Inequality Is not Inevitable / Inequality Is a Choice


AN insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this “shining city on a hill” become the advanced country with the greatest level of inequality?

One stream of the extraordinary discussion set in motion by Thomas Piketty’s timely, important book, “Capital in the Twenty-First Century,” has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration.

This is actually a superficial reading of Mr. Piketty’s work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects.

Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn’t apply in the democracies of the 21st. We don’t need to have this much inequality in America.

Our current brand of capitalism is an ersatz capitalism. For proof of this go back to our response to the Great Recession, where we socialized losses, even as we privatized gains. Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.

If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforward answer: our policies and our politics. People get tired of hearing about Scandinavian success stories, but the fact of the matter is that Sweden, Finland and Norway have all succeeded in having about as much or faster growth in per capita incomes than the United States and with far greater equality.

So why has America chosen these inequality-enhancing policies? Part of the answer is that as World War II faded into memory, so too did the solidarity it had engendered. As America triumphed in the Cold War, there didn’t seem to be a viable competitor to our economic model. Without this international competition, we no longer had to show that our system could deliver for most of our citizens.

Ideology and interests combined nefariously. Some drew the wrong lesson from the collapse of the Soviet system. The pendulum swung from much too much government there to much too little here. Corporate interests argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.

But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.

The American political system is overrun by money. Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. In fact, as he recognizes, Mr. Piketty’s argument rests on the ability of wealth-holders to keep their after-tax rate of return high relative to economic growth. How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.

So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices. This last decision was particularly foolish. There were alternatives to throwing money at the banks and hoping it would circulate through increased lending. We could have helped underwater homeowners and the victims of predatory behavior directly. This would not only have helped the economy, it would have put us on the path to robust recovery.

OUR divisions are deep. Economic and geographic segregation have immunized those at the top from the problems of those down below. Like the kings of yore, they have come to perceive their privileged positions essentially as a natural right. How else to explain the recent comments of the venture capitalist Tom Perkins, who suggested that criticism of the 1 percent was akin to Nazi fascism, or those coming from the private equity titan Stephen A. Schwarzman, who compared asking financiers to pay taxes at the same rate as those who work for a living to Hitler’s invasion of Poland.

Our economy, our democracy and our society have paid for these gross inequities. The true test of an economy is not how much wealth its princes can accumulate in tax havens, but how well off the typical citizen is — even more so in America where our self-image is rooted in our claim to be the great middle-class society. But median incomes are lower than they were a quarter-century ago. Growth has gone to the very, very top, whose share has almost quadrupled since 1980. Money that was meant to have trickled down has instead evaporated in the balmy climate of the Cayman Islands.

With almost a quarter of American children younger than 5 living in poverty, and with America doing so little for its poor, the deprivations of one generation are being visited upon the next. Of course, no country has ever come close to providing complete equality of opportunity. But why is America one of the advanced countries where the life prospects of the young are most sharply determined by the income and education of their parents?

Among the most poignant stories in The Great Divide were those that portrayed the frustrations of the young, who yearn to enter our shrinking middle class. Soaring tuitions and declining incomes have resulted in larger debt burdens. Those with only a high school diploma have seen their incomes decline by 13 percent over the past 35 years.

Where justice is concerned, there is also a yawning divide. In the eyes of the rest of the world and a significant part of its own population, mass incarceration has come to define America — a country, it bears repeating, with about 5 percent of the world’s population but around a fourth of the world’s prisoners.

Justice has become a commodity, affordable to only a few. While Wall Street executives used their high-retainer lawyers to ensure that their ranks were not held accountable for the misdeeds that the crisis in 2008 so graphically revealed, the banks abused our legal system to foreclose on mortgages and evict people, some of whom did not even owe money.

More than a half-century ago, America led the way in advocating for the Universal Declaration of Human Rights, adopted by the United Nations in 1948. Today, access to health care is among the most universally accepted rights, at least in the advanced countries. America, despite the implementation of the Affordable Care Act, is the exception. It has become a country with great divides in access to health care, life expectancy and health status.

In the relief that many felt when the Supreme Court did not overturn the Affordable Care Act, the implications of the decision for Medicaid were not fully appreciated. Obamacare’s objective — to ensure that all Americans have access to health care — has been stymied: 24 states have not implemented the expanded Medicaid program, which was the means by which Obamacare was supposed to deliver on its promise to some of the poorest.

We need not just a new war on poverty but a war to protect the middle class. Solutions to these problems do not have to be newfangled. Far from it. Making markets act like markets would be a good place to start. We must end the rent-seeking society we have gravitated toward, in which the wealthy obtain profits by manipulating the system.

The problem of inequality is not so much a matter of technical economics. It’s really a problem of practical politics. Ensuring that those at the top pay their fair share of taxes — ending the special privileges of speculators, corporations and the rich — is both pragmatic and fair. We are not embracing a politics of envy if we reverse a politics of greed. Inequality is not just about the top marginal tax rate but also about our children’s access to food and the right to justice for all. If we spent more on education, health and infrastructure, we would strengthen our economy, now and in the future. Just because you’ve heard it before doesn’t mean we shouldn’t try it again.

We have located the underlying source of the problem: political inequities and policies that have commodified and corrupted our democracy. It is only engaged citizens who can fight to restore a fairer America, and they can do so only if they understand the depths and dimensions of the challenge. It is not too late to restore our position in the world and recapture our sense of who we are as a nation. Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.


By JOSEPH E. STIGLITZ  OCTOBER 13, 2013 9:06 PMOctober 13, 2013 

The Great Divide is a series about inequality.

It’s well known by now that income and wealth inequality in most rich countries, especially the United States, have soared in recent decades and, tragically, worsened even more since the Great Recession. But what about the rest of the world? Is the gap between countries narrowing, as rising economic powers like China and India have lifted hundreds of millions of people from poverty? And within poor and middle-income countries, is inequality getting worse or better? Are we moving toward a more fair world, or a more unjust one?

These are complex questions, and new research by a World Bank economist named Branko Milanovic, along with other scholars, points the way to some answers.

Starting in the 18th century, the industrial revolution produced giant wealth for Europe and North America. Of course, inequality within these countries was appalling — think of the textile mills of Liverpool and Manchester, England, in the 1820s, and the tenements of the Lower East Side of Manhattan and the South Side of Chicago in the 1890s — but the gap between the rich and the rest, as a global phenomenon, widened even more, right up through about World War II. To this day, inequality between countries is far greater than inequality within countries.

But starting around the fall of Communism in the late 1980s, economic globalization accelerated and the gap between nations began to shrink. The period from 1988 to 2008 “might have witnessed the first decline in global inequality between world citizens since the Industrial Revolution,” Mr. Milanovic, who was born in the former Yugoslavia and is the author of “The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality,” wrote in a paper published last November. While the gap between some regions has markedly narrowed — namely, between Asia and the advanced economies of the West — huge gaps remain. Average global incomes, by country, have moved closer together over the last several decades, particularly on the strength of the growth of China and India. But overall equality across humanity, considered as individuals, has improved very little. (The Gini coefficient, a measurement of inequality, improved by just 1.4 points from 2002 to 2008.)

Credit Javier Jaén

So while nations in Asia, the Middle East and Latin America, as a whole, might be catching up with the West, the poor everywhere are left behind, even in places like China where they’ve benefited somewhat from rising living standards.

From 1988 to 2008, Mr. Milanovic found, people in the world’s top 1 percent saw their incomes increase by 60 percent, while those in the bottom 5 percent had no change in their income. And while median incomes have greatly improved in recent decades, there are still enormous imbalances: 8 percent of humanity takes home 50 percent of global income; the top 1 percent alone takes home 15 percent. Income gains have been greatest among the global elite — financial and corporate executives in rich countries — and the great “emerging middle classes” of China, India, Indonesia and Brazil. Who lost out? Africans, some Latin Americans, and people in post-Communist Eastern Europe and the former Soviet Union, Mr. Milanovic found.

The United States provides a particularly grim example for the world. And because, in so many ways, America often “leads the world,” if others follow America’s example, it does not portend well for the future.

On the one hand, widening income and wealth inequality in America is part of a trend seen across the Western world. A 2011 study by the Organization for Economic Cooperation and Development found that income inequality first started to rise in the late ’70s and early ’80s in America and Britain (and also in Israel). The trend became more widespread starting in the late ’80s. Within the last decade, income inequality grew even in traditionally egalitarian countries like Germany, Sweden and Denmark. With a few exceptions — France, Japan, Spain — the top 10 percent of earners in most advanced economies raced ahead, while the bottom 10 percent fell further behind.

But the trend was not universal, or inevitable. Over these same years, countries like Chile, Mexico, Greece, Turkey and Hungary managed to reduce (in some cases very high) income inequality significantly, suggesting that inequality is a product of political and not merely macroeconomic forces. It is not true that inequality is an inevitable byproduct of globalization, the free movement of labor, capital, goods and services, and technological change that favors better-skilled and better-educated employees.

Of the advanced economies, America has some of the worst disparities in incomes and opportunities, with devastating macroeconomic consequences. The gross domestic product of the United States has more than quadrupled in the last 40 years and nearly doubled in the last 25, but as is now well known, the benefits have gone to the top — and increasingly to the very, very top.

Last year, the top 1 percent of Americans took home 22 percent of the nation’s income; the top 0.1 percent, 11 percent. Ninety-five percent of all income gains since 2009 have gone to the top 1 percent. Recently released census figures show that median income in America hasn’t budged in almost a quarter-century. The typical American man makes less than he did 45 years ago (after adjusting for inflation); men who graduated from high school but don’t have four-year college degrees make almost 40 percent less than they did four decades ago.

American inequality began its upswing 30 years ago, along with tax decreases for the rich and the easing of regulations on the financial sector. That’s no coincidence. It has worsened as we have under-invested in our infrastructure, education and health care systems, and social safety nets. Rising inequality reinforces itself by corroding our political system and our democratic governance.

And Europe seems all too eager to follow America’s bad example. The embrace of austerity, from Britain to Germany, is leading to high unemployment, falling wages and increasing inequality. Officials like Angela Merkel, the newly re-elected German chancellor, and Mario Draghi, president of the European Central Bank, argue that Europe’s problems are a result of a bloated welfare spending. But that line of thinking has only taken Europe into recession (and even depression). That things may have bottomed out — that the recession may be “officially” over — is little comfort to the 27 million out of a job in the E.U. On both sides of the Atlantic, the austerity fanatics say, march on: these are the bitter pills that we need to take to achieve prosperity. But prosperity for whom?

Excessive financialization — which helps explain Britain’s dubious status as the second-most-unequal country, after the United States, among the world’s most advanced economies — also helps explain the soaring inequality. In many countries, weak corporate governance and eroding social cohesion have led to increasing gaps between the pay of chief executives and that of ordinary workers — not yet approaching the 500-to-1 level for America’s biggest companies (as estimated by the International Labor Organization) but still greater than pre-recession levels. (Japan, which has curbed executive pay, is a notable exception.) American innovations in rent-seeking — enriching oneself not by making the size of the economic pie bigger but by manipulating the system to seize a larger slice — have gone global.

Asymmetric globalization has also exerted its toll around the globe. Mobile capital has demanded that workers make wage concessions and governments make tax concessions. The result is a race to the bottom. Wages and working conditions are being threatened. Pioneering firms like Apple, whose work relies on enormous advances in science and technology, many of them financed by government, have also shown great dexterity in avoiding taxes. They are willing to take, but not to give back.

Inequality and poverty among children are a special moral disgrace. They flout right-wing suggestions that poverty is a result of laziness and poor choices; children can’t choose their parents. In America, nearly one in four children lives in poverty; in Spain and Greece, about one in six; in Australia, Britain and Canada, more than one in 10. None of this is inevitable. Some countries have made the choice to create more equitable economies: South Korea, where a half-century ago just one in 10 people attained a college degree, today has one of the world’s highest university completion rates.

For these reasons, I see us entering a world divided not just between the haves and have-nots, but also between those countries that do nothing about it, and those that do. Some countries will be successful in creating shared prosperity — the only kind of prosperity that I believe is truly sustainable. Others will let inequality run amok. In these divided societies, the rich will hunker in gated communities, almost completely separated from the poor, whose lives will be almost unfathomable to them, and vice versa. I’ve visited societies that seem to have chosen this path. They are not places in which most of us would want to live, whether in their cloistered enclaves or their desperate shantytowns.

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