Joseph Stiglitz has a must-read article in Vanity Fair “Of the 1%, by the 1%, for the 1%“. The article systematically deconstructs and debunks the many myths of inequality.
For example, you probably won’t find any politicians promoting the theory of “trickle-down economics” any more, and yet we are still furiously cutting taxes for the rich in order to “stimulate the economy”. It just doesn’t work. In fact, quite the opposite is true — as the rich have gotten richer, the economy is sinking faster. And America is quickly becoming like the third-world countries that we used to deride, with the richest 1% taking in a quarter of the nation’s income and controlling 40% of the nation’s wealth, the poor getting poorer, and the middle class all but dying out.
Ironically, as the economy gets worse, the bankers and rich investors who caused the Great Recession do not have to suffer the consequences. Instead, they give themselves large bonuses and get their taxes cut, while instead we punish teachers, cops, firemen, and the working classes.
But what is even more ironic is that the underlying argument for trickle-down economics — “a rising tide raises all boats” — is actually true, but in the opposite way that its proponents meant. Instead, a lowering tide lowers all boats, even those of the rich and privileged. A relative of mine is a social scientist, and her research shows that as income inequality increases it hurts everyone, even the rich whose income has gone up. By every measure — health, life expectancy, happiness, except for wealth — the rich do worse as the poor and middle class do worse.
In fact, there is a good argument that the rich even do worse economically. As inequality increases, the economy will get worse for everyone. Stiglitz argues it like 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.
Gridlock is a excellent metaphor for more than just our current government. Everyone has experienced actual gridlock in traffic — where people entering an intersection in order to get through it before the light turns red get caught in the intersection, and end up blocking the traffic coming from the cross street. As long as you take the greedy view and try to more forward as much as possible, all traffic will get blocked and nobody will get anywhere.
But if you think about it for a moment, you realize that if you just hold back a bit and let that cross-traffic get through, then everyone — including you — will benefit. Some people, like Warren Buffett and Bill Gates, have already figured this out. When the rich pay their fair share and we have good schools and good infrastructure, then everyone does better. The economy improves for all, even the rich. When will the rest of us become enlightened?