The Price of Inequality: How Today's Divided Society Endangers Our Future (7 page)

So far, we have constructed a picture of an economy and a society that is increasingly divided. It shows up not only in income data but also in health, education, crime—indeed, in every metric of performance. While inequalities in parental income and education translate directly into inequalities of educational opportunity, inequalities of opportunity begin even before school—in the conditions that poor people face immediately before and after birth, differences in nutrition and the exposure to environmental pollutants that can have lifelong effects.
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So difficult is it for those born into poverty to escape that economists refer to the situation as a “poverty trap.”
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Even as the data show otherwise, Americans still believe in the myth of opportunity. A public opinion poll by the Pew Foundation found that “nearly 7 in 10 Americans had already achieved, or expected to achieve, the American Dream at some point in their lives.”
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Even as a myth, the belief that everyone had a fair chance had its uses: it motivated people to work hard. It seemed we were all in the same boat; even if some were, for the moment, traveling first-class while others stayed in steerage. On the next cruise positions might be reversed. The belief enabled the United States to avoid some of the class divisions and tensions that marked some European countries. By the same token, as the reality sinks in, as most Americans finally grasp that the economic game is stacked against them, all of this is at risk. Alienation has begun to replace motivation. Instead of social cohesion we have a new divisiveness.

A C
LOSER
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OOK AT THE
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OP:
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RABBING A
B
IGGER
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LICE OF THE
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As we’ve noted, the growing inequality in our society is visible at the top, the middle, and the bottom. We’ve already observed what’s happening at the bottom and in the middle. Here we take a closer look at the top.

If struggling poor families get our sympathy today, those at the top increasingly draw our ire. At one time, when there was a broad social consensus that those at the top earned what they got, they received our admiration. In the recent crisis, however, bank executives received outsize bonuses for outsize losses, and firms fired workers, claiming they couldn’t afford them, only to use the savings to increase executive bonuses still more. The result was that admiration at their cleverness turned to anger at their insensitivities.

Numbers on compensation of corporate executives—including those who brought on the crisis—tell the story. We described earlier the huge gap between CEO pay and that of the typical worker—more than 200 times greater—a number markedly higher than in other countries (in Japan, for instance, the corresponding ratio is 16 to 1)
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and even markedly higher than it was in the United States a quarter century ago.
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The old U.S. ratio of 30 to 1 now seems quaint by comparison. It strains credulity to think that over the intervening years CEOs as a group have increased their productivity so much, relative to the average worker, that a multiple of more than 200 could be justified. Indeed, the available data on the success of U.S. companies provide no support for such a view.
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What’s worse, we have provided a bad example, as executives in other countries around the world emulate their American counterparts. The UK’s High Pay Commission reported that the executive pay at its large companies is heading toward Victorian levels of inequality, vis-à-vis the rest of society (though currently the disparity is only as egregious as it was in the 1920s).
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As the report puts it, “Fair pay within companies matters; it affects productivity, employee engagement and trust in our businesses. Moreover pay in publicly listed companies sets a precedent, and when it is patently not linked to performance, or rewards failure, it sends out the wrong message and is a clear symptom of market failure.”
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I
NTERNATIONAL
C
OMPARISONS

As we look out at the world, the United States not only has the highest level of inequality among the advanced industrial countries, but the level of its inequality is increasing in absolute terms relative to that in other countries. The United States was the most unequal of the advanced industrial countries in the mid-1980s, and it has maintained that position.
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In fact, the gap between it and many other countries has increased: from the mid-1980s France, Hungary, and Belgium have seen no significant increase in inequality, while Turkey and Greece have actually seen a decrease in inequality. We are now approaching the level of inequality that marks dysfunctional societies—it is a club that we would distinctly not want to join, including Iran, Jamaica, Uganda, and the Philippines.
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Because we have so much inequality, and because it is on the rise, what’s happening to
income (or GDP) per capita
doesn’t tell us much about what the typical American is experiencing. If Bill Gates and Warren Buffett’s incomes go up, the
average
income for America goes up. More meaningful is what’s happening to the
median
income, the income of the family in the middle, which, as we saw, has been stagnating, or even falling, in recent years.

The UNDP (the UN Development Program) has developed a standard measure of “human development,” which aggregates measures of income, health, and education. It then adjusts those numbers to reflect inequality. Before adjustment for inequality, the United Sstates looked reasonably good in 2011—fourth, behind Norway, Australia, and Netherlands. But once account is taken of inequality, the United States is ranked twenty-third, behind all of the European countries. The difference between the rankings with and without inequality was the largest of any of the advanced industrial countries.
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All of the Scandinavian countries rank much higher than the United States, and each provides not only universal education but also health care to its citizens. The standard mantra in the United States claims that the taxes required to finance these benefits stifle growth. Far from it. Over the period 2000 to 2010, high-taxing Sweden, for example, grew far faster than the United States—the country’s average growth rates have exceeded those of the United States—2.31 percent a year versus 1.85 percent.
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As a former finance minister of one of these countries told me, “We have grown so fast and done so well because we had high taxes.” Of course, what he meant was not that the taxes themselves led to higher growth but that the taxes financed public expenditures—investments in education, technology, and infrastructure—and the public expenditures were what had sustained the high growth—more than offsetting any adverse effects from the higher taxation.

Gini coefficient

One standard measure of inequality is the Gini coefficient. If income were shared in proportion to the population—the bottom 10 percent getting roughly 10 percent of the income, the bottom 20 percent getting 20 percent, and so forth—then the Gini coefficient would be zero. There would be no inequality. On the other hand, if all the income went to the top person, the Gini coefficient would be one, in some sense “perfect” inequality. More-equal societies have Gini coefficients of .3 or below. These include Sweden, Norway, and Germany.
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The most unequal societies have Gini coefficients of .5 or above. These include some countries in Africa (notably South Africa with its history of grotesque racial inequality) and Latin America—long recognized for their divided (and often dysfunctional) societies and polities.
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America hasn’t made it
yet
into this “elite” company, but it’s well on the way. In 1980 our Gini coefficient was just touching .4; today it’s .47.
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According to UN data, we are slightly more unequal than Iran and Turkey,
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and much less equal than any country in the European Union.
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We end this international comparison by coming back to a theme we raised earlier: measures of income inequality don’t fully capture critical aspects of inequality. America’s inequality may, in fact, be far worse than those numbers suggest. In other advanced industrial countries, families don’t have to worry about how they will pay the doctor’s bill, or whether they can afford to pay for their parent’s health care. Access to decent health care is taken as a basic human right. In other countries, the loss of a job is serious, but at least there is a better safety net. In no other country are so many persons worried about the loss of their home. For Americans at the bottom and in the middle, economic insecurity has become a fact of life. It is real, it is important, but it’s not captured in these metrics. If it were, the international comparisons would cast what’s been happening in America in an even worse light.

Concluding Comments

In the years before the crisis, many Europeans looked to America as a model and asked how they could reform their economy to make it perform as well as that of the United States. Europe has its problems, too, caused mainly by countries’ joining together to form a currency union without making the necessary political and institutional arrangements to make it work, and they will pay a high price for that failure. But setting that aside, they (and people in countries around the world) now know that GDP per capita does not provide a good picture of what is happening to most citizens in society—and in a fundamental sense, then, of how well the economy is doing. They were misled by the GDP per capita data to thinking the United States was performing well. Today that is no longer the case. Of course, economists who looked beneath the surface knew back in 2008 that America’s debt-driven growth was not sustainable; and even when all appeared to be going well, the income of most Americans was declining, even as the outsize gains of those at the top were distorting the overall picture.

The success of an economy can be assessed only by looking at what is happening to the living standards—broadly defined—of most citizens over a sustained period of time. In those terms, America’s economy has not been performing well, and it hasn’t been for at least a third of a century. Although it has managed to increase GDP per capita, from 1980 to 2010 by three-fourths,
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most full-time male workers have, as we’ve noted, seen their incomes go down. For these workers, the American economy is failing to bring the increases in living standards that they had come to expect. It is not that the American economic engine has lost its ability to produce. It is that the way the American economic engine has been run has given the benefits of that growth to an increasingly small sliver at the top—and even taken away some of what had previously gone to the bottom.

This chapter has illuminated certain stark and uncomfortable facts about the U.S. economy:

(a) Recent U.S. income growth primarily occurs at the top 1 percent of the income distribution.

(b) As a result there is growing inequality.

(c) And those at the bottom and in the middle are actually worse-off today than they were at the beginning of the century.

(d) Inequalities in wealth are even greater than inequalities in income.

(e) Inequalities are apparent not just in income but in a variety of other variables that reflect standards of living, such as insecurity and health.

(f) Life is particularly harsh at the bottom—and the recession made it much worse.

(g) There has been a hollowing out of the middle class.

(h) There is little income mobility—the notion of America as a land of opportunity is a myth.

(i) And America has more inequality than any other advanced industrialized country, it does less to correct these inequities, and inequality is growing more than in many other countries.

The American Right finds the facts described in this chapter inconvenient. The analysis runs counter to some cherished myths that it would like to propagate: that America is a land of opportunity, that most people have been benefiting from the market economy, especially in the era since Reagan deregulated the economy and downsized government. Members of the Right would like to deny the facts, but the accumulation of data makes it hard to do so. They especially can’t deny that those at the bottom
and in the middle
are doing poorly and that those at the top are grabbing an increasing fraction of the nation’s income—so much of a larger share that what’s left over for the rest is diminished; and that the chances that those at the bottom or in the middle will make it to the top are far lower than the chances that those at the top will remain there. Nor can the Right really deny the fact that government can help ameliorate poverty—it has done so especially effectively among the elderly. And that means that cutbacks in government programs, including Social Security, unless they are very carefully designed, are likely to increase poverty.

In response, the Right offers four retorts. The first is that in any year someone will be down and out and someone else will enjoy a bonanza. What really matters is lifetime inequality. Those with the lowest incomes will, by and large, have higher incomes in later years, so lifetime inequality is less than these data suggest. Economists have taken a hard look at differences in lifetime income—and, unfortunately, the wish of the Right doesn’t conform to today’s reality: lifetime inequality is very large, almost as great as income at each moment of time, and has increased enormously in recent years.
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The Right also sometimes claims that poverty in America is not real poverty. After all, most of those in poverty have amenities that are not available to the poor in other countries. They should be grateful for living in America. They have TVs, indoor plumbing, heating (most of the time), and access to free schools. But as a National Academy of Sciences panel found,
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one cannot ignore relative deprivation
.
Basic standards of sanitation in America’s cities lead naturally to indoor plumbing. Cheap Chinese TVs mean that even the poor can afford them—and indeed, even in poor Indian and Chinese villages, there is in general access to TV. In today’s world, this is not a mark of affluence. But the fact that people may be enjoying a small TV doesn’t really mean that they aren’t facing stark poverty—nor does it mean that they are participating in the American dream.
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