Inequality is not inevitable

It is not capitalism but politics and policies that drive inequality

 JUL 1, 2014


BY JOSEPH E. STIGLITZ

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 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 12 years, 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.

America's current brand of capitalism is an ersatz capitalism. For proof of this go back to our response to the Great Recession, where we socialised losses, even as we privatised gains. Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. CEOs 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 the US 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 recognises, 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 home owners and victims of the same banks' predatory lending practices. We could have helped underwater home owners and the victims of predatory behaviour directly. This would not only have helped the economy, it would have put America on the path to robust recovery.

Our divisions are deep. Economic and geographic segregation have immunised 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. 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 five 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?

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 America's democracy.

Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.

NEW YORK TIMES

The writer, a Nobel laureate in economics, is a professor at Columbia and a former chairman of the Council of Economic Advisers and chief economist for the World Bank.