The Price of Inequality: How Today's Divided Society Endangers Our Future (21 page)

Shortsighted financial markets, focusing on quarterly returns, have also been central in undermining trust within the workplace. In
old
economics, most firms held on to their good workers through the ups and downs of the business cycle, and those workers returned the favor with loyalty and investment of human capital in the firm, to increase the firm’s productivity. This was called “labor hoarding,” and it made good economic sense.
9
But as markets became more shortsighted, such humane polices no longer seemed profitable. The extra profitability—from investments in human capital, from lower turnover costs, and from greater loyalty among workers—wouldn’t be felt for years to come, especially if the downturn went on for some time. Sloughing off workers was relatively easy in America’s flexible labor market, and that rendered them another disposable input. That helps explain one of the unusual aspects of the 2008 recession (and other recent downturns) that I discussed in the beginning of chapter 2. Under the old model, in an economic downturn, productivity would go down because so many workers were retained. Instead of going down at the bottom of the cycle, productivity now went up: all those good workers about whom the firm worried, wondering whether they should or should not be terminated, were given the ax. The task of restoring team spirit, loyalty, and human capital would be left to a future manager.
10

More broadly, not only are workers happier in workplaces that treat them well—including during downturns—but productivity is enhanced.
11
The importance of a sense of well-being in the workplace should not be underestimated: most people spend a substantial fraction of their lifetime at the workplace, and what happens there spills over strongly into the rest of their lives.
12

The breaking of the social bonds and trust—seen in our politics, in our financial sector, and in the workplace—will, inevitably, have broader societal consequences. Trust and reciprocal goodwill are necessary not only for the functioning of markets but also for every other aspect of societal cooperation. We have explained how the long-term success of any country requires social cohesion—a kind of social contract that binds members of society together. Experiences elsewhere have shown, however, the fragility of social cohesion. When the social contract gets broken, social cohesion quickly erodes.

Governments and societies make decisions—expressed through policies, laws, and budgetary choices—that either strengthen that contract or weaken it. By allowing inequality to metastasize unchecked, America is choosing a path of the destruction of social capital, if not social conflict.

As we have emphasized, the arena in which social cooperation is absolutely essential is politics, for it is here that collective decisions affecting all are taken. Of course, there are other ways of organizing life: police states provide rules and punishments for disobeying. It is a system of compliance based on “incentives”—the incentives of threats. But such societies typically do not function well. The enforcers cannot be everywhere to make good on the threats, and if there is a sense that the rules and regulations are unfair, there will be attempts at circumvention. It will be expensive to achieve compliance, and even then it will be only partial. Productivity will be low, and life will be unpleasant.

The democratic alternative entails trust and a social compact, an understanding of the responsibilities and rights of different individuals. We tell the truth because it is the
right
or
moral
thing to do—knowing the costs imposed on others of the breakdown of the system of trust. We’ve seen how the erosion of trust hurts the economy. But what is happening in the sphere of politics may be even worse: the breaking of the social contract may have even more invidious effects on the functioning of our democracy.

Fairness and disillusionment

To most Americans it is
obvious
that fairness is important. Indeed, one of the aspects of our society that Americans were most proud of was that our economic system was fair—it gave opportunity to everybody.

Recent research has illuminated just how important fairness is to most individuals (though economists continue to focus almost exclusively on efficiency). In a series of experiments initially conducted by three German economists, Werner Güth, Rolf Schmittberger, and Bernd Schwarze, a subject was given a certain amount of money, say $100, and was told to divide it between himself and the other player in the game.
13
In the first version, called the dictator game, the second player has to accept what he is given. Standard economic theory provides a clear prediction: the first player keeps all of the $100 for himself. Yet in practice, the first player gives the second
something
, though usually less than half.
14

A related experiment gives even stronger evidence of the importance that individuals attach to fairness: most individuals would rather accept an inefficient outcome—even hurting themselves—than an unfair one. In what is known as the ultimatum game, the second player has the right to veto the division proposed by the first player. If the second player exercises his veto, neither party gets anything. Standard economic theory suggests a clear strategy: the first player keeps 99 dollars for himself, giving 1 dollar to the other player, who accepts it, because 1 dollar is better than zero. In fact, offers typically average about 30 to 40 dollars (or 30–40 percent of the total sum in a game with different quantities), and the second player tends to veto the allocation if he is offered less than 20 dollars.
15
He is willing to accept some inequity—he realizes he is in the less powerful position—but there is a limit to how much inequity he will stand for. He would rather have zero than, say, $20—a 4-to-1 split is too unfair.
16

Perceptions
of unfairness affect behavior. If individuals believe that their employer is treating them unfairly, they are more likely to shirk on the job.
17
In the last chapter, we described experimental results confirming the importance of perceptions of fairness to productivity.

But, as chapter 1 pointed out, America’s economic system is, in a fundamental sense, no longer fair. Equality of opportunity is just a myth; and Americans are gradually realizing this. One poll showed that 61 percent of Americans now believe that our economic system favors the wealthy; only 36 percent—a little over one out of three Americans—think our system is generally fair.
18
(And, perhaps not surprisingly, by similar numbers, they think unfairness in the economic system that favors the wealthy is a more serious problem than overregulation.)
19

Other research, comparing individuals’ views about what a good distribution of income might look like with their
perceptions
of inequality in the United States confirms that most think there is too much inequality. And these views were held broadly across very different demographic groups, men and women, Democrats and Republicans, and those at the top and those with lower incomes. Indeed, in most people’s ideal distribution, the top 40 percent had less wealth than the top 20 percent currently holds. Equally striking, when asked to choose between two distributions (shown on a pie chart), participants overwhelmingly chose one that reflected the distribution in Sweden over that in the United States (92 percent to 8 percent).
20

Views that our political system is rigged are even stronger than those that our economic system is unfair. The poor, especially, believe that their voice is not being heard. The widespread support expressed for the Occupy Wall Street movement (discussed in the preface) bears testimony to these concerns. The belief (and the reality) that our political and economic system is unfair weakens both.

While the most immediate symptom is disillusionment leading to a lack of participation in the political process, there is always a worry that voters will be attracted to populists and extremists who attack the establishment that has created this unfair system
21
and who make unrealistic promises of change.

Distrust, the media, and disillusionment

Among economists, no one doubts the importance of a competitive marketplace for goods and services. Even more important for our society and our politics is a competitive marketplace of ideas. And unfortunately, that marketplace is—and is perceived to be—distorted.
22
Citizens can’t make informed decisions as voters if they don’t have access to the requisite information. But if the media are biased, they won’t get information that is balanced. And even if the media were balanced, citizens know that the information that the government discloses to the media may not be.

John Kenneth Galbraith some sixty years ago, recognizing that few markets were anywhere close to the economists idea of “perfect competition,” wrote about the importance of “countervailing powers.”
23
We’ll never have truly competitive media in the United States, with a plethora of newspapers and TV stations representing a diversity of views, but we could do better. We could have more forceful policing of antitrust laws, recognizing that what is at stake is more than just control over, say, the market for advertising, but also control over the market for ideas. We could be especially vigilant about attempts by media firms to control newspapers, TV, and radio. And we could provide public support for the media that would help diversify it. After all, the public good is a public good—that is, all benefit from ensuring that our government performs well. A basic insight of economics is that private markets, on their own, spend too little on public goods, since the societywide benefits are far greater than the benefits the individual himself enjoys. Ensuring that we have a well-informed public citizenry is important for a well-functioning democracy, and that in turn requires an active
and diverse
media. Other countries have attempted to ensure this diversity—with some success—by providing broad public support for media, ranging from national public broadcasting stations to community radio stations to support for second newspapers, even in smaller communities.
24

We could also have more balanced media. As it is, the media are a realm where those in the 1 percent have the upper hand. They have the resources to buy and control critical media outlets, and some of them are willing to do so at a loss: it’s an investment in maintaining their economic position.
25
Like the political investments of the banks, these investments may yield far higher
private
returns than ordinary investments—if one includes impacts on the political process.
26

This is another element in the creation of distrust and disillusionment: not only isn’t there trust in the fairness of our political and economic system; there isn’t even trust in the information that is provided about our political and economic system.
27

Disenfranchisement

The political battle is not just fought over getting supporters and getting them to vote. It’s also fought over
not allowing those who disagree with you to vote
—a return to the mindset of two centuries ago, when the voting franchise was severely restricted.

The reluctance of the elites to extend the voting franchise, however objectionable from current perspectives, is understandable. In the UK, until the Reform Act of 1832, only large property owners or people of considerable wealth could vote. The elites didn’t trust what might happen if voting rights were extended. In the Jim Crow South at the end of the nineteenth century, white politicians devised poll taxes that were designed to disenfranchise the former slaves and their descendants, who wouldn’t have the wherewithal to pay.
28
Those taxes, combined with literacy tests and sometimes violence and terror, succeeded both in substantially lowering electoral turnouts and in increasing the Democratic vote share.
29

In Ecuador, before 1979, only the literate could vote, and the ruling elite made sure that the indigenous people didn’t have sufficient education to qualify. In each case elites feared they would lose their position of power and privilege, and even their wealth, if they extended the voting franchise.

Many of the efforts at disenfranchisement, now and in the past, have been directed at disenfranchising the poor; in the 1930s, pauper exclusion laws disenfranchised jobless men and women who were receiving relief.
30
The political science scholar Walter Dean Burnham has detailed the long history of what he calls efforts at voter “demobilization” targeted at various groups: against urban workers, by upstate agrarians and small towners; against leftist parties, by the major parties; against populists, by the urban corporate elites; against the poor, by the middle- and upper-income groups.
31
Many of these measures may be thought of as
disenfranchisement by stealth.

Of course, those trying to disenfranchise the poor don’t describe it that way. Economists and statisticians distinguish two kinds of errors: someone who is qualified to vote not being allowed to vote, and someone who is not qualified to vote being allowed to vote. Republicans tend to claim that the latter is the more important problem, Democrats that it’s the former. But the Republican claim is disingenuous: the barriers that they seek to create to catch the latter mistake are really
economic
barriers, not barriers based on the likelihood of being qualified to vote. Requiring a government-issued photo ID—typically a driver’s license or an identification card issued by the Department of Motor Vehicles—discriminates between those who have sufficient means, time, and access to information to get to the DMV, and those who do not.
32
Obtaining voter identification may also necessitate having a birth certificate or other documentation, which requires even more time, money, and knowledge of bureaucracy.