The Price of Inequality: How Today's Divided Society Endangers Our Future

by Joseph E. Stiglitz

In the United States and Europe, things seemed more fair, but only superficially so. Those who graduated from the best schools with the best grades had a better chance at the good jobs. But the system was stacked because wealthy parents sent their children to the best kindergartens, grade schools, and high schools, and those students had a far better chance of getting into the elite universities.

What happened in the midst of the crisis made clear that it was not contribution to society that determined relative pay, but something else: bankers received large rewards, though their contribution to society—and even to their firms—had been negative. The

The chances of an American citizen making his way from the bottom to the top are less than those of citizens in other advanced industrial countries.

When the norms of a society change in a way that so many have lost their moral compass, it says something significant about the society.

cigarette companies stealthily made their dangerous products more addictive, and as they tried to persuade Americans that there was no “scientific evidence” of their products’ dangers, their files were filled with evidence to the contrary. Exxon similarly used its money to try to persuade Americans that the evidence on global warming was weak, though the National Academy of Sciences had joined every other scientific body in saying that the evidence was strong. And

Americans, Europeans, and people in other democracies around the world take great pride in their democratic institutions. But the protesters have called into question whether there is a real democracy.

it seems that the political system is more akin to “one dollar one vote” than to “one person one vote.” Rather than correcting the market’s failures, the

The failures in politics and economics are related, and they reinforce each other.

while there may be underlying economic forces at play, politics have shaped the

market, and shaped it in ways that advantage the top at the expense of the rest.

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If we are to reverse these trends in inequality, we will have to reverse some of the policies that have helped make America the most economically divided

They believe that for capitalism to work its wonders, high inequality is an inevitable, even necessary feature of the economy.

Inequality’s apologists—and they are many—argue to the contrary that giving more money to the top will benefit everyone, partly because it would lead to more growth. This is an idea called trickle-down economics. It has a long pedigree—and has long been discredited.

Now, those who believe in trickle-down economics call this the politics of envy. One should look not at the relative size of the slices but at the absolute size. Giving more to the rich leads to a larger pie, so though the poor and middle get a smaller share of the pie, the piece of pie they get is enlarged. I wish that were so, but it’s not. In fact, it’s the opposite: as we noted, in the period of increasing inequality, growth has been slower—and the size of the slice given to most Americans has been diminishing.22

We’ll show later that whereas trickle-down economics doesn’t work, trickle-up economics may: all—even those at the top—could benefit by giving more to those at the bottom and the middle.

family: the six heirs to the Wal-Mart empire command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. The

the largest fraction of personal bankruptcies involve the illness of a family member.

Even customs like marriage are being affected, at least for the moment, by the lack of income and security. In just one year (2010), the number of couples who were living together without being married jumped by 13 percent.58

Residents of many poor (and not so poor) neighborhoods still feel the risk of physical assault. It’s expensive to keep 2.3 million people in prison. The U.S. incarceration rate is the world’s highest and some nine to ten times that of many European countries. Almost 1 in 100 American adults is behind bars.61 Some U.S. states spend as much on their prisons as they do on their universities.

Not surprisingly, government programs do matter. And they matter especially in economic downturns. Many of the programs, like unemployment insurance, provide only short-term assistance. They are directed at those facing temporary hardship.

Poor kids who succeed academically are less likely to graduate from college than richer kids who do worse in school.

Even if they graduate from college, the children of the poor are still worse-off than

low-achieving children of the

Only around 9 percent come from the bottom half of the population, while 74 percent come from the top quarter.

Even as the data show otherwise, Americans still believe in the myth of opportunity.

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)87

The United States was the most unequal of the advanced industrial countries in the mid-1980s, and it has maintained that position.92 In

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.

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

According to UN data, we are slightly more unequal than Iran and Turkey,99 and much less equal

(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

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,103 one cannot ignore relative deprivation. Basic standards of sanitation in America’s cities lead naturally to indoor plumbing. Cheap

AMERICAN INEQUALITY DIDN’T JUST HAPPEN. IT WAS created. Market forces played a role, but it was not market forces alone. In a sense, that should be obvious: economic laws are universal, but our growing inequality—especially the amounts seized by the upper 1 percent—is a distinctly American “achievement.”

The simple thesis of this chapter is that even though market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does and what it does not do. Government has the power to move money from the

Addressing inequality is of necessity multifaceted—we have to rein in the excesses at the top, strengthen the middle, and help those at the bottom. Each goal requires a program of its own. But to construct such programs, we have to have a better understanding of what has given rise to each facet of this unusual inequality.

Technology and scarcity, working through the ordinary laws of supply and demand, play a role in shaping today’s inequality, but something else is at work, and that something else is government. Inequality

Progressive tax and expenditure policies (which tax the rich more than the poor and provide systems of good social protection) can limit the extent of inequality. By contrast, programs that give away a country’s resources to the rich and well connected can increase inequality.

Economists have a name for these activities: they call them rent seeking, getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort. (We’ll

To put it baldly, there are two ways to become wealthy: to create wealth or to take wealth away from others. The former adds to society. The latter typically subtracts from it, for in the process of taking it away, wealth gets destroyed.

the railroad barons of the nineteenth century provided an important service in constructing the railroads, but much of their wealth was the result of their political

influence—getting large government land grants on either side of the railway.

Everything is negotiated, as opposed to how things work in more open and transparent modern markets.

And since the sellers are trading constantly, and buyers enter only episodically, sellers have more information than buyers, and they use that information to their advantage. This

means that on average, sellers (the writers of the derivatives, the banks) can extract more m...

But government didn’t put an end to these kind of activities, not even when, around 2007, it became increasingly apparent what was going on. The reason was obvious. The financial sector had invested heavily in lobbying and campaign

Modern capitalism has become a complex game, and those who win at it have to have more than a little smarts. But those who win at it often possess less admirable characteristics as well: the ability to skirt the law, or to shape the law in their own favor; the willingness to take

advantage of others, even the poor; and to play unfair when necessary.