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Of the 1%, by the 1%, for the 1% -- Joseph Stiglitz
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Sid Shniad
2014-10-19 04:39:42 UTC
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*http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105
<http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105>Vanity
Fair May 2011Of the 1%, by the 1%, for the 1%Americans have been
watching protests against oppressive regimes that concentrate massive
wealth in the hands of an elite few. Yet in our own democracy, 1 percent of
the people take nearly a quarter of the nation’s income—an inequality even
the wealthy will come to regret.By Joseph E. Stiglitz *

It’s no use pretending that what has obviously happened has not in fact
happened. The upper 1 percent of Americans are now taking in nearly a
quarter of the nation’s income every year. In terms of wealth rather than
income, the top 1 percent control 40 percent. Their lot in life has
improved considerably. Twenty-five years ago, the corresponding figures
were 12 percent and 33 percent. One response might be to celebrate the
ingenuity and drive that brought good fortune to these people, and to
contend that a rising tide lifts all boats. That response would be
misguided. While the top 1 percent have seen their incomes rise 18 percent
over the past decade, those in the middle have actually seen their incomes
fall. For men with only high-school degrees, the decline has been
precipitous—12 percent in the last quarter-century alone. All the growth in
recent decades—and more—has gone to those at the top. In terms of income
equality, America lags behind any country in the old, ossified Europe that
President George W. Bush used to deride. Among our closest counterparts are
Russia with its oligarchs and Iran. While many of the old centers of
inequality in Latin America, such as Brazil, have been striving in recent
years, rather successfully, to improve the plight of the poor and reduce
gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so
troubling in the mid-19th century—inequalities that are but a pale shadow
of what we are seeing in America today. The justification they came up with
was called “marginal-productivity theory.” In a nutshell, this theory
associated higher incomes with higher productivity and a greater
contribution to society. It is a theory that has always been cherished by
the rich. Evidence for its validity, however, remains thin. The corporate
executives who helped bring on the recession of the past three years—whose
contribution to our society, and to their own companies, has been massively
negative—went on to receive large bonuses. In some cases, companies were so
embarrassed about calling such rewards “performance bonuses” that they felt
compelled to change the name to “retention bonuses” (even if the only thing
being retained was bad performance). Those who have contributed great
positive innovations to our society, from the pioneers of genetic
understanding to the pioneers of the Information Age, have received a
pittance compared with those responsible for the financial innovations that
brought our global economy to the brink of ruin.

Some people look at income inequality and shrug their shoulders. So what if
this person gains and that person loses? What matters, they argue, is not
how the pie is divided but the size of the pie. That argument is
fundamentally wrong. An economy in which *most* citizens are doing worse
year after year—an economy like America’s—is not likely to do well over the
long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking
opportunity. Whenever we diminish equality of opportunity, it means that we
are not using some of our most valuable assets—our people—in the most
productive way possible. Second, many of the distortions that lead to
inequality—such as those associated with monopoly power and preferential
tax treatment for special interests—undermine the efficiency of the
economy. This new inequality goes on to create new distortions, undermining
efficiency even further. To give just one example, far too many of our most
talented young people, seeing the astronomical rewards, have gone into
finance rather than into fields that would lead to a more productive and
healthy economy.

Third, and perhaps most important, a modern economy requires “collective
action”—it needs government to invest in infrastructure, education, and
technology. The United States and the world have benefited greatly from
government-sponsored research that led to the Internet, to advances in
public health, and so on. But America has long suffered from an
under-investment in infrastructure (look at the condition of our highways
and bridges, our railroads and airports), in basic research, and in
education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a
society’s wealth distribution becomes lopsided. The more divided a society
becomes in terms of wealth, the more reluctant the wealthy become to spend
money on common needs. The rich don’t need to rely on government for parks
or education or medical care or personal security—they can buy all these
things for themselves. In the process, they become more distant from
ordinary people, losing whatever empathy they may once have had. They also
worry about strong government—one that could use its powers to adjust the
balance, take some of their wealth, and invest it for the common good. The
top 1 percent may complain about the kind of government we have in America,
but in truth they like it just fine: too gridlocked to re-distribute, too
divided to do anything but lower taxes.

Economists are not sure how to fully explain the growing inequality in
America. The ordinary dynamics of supply and demand have certainly played a
role: laborsaving technologies have reduced the demand for many “good”
middle-class, blue-collar jobs. Globalization has created a worldwide
marketplace, pitting expensive unskilled workers in America against cheap
unskilled workers overseas. Social changes have also played a role—for
instance, the decline of unions, which once represented a third of American
workers and now represent about 12 percent.

But one big part of the reason we have so much inequality is that the top 1
percent want it that way. The most obvious example involves tax policy.
Lowering tax rates on capital gains, which is how the rich receive a large
portion of their income, has given the wealthiest Americans close to a free
ride. Monopolies and near monopolies have always been a source of economic
power—from John D. Rockefeller at the beginning of the last century to Bill
Gates at the end. Lax enforcement of anti-trust laws, especially during
Republican administrations, has been a godsend to the top 1 percent. Much
of today’s inequality is due to manipulation of the financial system,
enabled by changes in the rules that have been bought and paid for by the
financial industry itself—one of its best investments ever. The government
lent money to financial institutions at close to 0 percent interest and
provided generous bailouts on favorable terms when all else failed.
Regulators turned a blind eye to a lack of transparency and to conflicts of
interest.

When you look at the sheer volume of wealth controlled by the top 1 percent
in this country, it’s tempting to see our growing inequality as a
quintessentially American achievement—we started way behind the pack, but
now we’re doing inequality on a world-class level. And it looks as if we’ll
be building on this achievement for years to come, because what made it
possible is self-reinforcing. Wealth begets power, which begets more
wealth. During the savings-and-loan scandal of the 1980s—a scandal whose
dimensions, by today’s standards, seem almost quaint—the banker Charles
Keating was asked by a congressional committee whether the $1.5 million he
had spread among a few key elected officials could actually buy influence.
“I certainly hope so,” he replied. The Supreme Court, in its recent *Citizens
United* case, has enshrined the right of corporations to buy government, by
removing limitations on campaign spending. The personal and the political
are today in perfect alignment. Virtually all U.S. senators, and most of
the representatives in the House, are members of the top 1 percent when
they arrive, are kept in office by money from the top 1 percent, and know
that if they serve the top 1 percent well they will be rewarded by the top
1 percent when they leave office. By and large, the key executive-branch
policymakers on trade and economic policy also come from the top 1 percent.
When pharmaceutical companies receive a trillion-dollar gift—through
legislation prohibiting the government, the largest buyer of drugs, from
bargaining over price—it should not come as cause for wonder. It should not
make jaws drop that a tax bill cannot emerge from Congress unless big tax
cuts are put in place for the wealthy. Given the power of the top 1
percent, this is the way you would *expect* the system to work.

America’s inequality distorts our society in every conceivable way. There
is, for one thing, a well-documented lifestyle effect—people outside the
top 1 percent increasingly live beyond their means. Trickle-down economics
may be a chimera, but trickle-down behaviorism is very real. Inequality
massively distorts our foreign policy. The top 1 percent rarely serve in
the military—the reality is that the “all-volunteer” army does not pay
enough to attract their sons and daughters, and patriotism goes only so
far. Plus, the wealthiest class feels no pinch from higher taxes when the
nation goes to war: borrowed money will pay for all that. Foreign policy,
by definition, is about the balancing of national interests and national
resources. With the top 1 percent in charge, and paying no price, the
notion of balance and restraint goes out the window. There is no limit to
the adventures we can undertake; corporations and contractors stand only to
gain. The rules of economic globalization are likewise designed to benefit
the rich: they encourage competition among countries for *business,* which
drives down taxes on corporations, weakens health and environmental
protections, and undermines what used to be viewed as the “core” labor
rights, which include the right to collective bargaining. Imagine what the
world might look like if the rules were designed instead to encourage
competition among countries for *workers.* Governments would compete in
providing economic security, low taxes on ordinary wage earners, good
education, and a clean environment—things workers care about. But the top 1
percent don’t need to care.

Or, more accurately, they think they don’t. Of all the costs imposed on our
society by the top 1 percent, perhaps the greatest is this: the erosion of
our sense of identity, in which fair play, equality of opportunity, and a
sense of community are so important. America has long prided itself on
being a fair society, where everyone has an equal chance of getting ahead,
but the statistics suggest otherwise: the chances of a poor citizen, or
even a middle-class citizen, making it to the top in America are smaller
than in many countries of Europe. The cards are stacked against them. It is
this sense of an unjust system without opportunity that has given rise to
the conflagrations in the Middle East: rising food prices and growing and
persistent youth unemployment simply served as kindling. With youth
unemployment in America at around 20 percent (and in some locations, and
among some socio-demographic groups, at twice that); with one out of six
Americans desiring a full-time job not able to get one; with one out of
seven Americans on food stamps (and about the same number suffering from
“food insecurity”)—given all this, there is ample evidence that something
has blocked the vaunted “trickling down” from the top 1 percent to everyone
else. All of this is having the predictable effect of creating
alienation—voter turnout among those in their 20s in the last election
stood at 21 percent, comparable to the unemployment rate.

In recent weeks we have watched people taking to the streets by the
millions to protest political, economic, and social conditions in the
oppressive societies they inhabit. Governments have been toppled in Egypt
and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling
families elsewhere in the region look on nervously from their
air-conditioned penthouses—will they be next? They are right to worry.
These are societies where a minuscule fraction of the population—less than
1 percent—controls the lion’s share of the wealth; where wealth is a main
determinant of power; where entrenched corruption of one sort or another is
a way of life; and where the wealthiest often stand actively in the way of
policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask
ourselves is this: When will it come to America? In important ways, our own
country has become like one of these distant, troubled places.

Alexis de Tocqueville once described what he saw as a chief part of the
peculiar genius of American society—something he called “self-interest
properly understood.” The last two words were the key. Everyone possesses
self-interest in a narrow sense: I want what’s good for me right now!
Self-interest “properly understood” is different. It means appreciating
that paying attention to everyone else’s self-interest—in other words, the
common welfare—is in fact a precondition for one’s own ultimate well-being.
Tocqueville was not suggesting that there was anything noble or idealistic
about this outlook—in fact, he was suggesting the opposite. It was a mark
of American pragmatism. Those canny Americans understood a basic fact:
looking out for the other guy isn’t just good for the soul—it’s good for
business.

The top 1 percent have the best houses, the best educations, the best
doctors, and the best lifestyles, but there is one thing that money doesn’t
seem to have bought: an understanding that their fate is bound up with how
the other 99 percent live. Throughout history, this is something that the
top 1 percent eventually do learn. Too late.
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