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

by Joseph E. Stiglitz

The problem, however, is not that globalization is bad or wrong but that governments are managing it so poorly—largely for the benefit of special interests.

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.

Something has happened to our sense of values, when the end of making more money justifies the means, which in the U.S. subprime crisis meant exploiting the poorest and least-educated among us.

capitalism is failing to produce what was promised, but is delivering on what was not promised—inequality, pollution, unemployment, and, most important of all, the degradation of values to the point where everything is acceptable and no one is accountable.

But increasingly, and especially in the United States, it seems that the political system is more akin to “one dollar one vote” than to “one person one vote.”

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.

For markets to work the way markets are supposed to, there has to be appropriate government regulation. But for that to occur, we have to have a democracy that reflects the general interests—not the special interests or just those at the top.

The simple story of America is this: the rich are getting richer, the richest of the rich are getting still richer, 25 the poor are becoming poorer and more numerous, and the middle class is being hollowed out.

Between 2005 and 2009, the typical African American household has lost 53 percent of its wealth—putting its assets at a mere 5 percent of the average white American’s, and the average Hispanic household has lost 66 percent of its wealth.

Even if they graduate from college, the children of the poor are still worse-off than low-achieving children of the rich.81

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.

the ability of those in the financial sector to take advantage of the poor and uninformed, as they made enormous amounts of money by preying upon these groups with predatory lending and abusive credit card practices.11 Each poor person might have only a little, but there are so many poor that a little from each amounts to a great deal.

Those at the top have managed to design a tax system in which they pay less than their fair share—they pay a lower fraction of their income than do those who are much poorer. We call such tax systems regressive.

Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase

it is not a sudden increase in their productivity that allowed these CEOs to amass such riches in the last couple of decades but rather an enhanced ability to take more from the corporation that they are supposed to be serving, and weaker qualms about, and enhanced public toleration of, doing so.

In many areas today, regulatory agencies are responsible for oversight of a sector (writing and enforcing rules and regulations)—the Federal Communications Commission (FCC) in telecom; the Securities and Exchange Commission (SEC) in securities; and the Federal Reserve in many areas of banking. The problem is that leaders in these sectors use their political influence to get people appointed to the regulatory agencies who are sympathetic to their perspectives.

the vast preponderance of government money subsidizing agriculture does not go, as many believe, to poor farmers or even family farms. The design of the program reveals its true objective: to redistribute money from the rest of us to the rich and corporate farms.)

Markets are shaped by laws, regulations, and institutions. Every law, every regulation, every institutional arrangement has distributive consequences—and the way we have been shaping America’s market economy works to the advantage of those at the top and to the disadvantage of the rest.

almost every law has distributive consequences, with some groups benefiting, typically at the expense of others.15 And these distributive consequences are often the most important effects of the policy or program.

When we wonder how it is that the financiers get so much wealth, part of the answer is simple: they’ve helped write a set of rules that allows them to do well, even in the crises that they help create.

The most obvious societal change is the decline of unions, from 20.1 percent of wage- and salary-earning U.S. workers in 1980 to 11.9 percent in 2010.31 This has created an imbalance of economic power and a political vacuum. Without the protection afforded by a union, workers have fared even more poorly than they would have otherwise.

strong worker protections correct what would otherwise be an imbalance of economic power. Such protection leads to a higher-quality labor force with workers who are more loyal to their firms and more willing to invest in themselves and in their jobs.

It doesn’t make sense that investors, let alone speculators, should be taxed at a lower rate than someone who works hard for his living, yet that’s what our tax system does. And capital gains are not taxed until they are realized (that is, until the asset is sold), so there is an enormous benefit from this deferral of taxes, especially when interest rates are high.

Government today plays a double role in our current inequality: it is partly responsible for the inequality in before-tax distribution of income, and it has taken a diminished role in “correcting” this inequality through progressive tax and expenditure policies.

Regulations are the rules of the game that are designed to make our system work better—to ensure competition, to prevent abuses, to protect those who cannot protect themselves.