The 1 Percent’s Problem

I suggest reading the whole article.

http://www.vanityfair.com/politics/2012/05/joseph-stiglitz-the-price-on-inequality

Joseph E. Stiglitz May 3, 2012

Adapted from The Price of Inequality, by Joseph Stiglitz, to be published in June by W.W. Norton & Company, Inc. (U.S.), and in July by Allen Lane (U.K.); © 2012 by the author.

Let’s start by laying down the baseline premise: inequality in America has been widening for dec­ades. We’re all aware of the fact. Yes, there are some on the right who deny this reality, but serious analysts across the political spectrum take it for granted. I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income, and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets. Consider the Walton family: the six heirs to the Walmart empire possess a combined wealth of some $90 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. (Many at the bottom have zero or negative net worth, especially after the housing debacle.) Warren Buffett put the matter correctly when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

So, no: there’s little debate over the basic fact of widening inequality. The debate is over its meaning. From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago.

.....

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Let me run through a few reasons why.

.....

The Consumption Problem

When one interest group holds too much power, it succeeds in getting policies that help itself in the short term rather than help society as a whole over the long term. This is what has happened in America when it comes to tax policy, regulatory policy, and public investment. The consequence of channeling gains in income and wealth in one direction only is easy to see when it comes to ordinary household spending, which is one of the engines of the American economy.

It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest. It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.

.....

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further.

.....



The “Rent Seeking” Problem

Here I need to resort to a bit of economic jargon.

.....

In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” ..... In a broad sense, “rent seeking” defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow C.E.O.’s to take a disproportionate share of corporate revenue (though Dodd-Frank has made matters better by requiring a non-binding shareholder vote on compensation at least once every three years), and laws that permit corporations to make profits as they degrade the environment.

.....

In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

But there is a broader economic consequence: the fight to acquire rents is at best a zero-sum activity. Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else. Countries rich in natural resources are infamous for rent-seeking activities. It’s far easier to get rich in these places by getting access to resources at favorable terms than by producing goods or services that benefit people and increase productivity. That’s why these economies have done so badly, in spite of their seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re not Congo. But the rent-seeking dynamic is the same.

.....

The Fairness Problem

People are not machines. They have to be motivated to work hard. If they feel that they are being treated unfairly, it can be difficult to motivate them. This is one of the central tenets of modern labor economics, encapsulated in the so-called efficiency-wage theory, which argues that how firms treat their workers—including how much they pay them—affects productivity.

.....

While people will always disagree over the precise meaning of what constitutes “fair,” there is a growing sense in America that the current disparity in income, and the way wealth is allocated in general, is profoundly unfair. There’s no begrudging the wealth accrued by those who have transformed our economy—the inventors of the computer, the pioneers of biotechnology. But, for the most part, these are not the people at the top of our economic pyramid. Rather, to a too large extent, it’s people who have excelled at rent seeking in one form or another. And, to most Americans, that seems unfair.

People were surprised when the financial firm MF Global, headed by Jon Corzine, suddenly collapsed into bankruptcy last year, leaving victims by the thousands as a result of actions that may prove to have been criminal; but given Wall Street’s recent history, I’m not sure people were all that surprised to learn that several MF Global executives would still be getting their bonuses. When corporate C.E.O.’s argue that wages have to be reduced or that there must be layoffs in order for companies to compete—and simultaneously increase their own compensation—workers rightly consider what is happening to be unfair. This in turn affects their efforts on the job, their loyalty to the firm, and their willingness to invest in its future. The widespread sense by workers in the Soviet Union that they were being mistreated in exactly this way—exploited by managers who lived high on the hog—played a major role in the hollowing out of the Soviet economy, and in its ultimate collapse. As the old Soviet joke had it, “They pretend to pay us, and we pretend to work.”

For Americans, one key aspect of fairness is opportunity: everyone should have a fair shot at living the American Dream. Horatio Alger stories remain the mythic ideal, but the statistics paint a very different picture: in America, the chances of someone’s making it to the top, or even to the middle, from a place near the bottom are lower than in the countries of old Europe or in any other advanced industrial country. Those at the top can take comfort from knowing that their chances of becoming downwardly mobile are lower in America than they are elsewhere.

There are many costs to this lack of opportunity. A large number of Americans are not living up to their potential; we’re wasting our most valuable asset, our talent.

.....

The Mistrust Problem

.....

Economists often underestimate the role of trust in making our economy work. If every contract had to be enforced by one party taking the other to court, our economy would be in gridlock. Throughout history, the economies that have flourished are those where a handshake is a deal. Without trust, business arrangements based on an understanding that complex details will be worked out later are no longer feasible. Without trust, each participant looks around to see how and when those with whom he is dealing will betray him.

Widening inequality is corrosive of trust: in its economic impact, think of it as the universal solvent. It creates an economic world in which even the winners are wary. But the losers! In every transaction—in every encounter with a boss or business or bureaucrat—they see the hand of someone out to take advantage of them.

.....

Today’s widening inequality extends to almost everything—police protection, the condition of local roads and utilities, access to decent health care, access to good public schools. As higher education becomes more important—not just for individuals but for the future of the whole U.S. economy—those at the top push for university budget cuts and tuition hikes, on the one hand, and cutbacks in guaranteed student loans, on the other. To the extent that they advocate student loans at all, it’s as another opportunity for rent seeking: loans to for-profit schools, without standards; loans that are non-dischargeable even in bankruptcy; loans designed as another way for those at the top to exploit those aspiring to get out of the bottom.

The “Be Selfish” Solution

.....

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment.

.....

So, the advice I’d give to the 1 percent today is: Harden your hearts. When invited to consider proposals to reduce inequality—by raising taxes and investing in education, public works, health care, and science—put any latent notions of altruism aside and reduce the idea to one of unadulterated self-interest. Don’t embrace it because it helps other people. Just do it for yourself.