Is No Longer a Land of Opportunity
By Joseph Stiglitz
June 26, 2012 "FT"
-- U.S. inequality is at its highest point for nearly a century.
Those at the top - no matter how you slice it - are enjoying a
larger share of the national pie; the number below the poverty
level is growing. The gap between those with the median income
and those at the top is growing, too. The U.S. used to think of
itself as a middle-class country - but this is no longer true.
Economists have justified such disparities by citing “marginal
productivity theory”, which explains higher incomes through
greater societal contributions. But those who have really
transformed our society, by providing the knowledge that
underpins the advances in technology, earn a relative pittance.
Just think of the inventors of the laser, the Turing machine or
the discoverers of DNA. The innovation of those on Wall Street,
while well compensated, brought the global economy to the brink
of ruin; and these financial entrepreneurs walked off with
One might feel better about inequality if there were a grain of
truth in trickle-down economics. But the median income of
Americans today is lower than it was a decade and a half ago;
and the median income of a full-time male worker is lower than
it was more than four decades ago. Meanwhile, those at the top
have never had it so good.
Some argue that increased inequality is an inevitable byproduct
of the market. False: several countries are reducing inequality
while maintaining economic growth.
Markets are shaped by the rules of the game. Our political
system has written rules that benefit the rich at the expense of
others. Financial regulations allow predatory lending and
abusive credit-card practices that transfer money from the
bottom to the top. So do bankruptcy laws that provide priority
for derivatives. The rules of globalization - where capital is
freely mobile but workers are not - enhance an already large
asymmetry of bargaining: businesses threaten to leave the
country unless workers make strong concessions.
Textbooks teach us that we can have a more egalitarian society
only if we give up growth or efficiency. However, closer
analysis shows that we are paying a high price for inequality:
it contributes to social, economic and political instability,
and to lower growth. Western countries with the healthiest
economies (for example those in Scandinavia) are also the
countries with the highest degree of equality.
The U.S. grew far faster in the decades after the second world
war, when inequality was lower, than it did after 1980, since
when the gains have gone disproportionately to the top. There is
growing evidence looking across countries over time that
suggests a link between equality, growth and stability.
There is good news in this: by reducing rent-seeking - finding
ways of getting a larger share of the pie, rather than making
the pie larger - and the distortions that give rise to so much
of America’s inequality we can achieve a fairer society and a
better-performing economy. Laws that tax speculators at less
than half the rate of those who work for a living or make the
innovations that are transforming our society, say something
about our values; but they also distort our economy, encouraging
young people to move into gambling rather than into more
productive areas. Since so much of the income at the top is
derived from rent seeking, higher taxes at the top would
America used to be thought of as the land of opportunity. Today,
a child’s life chances are more dependent on the income of his
or her parents than in Europe, or any other of the advanced
industrial countries for which there are data. The U.S. worked
hard to create the American dream of opportunity. But today,
that dream is a myth.
We can once again become a land of opportunity but it will not
happen on its own, and it will not happen with a politics that
focuses on cutting public education and other programs to
enhance opportunities for the bottom and middle, while cutting
taxes for those at the very top.
President Barack Obama’s support for these investments, as well
as the “Buffett rule” that asks those at the top to pay at least
as much in tax as a share of their income as those who are less
fortunate, are moves in the right direction. Republican
candidate Mitt Romney’s suggestion that we cut back on public
employees is worrisome; as is his silence on whether capital
gains on speculation should be taxed at a lower rate than income
derived from hard work.
The country will have to make a choice: if it continues as it
has in recent decades, the lack of opportunity will mean a more
divided society, marked by lower growth and higher social,
political and economic instability. Or it can recognize that the
economy has lost its balance. The gilded age led to the
progressive era, the excesses of the Roaring Twenties led to the
Depression, which in turn led to the New Deal. Each time, the
country saw the extremes to which it was going and pulled back.
The question is, will it do so once again?
Eugene Stiglitz, is an American economist and a professor at
Columbia University. He is a recipient of the Nobel Memorial
Prize in Economic Sciences (2001) and the John Bates Clark Medal
(1979). He is also the former Senior Vice President and Chief
Economist of the World Bank.