The Price of Inequality: How Today's Divided Society Endangers Our Future (44 page)

T
HE
P
OLITICAL
R
EFORM
A
GENDA

The economics is clear: the question is, What about the politics? Will our political processes allow the adoption of even the barest elements of this agenda? If that is to occur, major political reforms must precede it.

We all benefit from having a well-functioning democracy and society. But because we all benefit, anyone can be a free rider.
23
As a result, there will be underinvestment in the smooth functioning of our democracy, perhaps the most important public good of all. In effect, we’ve privatized to a large extent the support and maintenance of the public good, with disastrous consequences. We’ve let private corporations and rich individuals spend money to “inform” us of the merits of alternative policies and candidates. And they have every incentive to distort the information they provide.

Alternative institutional arrangements are possible, but, again, we may be moving in the wrong direction. Campaign finance reform would limit the scope for corporate funding of campaigns, but the Supreme Court in its
Citizens United
case removed strictures on big firms’ contributions.
24
We could make corporations more accountable to their shareholders, forcing them to go to their shareholders for a vote on campaign contributions, but with corporations controlling Congress, it’s been impossible to get this and similar legislation curbing the political power of corporations adopted, or even seriously discussed. We could diminish the need for campaign contributions, by having more public funding or by requiring broadcasters to provide free airtime. But neither the broadcasters (who make large amounts of money from campaign advertising) nor the corporations (who like things the way they are, for obvious reasons) support such reforms, and their opposition makes congressional passage of such reforms all but impossible.

We could try to ensure greater access to less biased information, as several of the Scandinavian countries do. Rather than just having media controlled by moguls—drawn disproportionately from the 1 percent, and mostly reflecting their views—they’ve tried, with some success, to create a more democratic media. We could, as many of the European countries do, provide public support for a variety of independent think tanks, to ensure a more balanced debate about the wisdom of alternative policies.

We could make money less important in the political process by requiring voting (with financial penalties for not complying), as Australia, Belgium, and Luxembourg do. This also shifts the focus of the political parties from turning out voters to informing voters. Not surprisingly, voter participation (surpassing 90 percent in Australia) far exceeds that in the United States.
25
And there are political reforms that would make voter registration and voting easier, and make voting more meaningful—and thus increase voter turnout, by ensuring that the political process is more responsive to the concerns of the 99 percent. Some reforms would represent fundamental changes in our political system,
26
but others, such as reducing the scope for gerrymandering or the scope for filibuster, could be accomplished within our current political structure.

None of these are foolproof recipes; all of them are likely to diminish only slightly the political power of the 1 percent. And yet, taken together with the economic reform agenda of the previous section, they offer the prospect of a new era—for our economy, our politics, and our society.

And that leads us to a final question.

I
S
T
HERE
H
OPE?

The political and economic reform agenda in this chapter assumes that while market forces play some role in the creation of our current level of inequality, market forces are ultimately shaped by politics. We can reshape these market forces in ways that promote
more
equality. We can make markets work, or at least work better. Similarly, we will never create a system with full equality of opportunity; but we can at least create
more
equality of opportunity. The Great Recession did not create the country’s inequality, but it made it much worse, so much so that it made it hard to ignore, and it further limited a large segment of the population’s access to opportunity. With the right policies, along the lines of the agenda laid out earlier in this chapter, we can make things better. It’s not a matter of eliminating inequality or creating full equality of opportunity. It’s just a matter of reducing the level of inequality and increasing the extent of equality of opportunity. The question is, can we get there?

Our democracy, tilted as it may be, provides two routes by which reform might happen. Those in the 99 percent could come to realize that they have been duped by the 1 percent: that what is in the interest of the 1 percent is
not
in their interests. The 1 percent has worked hard to convince the rest that an alternative world is not possible; that doing anything that the 1 percent doesn’t want will inevitably harm the 99 percent. Much of this book has been devoted to destroying this myth and to arguing that we could actually have a more dynamic and more efficient economy
and
a fairer society.

In 2011 we watched people take to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments toppled in Egypt, Tunisia, and Libya. Protests erupted in Yemen, Bahrain, and Syria. The ruling families elsewhere in the region looked 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, both political and economic; 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 the lives of people in general. As we gaze out at the popular fervor in the streets, we might ask ourselves some questions. When will it come to America? When will it come to other countries of the West? In important ways, our own country has become like one of these disturbed places, serving the interests of a tiny elite. We have a big advantage—we live in a democracy—but it’s a democracy that has increasingly not reflected the interests of large fractions of the population. The people sense this—it’s reflected in the low support they express for Congress and in the abysmally low voter turnout.

And that’s the second way that reform could happen: the 1 percent could realize that what’s been happening in the United States is not only inconsistent with our values but not even in the 1 percent’s own interest. Alexis de Tocqueville once described what he saw as a chief element of the peculiar genius of American society, something he called “self-interest properly understood.” The last two words were 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, to the common welfare—is in fact a precondition for one’s own ultimate well-being.
27
Tocqueville was not suggesting that there was anything noble or idealistic about this outlook. Rather, 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 has been something that the top 1 percent eventually do learn. Often, however, they learn it too late.

We have seen that politics and economics are inseparable, and that if we are to preserve a system of one person one vote—rather than one dollar one vote—reforms in our political system will be required; but we are unlikely to achieve a fair and responsive political system within an economic system that is characterized by the degree of inequality that marks ours. We have seen most recently that our political system can’t work if there isn’t a deeper sense of community; but how can we have such a sense of community if our country is so divided? And seeing the increasing divide in our economy, we can only ask, What will it portend for the future of our politics?

There are two visions for America a half century from now. One is of a society more divided between the haves and the have-nots, a country in which the rich live in gated communities, send their children to expensive schools, and have access to first-rate medical care. Meanwhile, the rest live in a world marked by insecurity, at best mediocre education, and in effect rationed health care—they hope and pray they don’t get seriously sick. At the bottom are millions of young people alienated and without hope. I have seen that picture in many developing countries; economists have even given it a name, a dual economy, two societies living side by side, but hardly knowing each other, hardly imagining what life is like for the other. Whether we will fall to the depths of some countries, where the gates grow higher and the societies split farther and farther apart, I do not know. It is, however, the nightmare toward which we are slowly marching.

The other vision is of a society where the gap between the haves and the have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness, where the words “liberty and justice for
all
” actually mean what they seem to mean, where we take seriously the Universal Declaration of Human Rights, which emphasizes the importance not just of civil rights but of economic rights, and not just the rights of property but the economic rights of ordinary citizens. In this vision, we have an increasingly vibrant political system far different from the one in which 80 percent of the young are so alienated that they don’t even bother to vote.

I believe that this second vision is the only one that is consistent with our heritage and our values. In it the well-being of our citizens—and even our economic growth, especially if properly measured—will be much higher than what we can achieve if our society remains deeply divided. I believe it is still not too late for this country to change course, and to recover the fundamental principles of fairness and opportunity on which it was founded. Time, however, may be running out. Four years ago there was a moment where most Americans had the audacity to hope. Trends more than a quarter of the century in the making might have been reversed. Instead, they have worsened. Today that hope is flickering.

N
OTES

Preface

1.
May 2011, available at
http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105
(accessed February 28, 2012).

2.
See chapter 1 for a description of how unequal the United States has become, and for citations.

3.
The nature of the market failures differed, of course, across countries. In Egypt, for instance, neoliberal market reforms had brought some growth, but the benefits of that growth had not trickled down to most individuals.

4.
Not all of them show up in the “official” unemployment statistic, which stood at 8.3 percent. Some were actively looking for a full-time job and couldn’t get any job, some had accepted a part-time job because a full-time job was not available, some were so discouraged by the lack of jobs that they had dropped out of the labor force. The numbers in Europe are similar.

5.
Widely reported in the media; see, e.g.,
http://www.dailymail.co.uk/news/article-2048754/Occupy-Wall-Street-Bloomberg-backs-dawn-eviction.html
(accessed December 3, 2011).

6.
USA Today
, available at
http://www.usatoday.com/news/nation/story/2011-10-17/poll-wall-street-protests/50804978/1
.

7.
Non-Americans may be surprised to find out that the U.S. unemployment insurance normally extends for only six months. Chapter 1 describes both the battles to get it extended during the recession and the large numbers of people not covered.

8.
Such divisions smacked of Marxian analysis, which was anathema during the Cold War, and in some places even after it.

9.
As we show in chapter 1. Sociologists emphasize that there is more to class than just income.

10.
We’ll provide evidence on this in later chapters.

11.
One response would be to stop talking about values. Rhetoric about equality, fairness, due process, and the like don’t have anything to do with how the world works. In politics we would call this emphasis on reality realpolitik
.
Advocates of “realism” in economics often support a kind of economic Darwinism; let the system evolve and let the fittest survive. Systems that are flawed, like communism, won’t survive. For now, American-style capitalism is the best system. In the nineteenth century these ideas were referred to as “social Darwinism.” A variant of this concept was popularized among the Right. Such an argument (often unexpressed) sometimes seems to have influenced advocates of American-style capitalism. There are, however, a number of problems with this perspective. At a theoretical level, this teleological take on evolution—that it leads to the best-possible system—has no justification. Nor is it certain that a system that works now will have the resilience to meet future challenges. It is precisely this inability to assess resilience that is one of the flaws of the modern market economy. See also J. E. Stiglitz,
Whither Socialism?
(Cambridge:
MIT Press, 1994).

12.
As of August 2011, for 16- to 24-year-olds. See Bureau of Labor Statistics website,
http://www.bls.gov/news.release/youth.nr0.htm
(accessed December 3, 2011).

13.
That our judicial system has been undermined by the growing inequality has been the subject of recent discussions. See, e.g., Glenn Greenwald,
With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful
(New York: Metropolitan Books/Henry Holt, 2011)
.
Others have also called attention to how the failure of our politics—the undue influence of special interests—is undermining our economy, and did so even before the financial crisis made it self-evident. See Robert Kuttner,
The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity
(New York: Knopf, 2007).

14.
This is the perspective that I argued for in my earlier books
Globalization and Its Discontents
(New York: W. W. Norton, 2002),
Making Globalization Work
(New York: W. W. Norton, 2006),
The Roaring Nineties
(New York: W. W. Norton, 2003), and
Freefall
(New York: W. W. Norton, 2010)
.
Others who have sounded similar themes include the excellent books by Robert Kuttner,
Everything for Sale: The Virtues and Limits of Markets
(New York: Knopf, 1997); John Cassidy,
How Markets Fail: The Logic of Economic Calamities
(New York: Farrar,
Straus and Giroux, 2009); Michael Hirsh,
Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street
(New York:
Wiley, 2010); and Jeff Madrick,
The Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present
(New York: Knopf, 2011).

15.
New York: Simon and Schuster, 2010.

16.
New York: Twelve, 2011.

17.
New York: Russell Sage, 2008.

18.
New York: MIT Press, 2008. These books follow in a long tradition, including Greg Palast,
The Best Democracy Money Can Buy
, rev. ed.
(New York: Plume, 2004).

19.
An alternative interpretation, which I discuss briefly in chapter 5, is that of Thomas Frank, in his
What’s the Matter with Kansas? How Conservatives Won the Heart of America
(New York: Metropolitan Books, 2004).

20.
This chapter of my thesis was published as “The Distribution of Income and Wealth Among Individuals,”
Econometrica
37, no. 3 (July 1969): 382–97. Other papers growing out of this early work include two with George Akerlof, with whom I shared the 2001 Nobel Prize, “Investment, Income, and Wages” (abstract),
Econometrica
34, no. 5, suppl. issue (1966):118, and “Capital, Wages and Structural Unemployment,”
Economic Journal
79, no. 314 (June 1969): 269–81; one with my thesis supervisor, Robert Solow, “Output, Employment and Wages in the Short Run,”
Quarterly Journal of
Economics
82 (November 1968): 537–60; and another chapter from my thesis, “A Two-Sector, Two Class Model of Economic Growth,”
Review of Economic Studies
34 (April 1967): 227–38.

21.
I describe some of the influences contributing to the evolution of my thinking, especially about the role of information imperfections, in my Nobel lecture, “Information and the Change in the Paradigm in Economics,” in
Les Prix Nobel; The Nobel Prizes 2001
,
ed. Tore Frängsmyr (Stockholm: Nobel Foundation, 2002), pp. 472–540. Also available at
http://www.nobelprize.org/nobel_prizes/economics/laureates/2001/stiglitz-lecture.pdf
(accessed February 28, 2012) and in abbreviated form as “Information and the Change in the Paradigm in Economics,”
American Economic Review
92, no. 3 (June 2002): 460–501. See also the brief autobiography written for the Nobel Foundation, “Nobel Memoirs,” in
Les Prix Nobel; The Nobel Prizes 2001,
pp. 447–71, and “Reflections on Economics and on Being and Becoming an Economist,” in
The Makers of Modern Economics
, vol. 2, ed. Arnold Heertje (New York: Harvester Wheatsheaf, 1994), pp. 140–83.

Chapter One
A
MERICA’S
1 P
ERCENT
P
ROBLEM

1.
From January 2007 to December 2011 there were more than 8.2 million foreclosure starts and 4 million completed foreclosures. See Realtytrac, 2012, “2012 Foreclosure Market Outlook,” February 13, available at
http://www.realtytrac.com/content/news-and-opinion/slideshow-2012-foreclosure-market-outlook-7021
(accessed March 28, 2012). There are still many foreclosures in the pipeline—some 5.9 million properties are 30 or more days delinquent or in foreclosure; see Mortgage Monitor Report, Lender Processing Services (March 2012), available at 
http://www.lpsvcs.com/LPSCorporateInformation/NewsRoom/Pages/20120321.aspx
(accessed March 28, 2012). Additionally, 11.1 million, or 22.8 percent, of all residential properties with a mortgage in the United States were underwater (had negative equity at the end of the fourth quarter of 2011); see “Negative Equity Report,” Corelogic (Q4, 2011), available at
http://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdf
(accessed March 28, 2012).

2.
The exact amount varies from year to year. For data on income inequality, I rely heavily on the work of Emmanuel Saez and Thomas Piketty. The important initial work is T. Piketty and E. Saez, “Income Inequality in the United States, 1913–1998,”
Quarterly Journal of Economics
118, no. 1 (2003): 1–39. A longer and updated version is published in A. B. Atkinson and T. Piketty, eds.,
Top Incomes over the Twentieth Century: A Contrast between Continental European and English-Speaking Countries
(New York: Oxford University Press, 2007). Tables and figures updated to 2010 in Excel format are available at Saez’s website,
http://www.econ.berkeley.edu/~saez/
. Saez has an accessible summary of this work on his website, “Striking It Richer: The Evolution of Top Incomes in the United States.” Note that the Saez data are based on income tax returns, and thus are high quality, but also therefore cover only reported income. To the extent that upper-income taxpayers are better able to avoid reporting income, e.g., through keeping income abroad in corporations they control, the data may underestimate the extent of inequality. I also draw on a recent CBO report, “Trends in the Distribution of Household Income between 1979 and 2007,” October 2011, available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/10-25-HouseholdIncome.pdf
; and on recent work by J. Bakija, A. Cole, and B. T. Hein in “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data,” working paper, January 2012, available at
http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf
. The Census Historical Tables provide data on median household incomes over time, available at
ttp://www.census.gov/hhes/www/income/data/historical/household/index.html
. Basic sources of data for across-country comparisons are OECD, “Divided We Stand: Why Inequality Keeps Rising,” December 5, 2011; World Bank, World Bank Development Indicators, available at
http://data.worldbank.org/indicator
; and the Luxembourg Income Study. The Economic Policy Institute provides excellent interpretations and updates of the data at its website,
http://www.epi.org/
.

3.
Laurence Mishel and Josh Bivens, “Occupy Wall Streeters Are Right about Skewed Economic Rewards in the United States,” EPI Briefing Paper 331, October 26, 2011, available at
https://docs.google.com/viewer?url=http://www.epi.org/files/2011/BriefingPaper331.pdf&hl=en_US&chrome=true
(accessed February 28, 2012). Another manifestation of the growing inequality that in 1979 the ratio of the average income in the top 0.1 percent, including capital gains, was “only” around 50 times greater than that of the average in the bottom 90 percent. By 2010 the ratio was 164 times that of the average bottom 90 percent of income earners. Meanwhile, the ratio of the average household income of the top 1 percent to that of the bottom 90 percent has tripled, from 14:1 to 42:1. Based on data from Piketty and Saez, “Income Inequality in the United States, 1913–1998,” and the updates on Saez’s website, cited in n. 2, above.

4.
More precisely, the top 1 percent control about 35 percent of the wealth. If the value of the home is excluded, i.e., “nonhome wealth,” the number is considerably larger: the top 1 percent owns two-fifths of the nation’s wealth. Edward N. Wolff compares both figures in “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007,” Levy Institute Working Paper no. 589, March 2010, available at
http://www.levyinstitute.org/pubs/wp_589.pdf
(accessed February 28, 2012). The Federal Reserve is the original source for the net-worth figures, including home wealth; see Arthur B. Kennickell, “What’s the Difference? Evidence on the Distribution of Wealth, Health, Life Expectancy and Health Insurance Coverage,” paper prepared for the 11th Biennial CDC/ATSDR Symposium, September 23, 2007, available at
http://www.federalreserve.gov/pubs/oss/oss2/papers/CDC.final.pdf
(accessed February 28, 2012). Note that the top 1 percent income may not perfectly overlap the top 1 percent wealth holders—these are two different categories. The top 1 percent of income earners own “only” about 25 percent of the nation’s wealth. See Arthur B. Kennickell, “Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007,” staff working paper in the Finance and Economics Discussion Series, Federal Reserve Board, Washington, DC, January 7, 2009, p. 36, available at
http://www.federalreserve.gov/pubs/feds/2009/200913/200913pap.pdf
(accessed February 29, 2012).

5.
Based on data from Piketty and Saez’s, “Income Inequality in the United States, 1913–1998,” and the updates on Saez’s website, cited in n. 2, above.