Stiglitz: Of the 1%, by the 1%, for the 1%

Paul Mobbs mobbsey at
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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