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Bottom line: economic inequality in America has reached historic highs, and this phenomenon imperils American democracy and society.

Rating: Must Read 

In a nation where so many issues divide, it seems that one particular seems to be gaining a slow consensus on both left and right, and that is the growing economic inequality in the US. Already bad before 2008, the Great Recession has pushed open the economic gap between this country’s richest and poorest to historically high levels.

In The Price of Inequality (WW Norton, 20130, Joseph Stiglitz, a World Bank economist and author of Globalization and It’s Discontents, presents a very good (if clearly left-leaning) analysis of (a) the problem and (b) how it got to be so bad.

As a person who normally leans toward the Austrian/Libertarian view of markets, I am not predisposed to worry about economic inequality, per se, but even I was startled to read about just how out of whack wealth distribution has become in this country.

As Stiglitz notes:

Although the United States has always been a capitalist country, our inequality — or at least its current high level — is new. Some thirty years ago, the top 1 percent of income earners received only [italics his] 12 percent of the nation’s income. That level of inequality should itself have been unacceptable; but since then the average disparity has grown dramatically, so that by 2007 the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800. The top 1 percent get in one week 40 percent more than the bottom fifth received in a year; the top 0.1 percent received in a day and a half about what the bottom 90 percent received in a year; and the richest 20 percent of income earners earn in total after tax [italics his] more than the bottom 80 percent combined.

As I mentioned, this is a concern not just of left-leaning people like Stiglitz. In 2012, a special report by The Economist analyzed in depth  the same growing trend. The figure below shows how the US has left behind “normal” economies and recently passed traditionally “unequal” areas like Latin America and even parts of Africa. Indeed, though the common view in the US is that in Russia a few oligarchs own most of the economic power, in fact US inequality surpasses that of Russia and is closer to China (hardly the role model we want to emulate).

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Now, I know economists who dismiss these concerns with a quick wave of their Austrian hand and reply simply, “so what?” To them, there is no “correct” income distribution ratio, and if the inequality that Stiglitz notes were to double in the next twenty years, they would say simply that this is the market at work.

While this point of view is academically attractive, in the real work we can’t afford to be so sanguine about what is happening in the United States today. As The Economist notes in their report:

Whatever its causes, the stratification of American society is having profound consequences. A country that prides itself on its social mobility is already less mobile than most people think and is almost certainly becoming even less so. As the box with the previous article showed, standard measures of inter-generational mobility in America are lower than in Canada and much of Europe. Most of this has to do with the difficulty of escaping from the bottom rungs of America’s income ladder. According to Markus Jantti, a Finnish economist who has studied mobility across countries, more than 40% of the sons of the poorest 20% of Americans stay in that quintile, compared with around 25% in Nordic countries. The evidence is mixed on whether social mobility has lessened or simply stayed the same over the past 30 years. But it is clear that there has been no improvement in mobility to compensate for widening inequality.

And even the most recent studies of social mobility look at the earnings of people who were children over two decades ago. Since disparities in income, education and social behaviour now strongly reinforce each other, future mobility might be a lot lower still. A study by Sean Reardon of Stanford University suggests that the gap in standardised test scores between schoolchildren from high- and low-income families is roughly 30-40% bigger today than it was 25 years ago. Bob Putnam, of Harvard University, puts it starkly. Put away the rear-view mirror and look at future social mobility, he says, and “we’re about to go over a cliff.”

Stiglitz, to his credit, does a thorough job of walking the reader not just through how we got into this situation but also the negative consequences on American society, including the 1 percent themselves:

…the rich do not exist in a vacuum. They need a functioning society around them to sustain their position and to produce income from their assets. The rich resists taxes, but taxes allow society to make investments that sustain the country’s growth….Taken to its extreme — and this is where we are now — this trend distorts a country and its economy as much as the quick and easy revenues of the extractive industry distort oil- or mineral-rich countries.

It is this last point that really hit home to me as I read this book. As someone from Latin America who emigrated to this country, it worries me that the US is headed toward the model that, until recently, was prevalent throughout the southern half of this continent. In that model, a few elites controlled the nation’s wealth through monopolies or cartels, and a subservient military kept the people in line when they rebelled. Is it really that hard to imagine a US where inequality becomes so extreme that the top 1 percent begin to use force and/or the intelligence apparatus to protect their wealth? Do we event want to get close to such a state?

Sitglitz’ book is not perfect. Like his earlier best-seller on globalization, Sitglitz is quick to ignore the benefits brought by the forces he often derides. Indeed, as someone who has worked in the outsourcing industry, I am a committed advocate of globalization and the benefits that it has brought to the poor of the world. I have seen first-hand how employees in outsourcing centers India value their chance to earn a decent global wage and how they sacrifice to get those jobs. Stiglitz usually ignores these benefits, and prefers to focus his arguments against CEO’s and Wall Street bankers — fair enough, since many of those individuals are reaping economic rents that are undeserved and maintained through political lobbying. But Stiglitz would be better-served by taking a more nuanced view of some of the issues he critiques. They would not diminish the force of his arguments against inequality. Also, as is common in these types of expository books, his reform agenda is a long list of high-level ideas backed up with little analysis of both implementation methods, costs or consequences.

These critiques aside, and despite the fact that  I have a natural inclination to disagree with a lot of his positions on globalization, this is a book that everyone should read. American citizens, as a whole, are woefully uneducated about economics and finance, but this is a dangerous ignorance, for, as Stiglitz notes in one of his better points, economics shape laws and laws shape society. It is undeniable that the economics of inequality are re-shaping American society. Regardless of whether you think the coming model is good or bad, now is the time to understand the new America our new, post-recessionary, level of income re-allocation is creating. Kudos to Stiglitz for giving us an excellent view of this phenomenon and the impact it has and is having on our country.

Read more:http://www.economist.com/node/21564418

Buy book: http://www.amazon.com/Price-Inequality-Divided-Society-Endangers/dp/0393345068/ref=la_B000APIKRK_1_1?ie=UTF8&qid=1371909209&sr=1-1

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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