Inequality of 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
Vanity Fair
May 2011

http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105

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.

Vanity Fair c Conde Nast Digital. All rights reserved.

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