought and paid for by the financial
industry itself -- one of its best investments ever. The government lent money
to financial institutions at close to 0 percent interest and provided generous
bailouts on favorable terms when all else failed. Regulators turned a blind
eye to a lack of transparency and to conflicts of interest.
When you look at the sheer volume of wealth controlled by the top 1 percent in
this country, it’s tempting to see our growing inequality as a
quintessentially American achievement -- we started way behind the pack, but
now we’re doing inequality on a world-class level. And it looks as if we’ll be
building on this achievement for years to come, because what made it possible
is self-reinforcing. Wealth begets power, which begets more wealth. During the
savings-and-loan scandal of the 1980s -- a scandal whose dimensions, by
today’s standards, seem almost quaint -- the banker Charles Keating was asked
by a congressional committee whether the $1.5 million he had spread among a
few key elected officials could actually buy influence. “I certainly hope so,” he
replied. The Supreme Court, in its recent Citizens United case, has enshrined
the right of corporations to buy government, by removing limitations on
campaign spending. The personal and the political are today in perfect
alignment. Virtually all U.S. senators, and most of the representatives in the
House, are members of the top 1 percent when they arrive, are kept in office by
money from the top 1 percent, and know that if they serve the top 1 percent
well they will be rewarded by the top 1 percent when they leave office. By and
large, the key executive-branch policymakers on trade and economic policy also
come from the top 1 percent. When pharmaceutical companies receive a trillion-
dollar gift -- through legislation prohibiting the government, the largest
buyer of drugs, from bargaining over price -- it should not come as cause for
wonder. It should not make jaws drop that a tax bill cannot emerge from
Congress unless big tax cuts are put in place for the wealthy. Given the power
of the top 1 percent, this is the way you would expect the system to work.
America’s inequality distorts our society in every conceivable way. There is,
for one thing, a well-documented lifestyle effect -- people outside the top 1
percent increasingly live beyond their means. Trickle-down economics may be a
chimera, but trickle-down behaviorism is very real. Inequality massively
distorts our foreign policy. The top 1 percent rarely serve in the military --
the reality is that the “all-volunteer” army does not pay enough to attract
their sons and daughters, and patriotism goes only so far. Plus, the
wealthiest class feels no pinch from higher taxes when the nation goes to war:
borrowed money will pay for all that. Foreign policy, by definition, is about
the balancing of national interests and national resources. With the top 1
percent in charge, and paying no price, the notion of balance and restraint
goes out the window. There is no limit to the adventures we can undertake;
corporations and contractors stand only to gain. The rules of economic
globalization are likewise designed to benefit the rich: they encourage
competition among countries for business, which drives down taxes on
corporations, weakens health and environmental protections, and undermines
what used to be viewed as the “core” labor rights, which include the right to
collective bargaining. Imagine what the world might look like if the rules
were designed instead to encourage competition among countries for workers.
Governments would compete in providing economic security, low taxes on
ordinary wage earners, good education, and a clean environment -- things
workers care about. But the top 1 percent don’t need to care.
O r, more accurately, they think they don’t. Of all the costs imposed on our
society by the top 1 percent, perhaps the greatest is this: the erosion of our
sense of identity, in which fair play, equality of opportunity, and a sense of
community are so important. America has long prided itself on being a fair
society, where everyone has an equal chance of getting ahead, but the
statistics suggest otherwise: the chances of a poor citizen, or even a middle-
class citizen, making it to the top in America are smaller than in many
countries of Europe. The cards are stacked against them. It is this sense of
an unjust system without opportunity that has given rise to the conflagrations
in the Middle East: rising food prices and growing and persistent youth
unemployment simply served as kindling. With youth unemployment in America at
around 20 percent (and in some locations, and among some socio-demographic
groups, at twice that); with one out of six Americans desiring a full-time job
not able to get one; with one out of seven Americans on food stamps (and about
the same number suffering from “food insecurity”) -- given all this, there is
ample evidence that something has blocked the vaunted “trickling down” from
the top 1 percent to everyone else. All of this is having the predictable
effect of creating alienation -- voter turnout among those in their 20s in the
last election stood at 21 percent, comparable to the unemployment rate.
In recent weeks we have watched people taking to the streets by the millions
to protest political, economic, and social conditions in the oppressive
societies they inhabit. Governments have been toppled in Egypt and Tunisia.
Protests have erupted in Libya, Yemen, and Bahrain. The ruling families
elsewhere in the region look on nervously from their air-conditioned
penthouses -- will they be next? They are right to worry. These are societies
where a minuscule fraction of the population -- less than 1 percent --
controls the lion’s share of the wealth; where wealth is a main determinant of
power; where entrenched corruption of one sort or another is a way of life;
and where the wealthiest often stand actively in the way of policies that
would improve life for people in general.
As we gaze out at the popular fervor in the streets, one question to ask
ourselves is this: When will it come to America? In important ways, our own
country has become like one of these distant, troubled places.
A lexis de Tocqueville once described what he saw as a chief part of the
peculiar genius of American society -- something he called “self-interest
properly understood.” The last two words were the key. Everyone possesses
self-interest in a narrow sense: I want what’s good for me right now! Self-
interest “properly understood” is different. It means appreciating that paying
attention to everyone else’s self-interest -- in other words, the common
welfare -- is in fact a precondition for one’s own ultimate well-being.
Tocqueville was not suggesting that there was anything noble or idealistic
about this outlook -- in fact, he was suggesting the opposite. It was a mark
of American pragmatism. Those canny Americans understood a basic fact: looking
out for the other guy isn’t just good for the soul -- it’s good for business.
The top 1 percent have the best houses, the best educations, the best doctors,
and the best lifestyles, but there is one thing that money doesn’t seem to
have bought: an understanding that their fate is bound up with how the other
99 percent live. Throughout history, this is something that the top 1 percent
eventually do learn. Too late.
"We are not for names, nor men, nor titles of Government,
nor are we for this party nor against the other but we are
for justice and mercy and truth and peace and true freedom,
that these may be exalted in our nation, and that goodness,
righteousness, meekness, temperance, peace and unity with
God, and with one another, that these things may abound."
(Edward Burrough, 1659 - from 'Quaker Faith and Practice')
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