# The Price of Inequality  ## Metadata - Author:: [[Joseph E. Stiglitz]] - Full Title:: The Price of Inequality - Category: #books ## Highlights > Not surprisingly, the persistent economic slump has led to a continuing weakening of wages: real wages have declined, by nearly 1 percent for men and more than 3 percent for women from 2010 to 2011 alone.14 So have incomes of the typical American. Adjusted for inflation, median household income in 2011 (the most recent year for which we have data) was $50,054, lower that it was in 1996 ($50,661). ([Location 122](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=122)) > Today, women in the United States, on average, have the lowest life expectancy of women in any of the advanced countries.18 Educational attainment, which is often tied in with income and race, is a large and growing predictor of life span. Non-Hispanic white women with a college degree have a life expectancy that is some ten years greater than the life expectation of black or white women without a high school diploma. Non-Hispanic white women without a high school diploma lost about five years of life expectancy between 1990 and 2008.19 The three-year decline in life expectancy of white males without a high school diploma over the same period was only slightly less dramatic. ([Location 131](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=131)) > Decreases in income and decline in standards of living are often accompanied by a multitude of social manifestations—malnutrition, drug abuse, and deterioration in family life, all of which take a toll on health and life expectancy. Indeed, these declines in life expectancy are often considered more telling than income numbers themselves. In the years after the fall of the Iron Curtain, incomes in Russia fell, but perhaps a more reliable indicator of how bad things were was provided by data showing a dramatic fall in life expectancy. ([Location 138](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=138)) > Not surprisingly, health care experts have drawn parallels between recent declines in the United States and what happened in Russia. Michael Marmot, director of the Institute of Health Equity in London and a leading expert on the relationship between incomes and health, observed that “the five-year decline for white women rivals the catastrophic seven-year drop for Russian men in the years after the collapse of the Soviet Union.” ([Location 141](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=141)) > Nor was there any attempt to deny that much of America’s concentration of wealth at the top was a result of rent seeking—including monopoly profits and the excessive compensation of some CEOs and, especially, that of the financial sector. ([Location 159](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=159)) - Tags: [[favorite]] > Noting, as I had, that much of America’s inequality, especially at the top, was due to rent seeking,29 the Economist concluded, in particular, that “inequality has reached a stage where it can be inefficient and bad for growth.” ([Location 169](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=169)) > Sharing our concern about the lack of opportunity in the United States, the report cites results obtained by Sean Reardon of Stanford31 that the “gap in test scores between rich and poor American children is roughly 30–40% wider than it was 25 years ago.” ([Location 172](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=172)) > It even recognized the need for more progressive taxation, including “narrowing the gap between tax rates on wages and capital income; and relying more on efficient taxes that are paid… ([Location 178](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=178)) > The debate was more intense, though, around an argument (made explicitly in a book published shortly after mine)34 that was based on another variant of trickle-down economics. In this new version of an old myth, the rich are the job creators; give more money to the rich, and there will be more jobs. The irony was that the author of this book, like the presidential candidate whom he supported, was from a private-equity firm with a well-established business model that involved taking over companies, piling on debt, “… ([Location 179](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=179)) > In a world of globalization, creating market value had become entirely separated… ([Location 187](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=187)) > There was no reason to believe that giving more money to America’s wealthy would lead to more investment in the United States: money goes to where returns are highest, and with America’s downturn, returns… ([Location 188](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=188)) > Remarkably, in the heyday of unbridled capitalism, the early years of this century, a period in which inequality at the top increased at historic rates, there was no private-sector job creation. And if we exclude… ([Location 191](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=191)) > Not only doesn’t the money given to the top not necessarily go into “job creation” and innovation; some of it goes into distorting our politics, especially in this new era of unbridled… ([Location 193](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=193)) > What we have seen quite clearly is that a common use of wealth is to gain advantage in rent seeking, perpetuating… ([Location 195](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=195)) > The same old “myth” that we should celebrate the wealth of those at the top because we all benefit from it has been used to justify the maintenance of low taxes on capital gains. But most capital gains accrue not from job creation but from one form of speculation or another. Some of this speculation is… ([Location 197](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=197)) > Perhaps the moment when inequality moved closest to being front and center in the campaign was when Mitt Romney suggested that 47 percent of Americans were paying no income tax, living off of government handouts. ([Location 208](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=208)) > The irony, of course, was that people like Romney are the true freeloaders: the taxes that he has said he is paying (as a percentage of his reported income) are (at 14 percent in 2011) far less than those of people with substantially less income. ([Location 211](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=211)) > The government didn’t do what it should have done to prevent the crisis and banks’ exploitive behavior—or to resuscitate the economy or to help those that were suffering from the economic downturn—but, given the imbalances in American politics, it is perhaps more remarkable what was done. ([Location 218](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=218)) > In his remarks, Romney articulated a set of widespread misunderstandings. First, even those who don’t pay income taxes pay a host of other taxes, including payroll, sales, excise, and property taxes.37 Second, many of those receiving “benefits” paid for them—through Social Security and Medicare contributions funded out of payroll taxes. They’re not free riders. ([Location 221](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=221)) > In addition, many of the people who receive government benefits without paying for them are our young, obviously unable to pay, say, for their own education. But spending on them is an investment in the country’s future. ([Location 227](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=227)) - Tags: [[favorite]] > But people receiving those benefits typically paid for them, either directly or indirectly, through contributions they or their employer made on their behalf to these insurance funds. Aside from a person’s right to draw benefits from programs they helped fund, social protection can make for a more productive society. Individuals can take on more high-return, high-risk activities if they know there is a safety net that will protect them if things don’t work out. It’s one of the reasons that some economies with better social protection have been growing much more rapidly than that of the United States, even during the recent recession. ([Location 231](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=231)) > Finally, those at the top have tried to sell the idea that discussions about inequality are just about “redistribution,” taking from some to give to others—or, as Romney would put it, taking from the job creators to give to the freeloaders. ([Location 240](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=240)) > But it’s not. Part of America’s problem today is that too many of those at the top don’t want to contribute their fair share to the “public goods” that are necessary if our society, and our economy, are going to ([Location 241](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=241)) > While there may be some disagreement about what “fair” means, when those at the top pay a smaller percentage of their income than those with… ([Location 243](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=243)) > While a few on the right tried to contest the now widely accepted view that inequality is bad for the economy, I received, on the other hand, criticisms that the book overemphasized an economic perspective on… ([Location 245](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=245)) > I had suggested not only that the economy as a whole would be better-off if there were less inequality but also that even those in the 1 percent would be better-off. It was in their “… ([Location 247](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=247)) > After I spoke, Cornel West, who was in attendance, rose to say the following: The great movements in America—abolitionism, civil rights movement, feminist movement, anti-homophobic movement—they didn’t argue we need self-interest properly understood. If that was the slogan, black folks would still be in Jim Crow. Something else was going on. Strong moral forces, strong spiritual forces, linked to stories—about a nation, in terms of national identity, in terms of what it means to be human, our connection to other countries. . . . There’s not going to be… ([Location 250](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=250)) > If our economic system leads to so many people without jobs, or with jobs that do not pay a livable wage, dependent on the government for food, it means that our economic system has not worked in the… ([Location 258](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=258)) > We do have a divided society. But the division is not, as Romney has suggested, between freeloaders and the rest. Rather, it is between those (including many members of the 1 percent) who see America as a community and recognize that the only way to achieve sustained prosperity is to have shared prosperity, and those who don’t; between those who… ([Location 260](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=260)) > Even if it were true that 47 percent of the population are freeloaders, it would mean that something is wrong with our society. Every society will have some rotten apples, but most individuals intrinsically want to make a contribution to their communities, to have a meaningful job; they want “decent work.”40 But if a country doesn’t give a large proportion of the population the education that they need to earn a decent living, if employers don’t pay workers a decent wage, if a society… ([Location 263](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=263)) > The presidential campaign reinforced the concerns I had raised about the nexus between economic inequality and political inequality, as the consequences of recent Court decisions giving increased scope for money in politics became manifest, with the unbridled spending of the super… ([Location 270](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=270)) > Though the problems in the eurozone first became apparent in Greece, other countries such as Ireland, Portugal, Spain, Cyprus, and Italy soon joined the list of countries facing difficulties. The length of the list should have made it clear that it was not a matter of one country’s going “astray.” There was something systemically wrong. But the diagnosis of Europe’s leaders was fundamentally flawed, the prescriptions that followed were misguided, and in the end they actually made matters worse. ([Location 307](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=307)) > The diagnosis of the European leaders focused on fiscal profligacy—ignoring the fact that two of the crisis countries, Spain and Ireland, had been running surpluses before the crisis. The downturn caused the deficits, not the other way around. But the prescription that followed from the diagnosis of fiscal profligacy was austerity—never mind that there have been almost no instances of countries that have recovered from a crisis through austerity. ([Location 313](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=313)) > The problems increased as talk of Spain’s leaving the euro increased. To many, good risk management meant switching money out of Spanish banks into German institutions; one could feel more confident about getting one’s money back—and getting it back in euros, not some new, devalued currency. The puzzle was more how long it took money to start leaving Spain, not that money left. But as money left the banking system, the banks grew weaker, they lent less, the credit squeeze got tighter, and the combined effects of austerity and the credit squeeze amplified the downturn, another vicious circle. ([Location 331](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=331)) > The founders of the euro had created a dynamically unstable system, but their successors failed to grasp the gravity of the situation. ([Location 335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=335)) > They talked about the need for a common banking system, but they focused on a common regulatory framework, not, say, a common deposit insurance system that would have stemmed the outflow of money. ([Location 335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=335)) > This book is not about what Europe could or should have done to address crises in Spain and elsewhere. It is about inequality, and about how flawed economic policies—based on flawed economic theories and ideology—have managed to exacerbate inequality on both sides of the Atlantic. ([Location 339](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=339)) > Bernard Arnault, the country’s richest man, decided to seek Belgian citizenship in what was widely interpreted as an attempt to reduce his tax obligation. With movements within Europe so easy, and with no tax harmonization, it is relatively easy for rich individuals to relocate to low-tax jurisdictions. Thus, free mobility of labor without tax harmonization is an invitation to a race to the bottom—for jurisdictions to compete to attract high-income individuals and profitable corporations by offering them lower taxes. Tax competition thus weakens the ability to engage in progressive tax policies, and limits the ability to “correct” an increasingly unequal market distribution. ([Location 348](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=348)) > When did we go astray? One of the questions I have been repeatedly asked is, when did we go astray? If I had to locate a time when we started down the path toward widening inequality, when would that moment be? There’s no easy answer to such a question, but clearly the election of President Ronald Reagan represented a turning point in the United States. Among the precipitating events were the beginning of the deregulation of the financial sector and the reduction in the progressivity of the tax system. Deregulation led to the excessive financialization of the economy—to the point that before the 2008 crisis 40 percent of all corporate profits went to the financial sector. The path of deregulation upon which Reagan set the country was, unfortunately, followed by his successors. So was the policy of lowering taxes at the top. First the top rate was lowered from 70 percent to 28 percent (under Reagan), and then (after Bill Clinton had raised the top rate to 39.6 percent in 1993) they were lowered under George W. Bush to 35 percent. But then the taxes on forms of income received disproportionately by the rich (capital gains, more than half of which are earned by the top 0.1 percent) were lowered further, under Clinton to 20 percent in 1997 and then under Bush to 15 percent.45 Interest on municipal bonds, another favorite of the rich, is not even taxed. The result is that the top 400 income earners in the United States paid an average tax rate of just 19.9 percent in 2009.46 Overall, the richest 1 percent of Americans pay effective income tax rates in the low twenties, lower than those of Americans with more moderate incomes. ([Location 382](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=382)) > Throughout its history, America has struggled with inequality. But with the tax policies and regulations that existed in the post–World War II war period—and the heavy investments in education, like the GI Bill—matters were improving. The tax cuts at the top and deregulation that began in the Reagan years reversed that trend. ([Location 405](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=405)) > There is, as a participant in one of my seminars pointed out, a two-way relationship between before-tax and after-tax inequality. The fact that the United States has the least progressive tax system and the most inequality in “market” incomes may not be an accident. It shows up systemically in the data: on average, countries with less progressive taxation have more inequality. This could be partly because societies with more economic inequality tend to have more political inequality, especially when it reaches the outsize levels found in the United States and a few other countries. And with a political system that allows the rich to exercise so much influence, it’s perhaps no surprise that taxes on the rich are as low as they are. But there is another explanation: in chapter 2, I explain how much of the inequality, especially at the top, is related to rent seeking. ([Location 407](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=407)) > Rent seeking is, on average, destructive, because the rent seekers gain for themselves less than they take away from others, so evident in the destruction wrought by the rent seekers in the financial sector. The more those gains are taxed, the fewer the resources that get devoted to rent seeking, and the more the efforts that get devoted to activities that may not pay as… ([Location 413](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=413)) > Is there hope? Americans are an optimistic people and want to believe that there is a way out. As a two-handed economist, I have to admit there are a few rays of hope, although the reasons for despair are obvious: the low levels of inequality of opportunity suggest that inequality in the future may be even worse than it is today. That there are economic policies that could bring down the high levels of inequality is clear: but the nexus between… ([Location 419](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=419)) > On the other hand, I describe in the text other countries that have even managed to reduce inequality. It is not inevitable either that it remain so large, or that it continue to grow. One of the main messages of this book is that our economy, our democracy, and our society would all benefit from reducing inequality and increasing equality… ([Location 423](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=423)) > Two periods in America’s history were marked by high levels of income and wealth disparities: the Gilded Age of the late nineteenth century and… ([Location 426](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=426)) > In both of these instances, the country pulled back from the brink. Our democratic processes worked. The Gilded Age was followed by the Progressive Era, which curbed monopoly power. The Roaring Twenties was followed by the important social and economic legislation of the New Deal, which strengthened the rights of workers, provided greater social protection for all Americans… ([Location 431](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=431)) > The voters’ rejection of Romney gives a glimmer of hope: with the exception of Franklin Delano Roosevelt’s reelection in 1936, no incumbent has been reelected with a level of unemployment… ([Location 435](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=435)) > But electoral politics had also failed in Western democracies. U.S. president Barack Obama had promised “change you can believe in,” but he subsequently delivered economic policies that, to many Americans, seemed like more of the same. ([Location 463](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=463)) > Three themes resonated around the world: that markets weren’t working the way they were supposed to, for they were obviously neither efficient nor stable;3 that the political system hadn’t corrected the market failures; and that the economic and political systems are fundamentally unfair. ([Location 477](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=477)) > While this book focuses on the excessive inequality that marks the United States and some other advanced industrial countries today, it explains how the three themes are intimately interlinked: the inequality is cause and consequence of the failure of the political system, and it contributes to the instability of our economic system, which in turn contributes to increased inequality—a vicious downward spiral into which we have descended, and from which we can emerge only through concerted policies that I describe below. ([Location 480](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=480)) > In some countries the Occupy Wall Street movement has become closely allied with the antiglobalization movement. They do have some things in common: a belief not only that something is wrong but also that change is possible. 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. ([Location 508](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=508)) > The interconnectedness of peoples, countries, and economies around the globe is a development that can be used as effectively to promote prosperity as to spread greed and misery. The same is true for the market economy: the power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them. At their best, markets have played a central role in the stunning increases in productivity and standards of living in the past two hundred years—increases that far exceeded those of the previous two millennia. ([Location 511](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=511)) > But government has also played a major role in these advances, a fact that free-market advocates typically fail to acknowledge. On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers. For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens. ([Location 514](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=514)) - Tags: [[favorite]] > The consequences of not doing so are serious: within a meaningful democracy, where the voices of ordinary citizens are heard, we cannot maintain an open and globalized market system, at least not in the form that we know it, if that system year after year makes those citizens worse-off. One or the other will have to give—either our politics or our economics. ([Location 520](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=520)) > The financial crisis unleashed a new realization that our economic system was not only inefficient and unstable but also fundamentally unfair. Indeed, in the aftermath of the crisis (and the response of the Bush and the Obama administrations), almost half thought so, according to a poll at the time. ([Location 538](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=538)) > 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 wealth given to the elites and to the bankers seemed to arise out of their ability and willingness to take advantage of others. ([Location 545](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=545)) > 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. There is a corresponding myth—rags to riches in three generations—suggesting that those at the top have to work hard to stay there; if they don’t, they (or their descendants) quickly move down. But as chapter 1 will detail, this too is largely a myth, for the children of those at the top will, more likely than not, remain there. ([Location 552](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=552)) > In a way, in America and throughout the world, the youthful protesters took what they heard from their parents and politicians at face value—just as America’s youth did fifty years ago during the civil rights movement. Back then they scrutinized the values equality, fairness, and justice in the context of the nation’s treatment of African Americans, and they found the nation’s policies wanting. Now they scrutinize the same values in terms of how our economic and judicial system works, and they have found the system wanting for poor and middle-class Americans—not just for minorities but for most Americans of all backgrounds. ([Location 555](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=555)) > The hedge fund industry did not cause the crisis. It was the banks. And it is the bankers who have gone, almost to a person, free. If no one is accountable, if no individual can be blamed for what has happened, it means that the problem lies in the economic and political system. ([Location 564](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=564)) > For years there was a deal between the top and the rest of our society that went something like this: we will provide you jobs and prosperity, and you will let us walk away with the bonuses. You all get a share, even if we get a bigger share. But now that tacit agreement between the rich and the rest, which was always fragile, has come apart. Those in the 1 percent are walking off with the riches, but in doing so they have provided nothing but anxiety and insecurity to the 99 percent. The majority of Americans have simply not been benefiting from the country’s growth. ([Location 577](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=577)) > If markets had actually delivered on the promises of improving the standards of living of most citizens, then all of the sins of corporations, all the seeming social injustices, the insults to our environment, the exploitation of the poor, might have been forgiven. But to the young indignados and protesters elsewhere in the world, 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. ([Location 603](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=603)) > Given a political system that is so sensitive to moneyed interests, growing economic inequality leads to a growing imbalance of political power, a vicious nexus between politics and economics. And the two together shape, and are shaped by, societal forces—social mores and institutions—that help reinforce this growing inequality. ([Location 636](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=636)) > The protesters have been criticized for not having an agenda, but such criticism misses the point of protest movements. They are an expression of frustration with the political system and even, in those countries where there are elections, with the electoral process. They sound an alarm. ([Location 646](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=646)) > In some ways the protesters have already accomplished a great deal: think tanks, government agencies, and the media have confirmed their allegations, the failures not just of the market system but of the high and unjustifiable level of inequality. The expression “we are the 99 percent” has entered into popular consciousness. No one can be sure where the movements will lead. But of this we can be sure: these young protesters have already altered public discourse and the consciousness of ordinary citizens and politicians alike. ([Location 648](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=648)) > America has been growing apart, at an increasingly rapid rate. In the first post-recession years of the new millennium (2002 to 2007), the top 1 percent seized more than 65 percent of the gain in total national income.5 While the top 1 percent was doing fantastically, most Americans were actually growing worse-off. ([Location 842](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=842)) > Members of America’s middle class have felt that they were long suffering, and they were right. For three decades before the crisis, their incomes had barely budged.7 Indeed, the income of a typical full-time male worker has stagnated for well over a third of a century. ([Location 848](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=848)) > Although the United States has always been a capitalist country, our inequality—or at least its current high level—is new. Some thirty years ago, the top 1 percent of income earners received only 12 percent of the nation’s income.13 That level of inequality should itself have been unacceptable; but since then the disparity has grown dramatically,14 so that by 2007 the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800.15 The top 1 percent get in one week 40 percent more than the bottom fifth receive in a year; the top 0.1 percent received in a day and a half about what the bottom 90 percent received in a year; and the richest 20 percent of income earners earn in total after tax more than the bottom 80 percent combined. ([Location 873](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=873)) > The last time inequality approached the alarming level we see today was in the years before the Great Depression. The economic instability we saw then and the instability we have seen more recently are closely related to this growing inequality, as I’ll explain in chapter 4. How we explain these patterns, the ebb and flow of inequality, is the subject of chapters 2 and 3. For now, we simply note that the marked reduction in inequality in the period between 1950 and 1970, was due partly to developments in the markets but even more to government policies, such as the increased access to higher education provided by the GI Bill and the highly progressive tax system enacted during World War II. In the years after the “Reagan revolution,” by contrast, the divide in market incomes increased and, ironically, at the same time government initiatives designed to temper the inequities of the marketplace were dismantled, taxes at the top were lowered and social programs were cut back. Market forces—the laws of supply and demand—of course inevitably play some role in determining the extent of economic inequality. But those forces are at play in other advanced industrial countries as well. Even before the burst in inequality that marked the first decade of this century, the United States already had more inequality and less income mobility than practically every country in Europe, as well as Australia and Canada. The trends in inequality can be reversed. A few other countries have managed to do so. Brazil has had one of the highest levels of inequality in the world—but in the 1990s, it realized the perils, in terms both of social and political divisiveness and of long-term economic growth. The result was a political consensus across society that something had to be done. Under President Fernando Henrique Cardoso, there were massive increases in education expenditures, including for the poor. Under President Luiz Inácio Lula da Silva, there were social expenditures to reduce hunger and poverty.17 Inequality was reduced, growth increased,18 and society became more stable. Brazil still has more inequality than the United States, but while Brazil has been striving, rather successfully, to improve the plight of the poor and reduce gaps in income between rich and poor, America has allowed inequality to grow and poverty to increase. ([Location 887](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=887)) > But this book shows that both the magnitude of America’s inequality today and the way it is generated actually undermine growth and impair efficiency. Part of the reason for this is that much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others. It is thus not surprising that our growth has been stronger in periods in which inequality has been lower and in which we have been growing together.19 This was true not only in the decades after World War II but, even in more recent times, in the 1990s.20 Trickle-down economics 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. As we’ve seen, higher inequality has not led to more growth, and most Americans have actually seen their incomes sink or stagnate. What America has been experiencing in recent years is the opposite of trickle-down economics: the riches accruing to the top have come at the expense of those down below.21 One can think of what’s been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone else gets a smaller slice. 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 Young men (aged twenty-five to thirty-four) who are less educated have an even harder time; those who have only graduated from high school have seen their real incomes decline by more than a quarter in the last twenty-five years.23 But even households of individuals with a bachelor’s degree or higher have not done well—their median income (adjusted for inflation) fell by a tenth from 2000 to 2010.24 (Median income is the income such that half have an income greater than that number, half less.) 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. ([Location 911](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=911)) > 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. The incomes of the middle class are stagnating or falling, and the difference between them and the truly rich is increasing. ([Location 938](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=938)) > These broad-spectrum numbers, while alarming, can fail to capture the current disparities with sufficient force. For an even more striking illustration of the state of inequality in America, consider the Walton 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 numbers may not be as surprising as they seem, simply because those at the bottom have so little wealth. ([Location 956](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=956)) > America has always thought of itself as a middle-class country. No one wants to think of himself as privileged, and no one wants to think of his family as among the poor. But in recent years, America’s middle class has become eviscerated, as the “good” middle-class jobs—requiring a moderate level of skills, like autoworkers’ jobs—seemed to be disappearing relative to those at the bottom, requiring few skills, and those at the top, requiring greater skill levels. Economists refer to this as the “polarization” of the labor force. ([Location 962](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=962)) > The Great Recession thus represented a triple whammy for many Americans: their jobs, their retirement incomes, and their homes were all at risk. ([Location 1043](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1043)) > 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. And even the net worth of the typical white American household was down substantially, to $113,149 in 2009, a 16 percent loss of wealth from 2005.53 ([Location 1057](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1057)) > Lack of health insurance is one factor contributing to poorer health, especially among the poor. Life expectancy in the United States is 78 years, lower than Japan’s 83 years, or Australia’s or Israel’s 82 years. According to the World Bank, in 2009 the United States ranked fortieth overall, just below Cuba.54 Infant and maternal mortality in the United States is little better than in some developing countries; for infant mortality, it is worse than Cuba, Belarus, and Malaysia, to name a few.55 And these poor health indicators are largely a reflection of the dismal statistics for America’s poor. For instance, America’s poor have a life expectancy that is almost 10 percent lower than that of those at the top. ([Location 1065](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1065)) > 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. ([Location 1087](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1087)) > Indeed, according to the Economic Mobility Project, “there is a stronger link between parental education and children’s economic, educational, and socio-emotional outcomes” in the United States than in any other country investigated, including those of “old Europe” (the UK, France, Germany, and Italy), other English speaking countries (Canada and Australia), and the Nordic countries Sweden, Finland, and Denmark, where the results were more expected.73 A variety of other studies have corroborated these findings. ([Location 1140](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1140)) > There are many other ways of summarizing the disadvantageous position of the poor. The journalist Jonathan Chait has drawn attention to two of the most telling statistics from the Economic Mobility Project and research from the Economic Policy Institute.79 •  Poor kids who succeed academically are less likely to graduate from college than richer kids who do worse in school.80 •  Even if they graduate from college, the children of the poor are still worse-off than low-achieving children of the rich. ([Location 1161](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1161)) > A stark reflection of the inequality of educational opportunity in our society is the composition of students in America’s highly selective colleges. Only around 9 percent come from the bottom half of the population, while 74 percent come from the top quarter. ([Location 1173](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1173)) > While inequalities in parental income and education translate directly into inequalities of educational opportunity, inequalities of opportunity begin even before school—in the conditions that poor people face immediately before and after birth, differences in nutrition and the exposure to environmental pollutants that can have lifelong effects.84 So difficult is it for those born into poverty to escape that economists refer to the situation as a “poverty trap.” ([Location 1177](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1177)) > Even as the data show otherwise, Americans still believe in the myth of opportunity. A public opinion poll by the Pew Foundation found that “nearly 7 in 10 Americans had already achieved, or expected to achieve, the American Dream at some point in their lives.” ([Location 1181](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1181)) > Even as a myth, the belief that everyone had a fair chance had its uses: it motivated people to work hard. It seemed we were all in the same boat; even if some were, for the moment, traveling first-class while others stayed in steerage. On the next cruise positions might be reversed. The belief enabled the United States to avoid some of the class divisions and tensions that marked some European countries. By the same token, as the reality sinks in, as most Americans finally grasp that the economic game is stacked against them, all of this is at risk. Alienation has begun to replace motivation. Instead of social cohesion we have a new divisiveness. ([Location 1184](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1184)) - Tags: [[favorite]] > Numbers on compensation of corporate executives—including those who brought on the crisis—tell the story. 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 and even markedly higher than it was in the United States a quarter century ago.88 The old U.S. ratio of 30 to 1 now seems quaint by comparison. It strains credulity to think that over the intervening years CEOs as a group have increased their productivity so much, relative to the average worker, that a multiple of more than 200 could be justified. Indeed, the available data on the success of U.S. companies provide no support for such a view. ([Location 1197](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1197)) > The United States was the most unequal of the advanced industrial countries in the mid-1980s, and it has maintained that position.92 In fact, the gap between it and many other countries has increased: from the mid-1980s France, Hungary, and Belgium have seen no significant increase in inequality, while Turkey and Greece have actually seen a decrease in inequality. 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. ([Location 1213](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1213)) > The UNDP (the UN Development Program) has developed a standard measure of “human development,” which aggregates measures of income, health, and education. It then adjusts those numbers to reflect inequality. Before adjustment for inequality, the United States looked reasonably good in 2011—fourth, behind Norway, Australia, and Netherlands. But once account is taken of inequality, the United States is ranked twenty-third, behind all of the European countries. The difference between the rankings with and without inequality was the largest of any of the advanced industrial countries. ([Location 1222](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1222)) > All of the Scandinavian countries rank much higher than the United States, and each provides not only universal education but also health care to its citizens. The standard mantra in the United States claims that the taxes required to finance these benefits stifle growth. Far from it. Over the period 2000 to 2010, high-taxing Sweden, for example, grew far faster than the United States—the country’s average growth rates have exceeded those of the United States—2.31 percent a year versus 1.85 percent. ([Location 1226](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1226)) > As a former finance minister of one of these countries told me, “We have grown so fast and done so well because we had high taxes.” Of course, what he meant was not that the taxes themselves led to higher growth but that the taxes financed public expenditures—investments in education, technology, and infrastructure—and the public expenditures were what had sustained the high growth—more than offsetting any adverse effects from the higher taxation. ([Location 1231](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1231)) > The American Right finds the facts described in this chapter inconvenient. The analysis runs counter to some cherished myths that it would like to propagate: that America is a land of opportunity, that most people have been benefiting from the market economy, especially in the era since Reagan deregulated the economy and downsized government. Members of the Right would like to deny the facts, but the accumulation of data makes it hard to do so. ([Location 1277](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1277)) > Nor can the Right really deny the fact that government can help ameliorate poverty—it has done so especially effectively among the elderly. And that means that cutbacks in government programs, including Social Security, unless they are very carefully designed, are likely to increase poverty. ([Location 1283](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1283)) > In response, the Right offers four retorts. The first is that in any year someone will be down and out and someone else will enjoy a bonanza. What really matters is lifetime inequality. Those with the lowest incomes will, by and large, have higher incomes in later years, so lifetime inequality is less than these data suggest. Economists have taken a hard look at differences in lifetime income—and, unfortunately, the wish of the Right doesn’t conform to today’s reality: lifetime… ([Location 1285](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1285)) > 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 Chinese TVs mean that even the poor can afford them—and indeed, even in poor Indian and Chinese villages, there is in general access to TV. In today’s world, this is not a mark of affluence.… ([Location 1290](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1290)) > The third response is to quibble about the statistics. Some might claim that inflation may be overestimated, so growth in incomes may be underestimated. But, if anything, I suspect that the numbers underestimate the travails facing the typical American family. As family members work longer hours to maintain their standard of living—“for the family”—family life often suffers. Earlier in this chapter, we described the increasing level of insecurity that the poor and the middle class in America face—and this, too, is not reflected in the income statistics. Plausibly, true inequality may be far larger than the measures of inequality of income would suggest. Indeed, as we noted… ([Location 1298](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1298)) > The final retort by the Right makes reference to an economic and moral justification of inequality, accompanied by a claim that attempting to do anything about it will simply “kill the golden goose,” and so weaken America’s economy that even the poor will suffer.106 As Mitt Romney put it, inequality is the kind of thing that should be discussed quietly and privately.107 The poor, in this land of opportunity, have only themselves to blame. In later chapters we’ll address these arguments. We’ll show that, for the most part, not only should we not blame the poor for their plight but also that the claim of those at the top, that they earned their money “on their own,” doesn’t have much merit. We’ll see that the 1 percent are by and large not those who earned their incomes by great social contributions—they are not the… ([Location 1305](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1305)) > AMERICAN INEQUALITY DIDN’T JUST HAPPEN. IT WAS created. ([Location 1321](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1321)) > By understanding the origins of inequality, we can better grasp the costs and benefits of reducing it. The simple thesis of this chapter is that even though market forces help shape the degree of inequality, government policies shape those market forces. ([Location 1326](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1326)) > 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. ([Location 1335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1335)) > Distinct as the inequality we face today is, inequality itself is not something new. The concentration of economic and political power was in many ways more extreme in the precapitalist societies of the West. At that time, religion both explained and justified the inequality: those at the top of society were there because of divine right. To question that was to question the social order, or even to question God’s will. ([Location 1338](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1338)) > However, for modern economists and political scientists, as also for the ancient Greeks, this inequality was not a matter of a preordained social order. Power—often military power—was at the origin of these inequities. Militarism was about economics: the conquerors had the right to extract as much as they could from the conquered. In antiquity, natural philosophy in general saw no wrong in treating other humans as means for the ends of others. As the ancient Greek historian Thucydides famously said, “right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.” ([Location 1341](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1341)) > Technology, of course, determines the productivity of different skills: in a primitive agriculture economy, physical strength and endurance is what mattered; in a modern hi-tech economy, brainpower is more relevant. ([Location 1356](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1356)) > Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity. This should not come as a surprise: we have a political system that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large “gifts.” 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 give a fuller definition of the concept of rent seeking later in the chapter.) Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation. ([Location 1379](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1379)) > Jean-Baptiste Colbert, the adviser to King Louis XIV of France, reportedly said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” So, too, for the art of rent seeking. ([Location 1386](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1386)) > Indeed, as we shall shortly see, some of the most important innovations in business in the last three decades have centered not on making the economy more efficient but on how better to ensure monopoly power or how better to circumvent government regulations intended to align social returns and private rewards. ([Location 1443](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1443)) > Making markets less transparent is a favorite tool. The more transparent markets are, the more competitive they are likely to be. Bankers know this. That’s why banks have been fighting to keep their business in writing derivatives, the risky products that were at the center of AIG’s collapse,8 in the shadows of the “over the counter” market. ([Location 1446](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1446)) > While lack of transparency results in more profits for the bankers, it leads to lower economic performance. Without good information, capital markets can’t exercise any discipline. Money won’t go to where returns are highest, or to the bank that does the best job of managing money. No one can know the true financial position of a bank or other financial institution today—and shadowy derivative transactions are part of the reason. ([Location 1453](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1453)) > The financial sector has developed expertise in a wide variety of forms of rent seeking. We’ve already mentioned some, but there are many others: taking advantage of asymmetries of information (for instance, selling securities that they had designed to fail, but knowing that buyers didn’t know that);10 taking excessive risk—with the government holding a lifeline, bailing them out and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could; and getting money from the Federal Reserve at low interest rates, now almost zero. ([Location 1465](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1465)) > But the form of rent seeking that is most egregious—and that has been most perfected in recent years—has been 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. ([Location 1470](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1470)) - Tags: [[favorite]] > After all, considerable amounts of resources were used up in the process of moving money from the poor to the rich, which is why it’s a negative-sum game. 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 contributions, and the investments paid off. ([Location 1474](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1474)) > Winning in the game of rent seeking has made fortunes for many of those at the top, but it is not the only means by which they obtain and preserve their wealth. The tax system also plays a key role, as we’ll see later. 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. ([Location 1485](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1485)) > Rent seeking takes many forms: hidden and open transfers and subsidies from the government, laws that make the marketplace less competitive, lax enforcement of existing competition laws, and statutes that allow corporations to take advantage of others or to pass costs on to the rest of society. The term “rent” was originally used to describe the returns to land, since the owner of land receives these payments by virtue of his ownership and not because of anything he does. This stands in contrast to the situation of workers, for example, whose wages are compensation for the effort they provide. The term “rent” then was extended to include monopoly profits, or monopoly rents, the income that one receives simply from the control of a monopoly. Eventually the term was expanded still further to include the returns on similar ownership claims. If the government gave a company the exclusive right to import a limited amount (a quota) of a good, such as sugar, then the extra return generated as a result of the ownership of those rights was called a “quota-rent.” ([Location 1503](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1503)) > Another form of rent seeking is the flip side: selling to government products at above market prices (noncompetitive procurement). The drug companies and military contractors excel in this form of rent seeking. Open government subsidies (as in agriculture) or hidden subsidies (trade restrictions that reduce competition or subsidies hidden in the tax system) are other ways of getting rents from the public. ([Location 1526](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1526)) > Chicago school economics argues that markets are presumptively competitive and efficient. If entry were easy, the dominant firm would gain nothing from driving out a rival, because the firm that is forced out would be quickly replaced by another firm. But in reality entry is not so easy, and predatory behavior does occur. ([Location 1612](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1612)) > It deployed a strategy known as FUD (fear, uncertainty, and doubt), creating anxiety about compatibility among users by programming error messages that would randomly appear if Netscape was installed on a Windows computer. ([Location 1626](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1626)) > monopolists are not good innovators. ([Location 1641](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1641)) > 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. Economists refer to this as “regulatory capture.” ([Location 1662](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1662)) > Sometimes, however, the capture is not just motivated by money. Instead, the mindset of regulators is captured by those whom they regulate. This is called “cognitive capture,” and it is more of a sociological phenomenon. ([Location 1667](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1667)) > Sometimes gifts are hidden in obscure provisions of legislation. A provision of one of the key bills deregulating the financial derivative market—ensuring that no regulator could touch it, no matter how great the peril to which it exposed the economy—also gave derivatives claims “seniority” in the event of bankruptcy. If a bank went under, the claims on the derivatives would be paid off before workers, suppliers, or other creditors saw any money—even if the derivatives had pushed the firm into bankruptcy in the first place.49 (The derivatives market played a central role in the 2008–09 crisis and was responsible for the $182 billion bailout of AIG.) ([Location 1687](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1687)) > The threat of capital outflow, should workers get too demanding about rights and wages, keeps workers’ wages low. ([Location 1888](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1888)) > There is a broader “race to the bottom,” trying to ensure that business regulations are weak and taxes are low. In one arena, finance, this has proven especially costly and especially critical to the growth in inequality. ([Location 1890](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1890)) > Indeed, even the IMF (the International Monetary Fund, the international agency responsible for ensuring global financial stability) has now recognized the dangers of unencumbered and excessive financial integration:22 a problem in one country can rapidly spread to ([Location 1897](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1897)) > In earlier crises, not only did the IMF (typically with the support of the U.S. Treasury) insist on huge budget cuts from troubled nations, converting downturns into recessions and depressions, but it also demanded the fire sales of assets, and the financiers then swooped in to make a killing. In my earlier book Globalization and Its Discontents, I described how Goldman Sachs was one of the winners in the 1997 East Asia crisis, as it was in the 2008 crisis. ([Location 1905](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1905)) > 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. ([Location 1908](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1908)) > The way globalization has been managed, however, has itself led to still lower wages because workers’ bargaining power has been eviscerated. With capital highly mobile—and with tariffs low—firms can simply tell workers that if they don’t accept lower wages and worse working conditions, the company will move elsewhere. To see how asymmetric globalization can affect bargaining power, imagine, for a moment, what the world would be like if there was free mobility of labor, but no mobility of capital.26 Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in, and that’s partly because the 1 percent doesn’t want it to be that way. ([Location 1917](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1917)) > As corporations have pushed a political agenda that shapes market forces to work for them, they have not, of course, revealed their hand. They don’t argue for globalization—for free capital mobility and investment protections—saying that doing so will enrich them at the expense of the rest of society. Rather, they make specious arguments about how all will benefit. ([Location 1926](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1926)) > As globalization proceeds, there will be further downward pressures on their wages. I don’t think markets work so well that wages will be fully equalized, but they will move in that direction, and far enough to be of serious concern.29 The problem is particularly severe today in the United States and Europe: at the same time that labor-saving technological change has reduced the demand for many of the “good” middle-class blue-collar jobs, globalization has created a global marketplace, putting the same workers in direct competition with comparable workers abroad. Both factors depress wages. ([Location 1946](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1946)) > Among the winners from globalization in the United States and some European countries, as it’s been managed, are the people at the top. Among the losers are those at the bottom, and increasingly even those in the middle. ([Location 1963](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1963)) > 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. ([Location 1970](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1970)) > That the American labor market performed so poorly in the Great Recession and that American workers have done so badly for three decades should cast doubt on the mythical virtues of a flexible labor market. ([Location 1982](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1982)) > One of the interpretations of these data is that in effect, during the periods when wages grew so much slower than productivity, corporate managers seized a larger share of the “rents” associated with corporations. ([Location 1990](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1990)) > In some circles, so engrained did these schizophrenic attitudes to “fairness” become that early in the Great Recession an Obama administration official could say, with a straight face, that it was necessary to honor AIG bonuses, even for the officials who had led the company to need a $182 billion bailout, because of the sanctity of contracts; minutes later he could admonish autoworkers to accept a revision of their contract that would have lowered their compensation enormously. ([Location 2016](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2016)) > Game-theoretic models, for instance, have shown how tacit collusive behavior of a dominant group (whites, men) can be used to suppress the economic interests of another group. Individuals who break with the discriminatory behavior are punished: others will refuse to buy from their store, work for them, supply them inputs; social sanctions, like ostracism, can also be effective. Those who don’t punish transgressors are subjected to the same punishment. ([Location 2045](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2045)) > A striking example, from a study by the sociologist Devah Pager, is of the stigmatizing effect of a criminal record.50 In her field study, matched pairs of twenty-three-year-olds applied for real entry-level jobs in order to test the degree to which a criminal record (a nonviolent drug offense) affects subsequent employment opportunities. All the individuals presented roughly identical credentials, including a high school diploma, so that differences experienced among groups can be attributed to the effects of race or criminal status. After an invited interview, the ratio of callbacks for white nonoffenders to white ex-offenders is 2:1, this same ratio for blacks is nearly 3:1. And a white man with a criminal record is slightly more likely to be considered for a job than a black man with no criminal past. Thus, on average, being black reduces employment opportunities substantially, and more so for ex-offenders. These effects can represent important barriers to black men trying to become economically self-sufficient, since roughly one in three black men will spend time in prison in his lifetime. ([Location 2063](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2063)) > Health statistics, for instance, are telling: life expectancy at birth for blacks in 2009 was 74.3 compared with 78.6 for whites. ([Location 2073](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2073)) > The irony is that just as markets started delivering more unequal outcomes, tax policy asked less of the top. The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton and down finally to 35 percent under George W. Bush.54 This reduction was supposed to lead to more work and savings, but it didn’t.55 In fact, Reagan had promised that the incentive effects of his tax cuts would be so powerful that tax revenues would increase. And yet, the only thing that increased was the deficit. George W. Bush’s tax cuts weren’t any more successful: savings did not increase; instead the household savings rate fell to a record low (essentially zero). ([Location 2094](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2094)) > 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. ([Location 2103](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2103)) > 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.56 Furthermore, if the assets are passed on at death, the capital gains made during the individual’s lifetime escape taxation. ([Location 2104](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2104)) > While the average tax rate has decreased little since 1979—going from 22.2 percent to 20.4 percent, that of the top 1 percent has fallen by almost a quarter, from 37 percent to 29.5 percent.62 ([Location 2125](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2125)) > What is striking about the United States is that while the level of inequality generated by the market—a market shaped and distorted by politics and rent seeking—is higher than in other advanced industrial countries, it does less to temper this inequality through tax and expenditure programs. And as the market-generated inequality has increased, our government has done less and less. ([Location 2160](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2160)) > Among the more disturbing findings recited in chapter 1 is that the United States has become a society in which there is less equality of opportunity, less than it was in the past, and less than in other countries, including those of old Europe. ([Location 2165](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2165)) > As the wealthy get wealthier, they have more to lose from attempts to restrict rent seeking and redistribute income in order to create a fairer economy, and they have more resources with which to resist such attempts. It might seem strange that as inequality has increased we have been doing less to diminish its impact, but it’s what one might have expected. It’s certainly what one sees around the world: the more egalitarian societies work harder to preserve their social cohesion; in the more unequal societies, government policies and other institutions tend to foster the persistence of inequality. This pattern has been well documented. ([Location 2205](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2205)) > Another theme of this book is that of “adverse dynamics,” “vicious circles.” We saw in the last chapter how greater inequality led to less equality of opportunity, leading in turn to more inequality. In the next chapter, we’ll see some further examples of downward spirals—how more inequality undermines support for collective action, the kinds of actions that ensure that everyone lives up to his or her potential, as a result, for instance, of good public schools. We’ll explain how inequality fosters instability, which itself gives rise to more inequality. ([Location 2298](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2298)) > In a 2011 study, the IMF concluded, “We find that longer growth spells are robustly associated with more equality in the income distribution. . . . Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin.” ([Location 2457](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2457)) > In April of that year its then–managing director, Dominique Strauss-Kahn, emphasized, “Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda.” ([Location 2459](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2459)) > For several decades America has suffered from underinvestment in infrastructure, basic research, and education at all levels. Further cutbacks in these areas lie ahead, given the commitment by both parties to bringing down the deficit and the refusal of the House of Representatives to raise taxes. The cuts come despite evidence that the boost these investments give to the economy far exceeds the average return in the private sector, and is certainly higher than the cost of funds to the government. ([Location 2484](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2484)) > Our failure to make these critical public investments should not come as a surprise. It is the end result of a lopsided wealth distribution in society. The more divided a society becomes in terms of wealth, the more reluctant the wealthy are 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. ([Location 2491](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2491)) > While the wealthiest Americans may complain about the kind of government we have in America, in truth many like it just fine: too gridlocked to redistribute, too divided to do anything but lower taxes. ([Location 2497](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2497)) > The main waste of resources is only on lobbying: there are more than 3,100 lobbyists working for the health industry (nearly 6 for every congressperson), and 2,100 lobbyists working for the energy and natural resources industries. All told, more than $3.2 billion was spent on lobbying in 2011 alone.25 The main distortion is to our political system; the main loser, our democracy. ([Location 2524](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2524)) > The magnitude of “rent seeking” and the associated distortions in our economy, while hard to quantify precisely, are clearly enormous. Individuals and corporations that excel at rent seeking are amply rewarded. They may garner immense profits for their firms. But this does not mean that their social contribution is even positive. In a rent-seeking economy such as ours is becoming, private and social returns are badly misaligned. ([Location 2530](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2530)) > Rent seeking distorts our economy in many ways—not the least of which is the misallocation of the country’s precious talent. It used to be that bright young people were attracted to a variety of professions—some to serving others, as in medicine or teaching or public service; some to expanding the frontiers of knowledge. ([Location 2541](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2541)) > Economists marvel at our health care sector and its ability to deliver less for more: health outcomes are worse in the United States than in almost all other advanced industrial countries, and yet the United States spends absolutely more per capita, and more as a percentage of GDP, by a considerable amount. ([Location 2556](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2556)) > We’ve been spending more than one-sixth of GDP on health care, while France has been spending less than an eighth. Per capita spending in the United States has been two and a half times higher than the average of the advanced industrial countries. ([Location 2559](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2559)) > Sometimes the distortions of the rent seekers are subtle, not well captured in the diminution of GDP. This is because GDP doesn’t adequately capture costs to the environment. It doesn’t assess the sustainability of the growth that is occurring. When GDP arises from taking resources out of the ground, we should make note that the country’s wealth is diminished, unless that wealth is reinvested above ground in human or physical capital. But our metrics don’t do that. Growth that arises from depleting fish stocks or groundwater is ephemeral, but our metrics don’t tell us that. ([Location 2580](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2580)) > Our price system is flawed, because it doesn’t reflect accurately the scarcity of many of these environmental resources. And since GDP is based on market prices, our GDP metrics are also flawed. ([Location 2584](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2584)) > Many years ago Keynes posed a question. For thousands of years, most people had to spend most of their time working just to survive—for food, clothing, and shelter. Then, beginning with the Industrial Revolution, unprecedented increases in productivity meant that more and more individuals could be freed from the chains of subsistence living. For increasingly large portions of the population, only a small fraction of their time was required to provide for the necessities of life. The question was, How would people spend the productivity dividend? ([Location 2702](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2702)) > A central thesis of this book is that rent seeking is pervasive in the American economy, and that it actually impairs overall economic efficiency. The large gaps between private rewards and social returns that characterize a rent-seeking economy mean that incentives that individuals face often misdirect their actions, and that those who receive high rewards are not necessarily those who have made the largest contributions. ([Location 2735](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2735)) > 6. The top 1 percent of income earners received some 60 percent of the gains during the country’s economic expansion between 1979 and 2007. While the real after-tax household income of the 1 percent grew by 275 percent in that period, the bottom fifth’s average real after-tax household income rose only 18 percent. Indeed, the bottom 90 percent of earners got just a fourth of what the top 0.1 percent gained. Based on data from, Piketty and Saez, “Income Inequality in the United States, 1913–1998,” and the updates on Saez’s website, cited in n. 2, above. See EPI Briefing Paper, October 26, 2011, cited in n. 3, above; and Josh Biven, “Three-Fifths of All Income Growth from 1979–2007 Went to the Top 1%,” Economic Policy Institue, October 27, 2011, available at http://www.epi.org/publication/fifths-income-growth-1979-2007-top-1/ (accessed February 28, 2012). The CBO 2011 study, cited in n. 1, above, presents a similar picture. ([Location 6195](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=6195)) # The Price of Inequality  ## Metadata - Author:: [[Joseph E. Stiglitz]] - Full Title:: The Price of Inequality - Category: #books ## Highlights > Not surprisingly, the persistent economic slump has led to a continuing weakening of wages: real wages have declined, by nearly 1 percent for men and more than 3 percent for women from 2010 to 2011 alone.14 So have incomes of the typical American. Adjusted for inflation, median household income in 2011 (the most recent year for which we have data) was $50,054, lower that it was in 1996 ($50,661). ([Location 122](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=122)) > Today, women in the United States, on average, have the lowest life expectancy of women in any of the advanced countries.18 Educational attainment, which is often tied in with income and race, is a large and growing predictor of life span. Non-Hispanic white women with a college degree have a life expectancy that is some ten years greater than the life expectation of black or white women without a high school diploma. Non-Hispanic white women without a high school diploma lost about five years of life expectancy between 1990 and 2008.19 The three-year decline in life expectancy of white males without a high school diploma over the same period was only slightly less dramatic. ([Location 131](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=131)) > Decreases in income and decline in standards of living are often accompanied by a multitude of social manifestations—malnutrition, drug abuse, and deterioration in family life, all of which take a toll on health and life expectancy. Indeed, these declines in life expectancy are often considered more telling than income numbers themselves. In the years after the fall of the Iron Curtain, incomes in Russia fell, but perhaps a more reliable indicator of how bad things were was provided by data showing a dramatic fall in life expectancy. ([Location 138](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=138)) > Not surprisingly, health care experts have drawn parallels between recent declines in the United States and what happened in Russia. Michael Marmot, director of the Institute of Health Equity in London and a leading expert on the relationship between incomes and health, observed that “the five-year decline for white women rivals the catastrophic seven-year drop for Russian men in the years after the collapse of the Soviet Union.” ([Location 141](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=141)) > Nor was there any attempt to deny that much of America’s concentration of wealth at the top was a result of rent seeking—including monopoly profits and the excessive compensation of some CEOs and, especially, that of the financial sector. ([Location 159](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=159)) - Tags: [[favorite]] > Noting, as I had, that much of America’s inequality, especially at the top, was due to rent seeking,29 the Economist concluded, in particular, that “inequality has reached a stage where it can be inefficient and bad for growth.” ([Location 169](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=169)) > Sharing our concern about the lack of opportunity in the United States, the report cites results obtained by Sean Reardon of Stanford31 that the “gap in test scores between rich and poor American children is roughly 30–40% wider than it was 25 years ago.” ([Location 172](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=172)) > It even recognized the need for more progressive taxation, including “narrowing the gap between tax rates on wages and capital income; and relying more on efficient taxes that are paid… ([Location 178](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=178)) > The debate was more intense, though, around an argument (made explicitly in a book published shortly after mine)34 that was based on another variant of trickle-down economics. In this new version of an old myth, the rich are the job creators; give more money to the rich, and there will be more jobs. The irony was that the author of this book, like the presidential candidate whom he supported, was from a private-equity firm with a well-established business model that involved taking over companies, piling on debt, “… ([Location 179](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=179)) > In a world of globalization, creating market value had become entirely separated… ([Location 187](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=187)) > There was no reason to believe that giving more money to America’s wealthy would lead to more investment in the United States: money goes to where returns are highest, and with America’s downturn, returns… ([Location 188](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=188)) > Remarkably, in the heyday of unbridled capitalism, the early years of this century, a period in which inequality at the top increased at historic rates, there was no private-sector job creation. And if we exclude… ([Location 191](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=191)) > Not only doesn’t the money given to the top not necessarily go into “job creation” and innovation; some of it goes into distorting our politics, especially in this new era of unbridled… ([Location 193](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=193)) > What we have seen quite clearly is that a common use of wealth is to gain advantage in rent seeking, perpetuating… ([Location 195](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=195)) > The same old “myth” that we should celebrate the wealth of those at the top because we all benefit from it has been used to justify the maintenance of low taxes on capital gains. But most capital gains accrue not from job creation but from one form of speculation or another. Some of this speculation is… ([Location 197](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=197)) > Perhaps the moment when inequality moved closest to being front and center in the campaign was when Mitt Romney suggested that 47 percent of Americans were paying no income tax, living off of government handouts. ([Location 208](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=208)) > The irony, of course, was that people like Romney are the true freeloaders: the taxes that he has said he is paying (as a percentage of his reported income) are (at 14 percent in 2011) far less than those of people with substantially less income. ([Location 211](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=211)) > The government didn’t do what it should have done to prevent the crisis and banks’ exploitive behavior—or to resuscitate the economy or to help those that were suffering from the economic downturn—but, given the imbalances in American politics, it is perhaps more remarkable what was done. ([Location 218](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=218)) > In his remarks, Romney articulated a set of widespread misunderstandings. First, even those who don’t pay income taxes pay a host of other taxes, including payroll, sales, excise, and property taxes.37 Second, many of those receiving “benefits” paid for them—through Social Security and Medicare contributions funded out of payroll taxes. They’re not free riders. ([Location 221](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=221)) > In addition, many of the people who receive government benefits without paying for them are our young, obviously unable to pay, say, for their own education. But spending on them is an investment in the country’s future. ([Location 227](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=227)) - Tags: [[favorite]] > But people receiving those benefits typically paid for them, either directly or indirectly, through contributions they or their employer made on their behalf to these insurance funds. Aside from a person’s right to draw benefits from programs they helped fund, social protection can make for a more productive society. Individuals can take on more high-return, high-risk activities if they know there is a safety net that will protect them if things don’t work out. It’s one of the reasons that some economies with better social protection have been growing much more rapidly than that of the United States, even during the recent recession. ([Location 231](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=231)) > Finally, those at the top have tried to sell the idea that discussions about inequality are just about “redistribution,” taking from some to give to others—or, as Romney would put it, taking from the job creators to give to the freeloaders. ([Location 240](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=240)) > But it’s not. Part of America’s problem today is that too many of those at the top don’t want to contribute their fair share to the “public goods” that are necessary if our society, and our economy, are going to ([Location 241](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=241)) > While there may be some disagreement about what “fair” means, when those at the top pay a smaller percentage of their income than those with… ([Location 243](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=243)) > While a few on the right tried to contest the now widely accepted view that inequality is bad for the economy, I received, on the other hand, criticisms that the book overemphasized an economic perspective on… ([Location 245](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=245)) > I had suggested not only that the economy as a whole would be better-off if there were less inequality but also that even those in the 1 percent would be better-off. It was in their “… ([Location 247](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=247)) > After I spoke, Cornel West, who was in attendance, rose to say the following: The great movements in America—abolitionism, civil rights movement, feminist movement, anti-homophobic movement—they didn’t argue we need self-interest properly understood. If that was the slogan, black folks would still be in Jim Crow. Something else was going on. Strong moral forces, strong spiritual forces, linked to stories—about a nation, in terms of national identity, in terms of what it means to be human, our connection to other countries. . . . There’s not going to be… ([Location 250](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=250)) > If our economic system leads to so many people without jobs, or with jobs that do not pay a livable wage, dependent on the government for food, it means that our economic system has not worked in the… ([Location 258](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=258)) > We do have a divided society. But the division is not, as Romney has suggested, between freeloaders and the rest. Rather, it is between those (including many members of the 1 percent) who see America as a community and recognize that the only way to achieve sustained prosperity is to have shared prosperity, and those who don’t; between those who… ([Location 260](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=260)) > Even if it were true that 47 percent of the population are freeloaders, it would mean that something is wrong with our society. Every society will have some rotten apples, but most individuals intrinsically want to make a contribution to their communities, to have a meaningful job; they want “decent work.”40 But if a country doesn’t give a large proportion of the population the education that they need to earn a decent living, if employers don’t pay workers a decent wage, if a society… ([Location 263](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=263)) > The presidential campaign reinforced the concerns I had raised about the nexus between economic inequality and political inequality, as the consequences of recent Court decisions giving increased scope for money in politics became manifest, with the unbridled spending of the super… ([Location 270](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=270)) > Though the problems in the eurozone first became apparent in Greece, other countries such as Ireland, Portugal, Spain, Cyprus, and Italy soon joined the list of countries facing difficulties. The length of the list should have made it clear that it was not a matter of one country’s going “astray.” There was something systemically wrong. But the diagnosis of Europe’s leaders was fundamentally flawed, the prescriptions that followed were misguided, and in the end they actually made matters worse. ([Location 307](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=307)) > The diagnosis of the European leaders focused on fiscal profligacy—ignoring the fact that two of the crisis countries, Spain and Ireland, had been running surpluses before the crisis. The downturn caused the deficits, not the other way around. But the prescription that followed from the diagnosis of fiscal profligacy was austerity—never mind that there have been almost no instances of countries that have recovered from a crisis through austerity. ([Location 313](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=313)) > The problems increased as talk of Spain’s leaving the euro increased. To many, good risk management meant switching money out of Spanish banks into German institutions; one could feel more confident about getting one’s money back—and getting it back in euros, not some new, devalued currency. The puzzle was more how long it took money to start leaving Spain, not that money left. But as money left the banking system, the banks grew weaker, they lent less, the credit squeeze got tighter, and the combined effects of austerity and the credit squeeze amplified the downturn, another vicious circle. ([Location 331](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=331)) > The founders of the euro had created a dynamically unstable system, but their successors failed to grasp the gravity of the situation. ([Location 335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=335)) > They talked about the need for a common banking system, but they focused on a common regulatory framework, not, say, a common deposit insurance system that would have stemmed the outflow of money. ([Location 335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=335)) > This book is not about what Europe could or should have done to address crises in Spain and elsewhere. It is about inequality, and about how flawed economic policies—based on flawed economic theories and ideology—have managed to exacerbate inequality on both sides of the Atlantic. ([Location 339](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=339)) > Bernard Arnault, the country’s richest man, decided to seek Belgian citizenship in what was widely interpreted as an attempt to reduce his tax obligation. With movements within Europe so easy, and with no tax harmonization, it is relatively easy for rich individuals to relocate to low-tax jurisdictions. Thus, free mobility of labor without tax harmonization is an invitation to a race to the bottom—for jurisdictions to compete to attract high-income individuals and profitable corporations by offering them lower taxes. Tax competition thus weakens the ability to engage in progressive tax policies, and limits the ability to “correct” an increasingly unequal market distribution. ([Location 348](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=348)) > When did we go astray? One of the questions I have been repeatedly asked is, when did we go astray? If I had to locate a time when we started down the path toward widening inequality, when would that moment be? There’s no easy answer to such a question, but clearly the election of President Ronald Reagan represented a turning point in the United States. Among the precipitating events were the beginning of the deregulation of the financial sector and the reduction in the progressivity of the tax system. Deregulation led to the excessive financialization of the economy—to the point that before the 2008 crisis 40 percent of all corporate profits went to the financial sector. The path of deregulation upon which Reagan set the country was, unfortunately, followed by his successors. So was the policy of lowering taxes at the top. First the top rate was lowered from 70 percent to 28 percent (under Reagan), and then (after Bill Clinton had raised the top rate to 39.6 percent in 1993) they were lowered under George W. Bush to 35 percent. But then the taxes on forms of income received disproportionately by the rich (capital gains, more than half of which are earned by the top 0.1 percent) were lowered further, under Clinton to 20 percent in 1997 and then under Bush to 15 percent.45 Interest on municipal bonds, another favorite of the rich, is not even taxed. The result is that the top 400 income earners in the United States paid an average tax rate of just 19.9 percent in 2009.46 Overall, the richest 1 percent of Americans pay effective income tax rates in the low twenties, lower than those of Americans with more moderate incomes. ([Location 382](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=382)) > Throughout its history, America has struggled with inequality. But with the tax policies and regulations that existed in the post–World War II war period—and the heavy investments in education, like the GI Bill—matters were improving. The tax cuts at the top and deregulation that began in the Reagan years reversed that trend. ([Location 405](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=405)) > There is, as a participant in one of my seminars pointed out, a two-way relationship between before-tax and after-tax inequality. The fact that the United States has the least progressive tax system and the most inequality in “market” incomes may not be an accident. It shows up systemically in the data: on average, countries with less progressive taxation have more inequality. This could be partly because societies with more economic inequality tend to have more political inequality, especially when it reaches the outsize levels found in the United States and a few other countries. And with a political system that allows the rich to exercise so much influence, it’s perhaps no surprise that taxes on the rich are as low as they are. But there is another explanation: in chapter 2, I explain how much of the inequality, especially at the top, is related to rent seeking. ([Location 407](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=407)) > Rent seeking is, on average, destructive, because the rent seekers gain for themselves less than they take away from others, so evident in the destruction wrought by the rent seekers in the financial sector. The more those gains are taxed, the fewer the resources that get devoted to rent seeking, and the more the efforts that get devoted to activities that may not pay as… ([Location 413](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=413)) > Is there hope? Americans are an optimistic people and want to believe that there is a way out. As a two-handed economist, I have to admit there are a few rays of hope, although the reasons for despair are obvious: the low levels of inequality of opportunity suggest that inequality in the future may be even worse than it is today. That there are economic policies that could bring down the high levels of inequality is clear: but the nexus between… ([Location 419](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=419)) > On the other hand, I describe in the text other countries that have even managed to reduce inequality. It is not inevitable either that it remain so large, or that it continue to grow. One of the main messages of this book is that our economy, our democracy, and our society would all benefit from reducing inequality and increasing equality… ([Location 423](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=423)) > Two periods in America’s history were marked by high levels of income and wealth disparities: the Gilded Age of the late nineteenth century and… ([Location 426](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=426)) > In both of these instances, the country pulled back from the brink. Our democratic processes worked. The Gilded Age was followed by the Progressive Era, which curbed monopoly power. The Roaring Twenties was followed by the important social and economic legislation of the New Deal, which strengthened the rights of workers, provided greater social protection for all Americans… ([Location 431](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=431)) > The voters’ rejection of Romney gives a glimmer of hope: with the exception of Franklin Delano Roosevelt’s reelection in 1936, no incumbent has been reelected with a level of unemployment… ([Location 435](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=435)) > But electoral politics had also failed in Western democracies. U.S. president Barack Obama had promised “change you can believe in,” but he subsequently delivered economic policies that, to many Americans, seemed like more of the same. ([Location 463](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=463)) > Three themes resonated around the world: that markets weren’t working the way they were supposed to, for they were obviously neither efficient nor stable;3 that the political system hadn’t corrected the market failures; and that the economic and political systems are fundamentally unfair. ([Location 477](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=477)) > While this book focuses on the excessive inequality that marks the United States and some other advanced industrial countries today, it explains how the three themes are intimately interlinked: the inequality is cause and consequence of the failure of the political system, and it contributes to the instability of our economic system, which in turn contributes to increased inequality—a vicious downward spiral into which we have descended, and from which we can emerge only through concerted policies that I describe below. ([Location 480](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=480)) > In some countries the Occupy Wall Street movement has become closely allied with the antiglobalization movement. They do have some things in common: a belief not only that something is wrong but also that change is possible. 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. ([Location 508](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=508)) > The interconnectedness of peoples, countries, and economies around the globe is a development that can be used as effectively to promote prosperity as to spread greed and misery. The same is true for the market economy: the power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them. At their best, markets have played a central role in the stunning increases in productivity and standards of living in the past two hundred years—increases that far exceeded those of the previous two millennia. ([Location 511](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=511)) > But government has also played a major role in these advances, a fact that free-market advocates typically fail to acknowledge. On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers. For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens. ([Location 514](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=514)) - Tags: [[favorite]] > The consequences of not doing so are serious: within a meaningful democracy, where the voices of ordinary citizens are heard, we cannot maintain an open and globalized market system, at least not in the form that we know it, if that system year after year makes those citizens worse-off. One or the other will have to give—either our politics or our economics. ([Location 520](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=520)) > The financial crisis unleashed a new realization that our economic system was not only inefficient and unstable but also fundamentally unfair. Indeed, in the aftermath of the crisis (and the response of the Bush and the Obama administrations), almost half thought so, according to a poll at the time. ([Location 538](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=538)) > 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 wealth given to the elites and to the bankers seemed to arise out of their ability and willingness to take advantage of others. ([Location 545](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=545)) > 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. There is a corresponding myth—rags to riches in three generations—suggesting that those at the top have to work hard to stay there; if they don’t, they (or their descendants) quickly move down. But as chapter 1 will detail, this too is largely a myth, for the children of those at the top will, more likely than not, remain there. ([Location 552](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=552)) > In a way, in America and throughout the world, the youthful protesters took what they heard from their parents and politicians at face value—just as America’s youth did fifty years ago during the civil rights movement. Back then they scrutinized the values equality, fairness, and justice in the context of the nation’s treatment of African Americans, and they found the nation’s policies wanting. Now they scrutinize the same values in terms of how our economic and judicial system works, and they have found the system wanting for poor and middle-class Americans—not just for minorities but for most Americans of all backgrounds. ([Location 555](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=555)) > The hedge fund industry did not cause the crisis. It was the banks. And it is the bankers who have gone, almost to a person, free. If no one is accountable, if no individual can be blamed for what has happened, it means that the problem lies in the economic and political system. ([Location 564](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=564)) > For years there was a deal between the top and the rest of our society that went something like this: we will provide you jobs and prosperity, and you will let us walk away with the bonuses. You all get a share, even if we get a bigger share. But now that tacit agreement between the rich and the rest, which was always fragile, has come apart. Those in the 1 percent are walking off with the riches, but in doing so they have provided nothing but anxiety and insecurity to the 99 percent. The majority of Americans have simply not been benefiting from the country’s growth. ([Location 577](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=577)) > If markets had actually delivered on the promises of improving the standards of living of most citizens, then all of the sins of corporations, all the seeming social injustices, the insults to our environment, the exploitation of the poor, might have been forgiven. But to the young indignados and protesters elsewhere in the world, 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. ([Location 603](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=603)) > Given a political system that is so sensitive to moneyed interests, growing economic inequality leads to a growing imbalance of political power, a vicious nexus between politics and economics. And the two together shape, and are shaped by, societal forces—social mores and institutions—that help reinforce this growing inequality. ([Location 636](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=636)) > The protesters have been criticized for not having an agenda, but such criticism misses the point of protest movements. They are an expression of frustration with the political system and even, in those countries where there are elections, with the electoral process. They sound an alarm. ([Location 646](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=646)) > In some ways the protesters have already accomplished a great deal: think tanks, government agencies, and the media have confirmed their allegations, the failures not just of the market system but of the high and unjustifiable level of inequality. The expression “we are the 99 percent” has entered into popular consciousness. No one can be sure where the movements will lead. But of this we can be sure: these young protesters have already altered public discourse and the consciousness of ordinary citizens and politicians alike. ([Location 648](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=648)) > America has been growing apart, at an increasingly rapid rate. In the first post-recession years of the new millennium (2002 to 2007), the top 1 percent seized more than 65 percent of the gain in total national income.5 While the top 1 percent was doing fantastically, most Americans were actually growing worse-off. ([Location 842](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=842)) > Members of America’s middle class have felt that they were long suffering, and they were right. For three decades before the crisis, their incomes had barely budged.7 Indeed, the income of a typical full-time male worker has stagnated for well over a third of a century. ([Location 848](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=848)) > Although the United States has always been a capitalist country, our inequality—or at least its current high level—is new. Some thirty years ago, the top 1 percent of income earners received only 12 percent of the nation’s income.13 That level of inequality should itself have been unacceptable; but since then the disparity has grown dramatically,14 so that by 2007 the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800.15 The top 1 percent get in one week 40 percent more than the bottom fifth receive in a year; the top 0.1 percent received in a day and a half about what the bottom 90 percent received in a year; and the richest 20 percent of income earners earn in total after tax more than the bottom 80 percent combined. ([Location 873](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=873)) > The last time inequality approached the alarming level we see today was in the years before the Great Depression. The economic instability we saw then and the instability we have seen more recently are closely related to this growing inequality, as I’ll explain in chapter 4. How we explain these patterns, the ebb and flow of inequality, is the subject of chapters 2 and 3. For now, we simply note that the marked reduction in inequality in the period between 1950 and 1970, was due partly to developments in the markets but even more to government policies, such as the increased access to higher education provided by the GI Bill and the highly progressive tax system enacted during World War II. In the years after the “Reagan revolution,” by contrast, the divide in market incomes increased and, ironically, at the same time government initiatives designed to temper the inequities of the marketplace were dismantled, taxes at the top were lowered and social programs were cut back. Market forces—the laws of supply and demand—of course inevitably play some role in determining the extent of economic inequality. But those forces are at play in other advanced industrial countries as well. Even before the burst in inequality that marked the first decade of this century, the United States already had more inequality and less income mobility than practically every country in Europe, as well as Australia and Canada. The trends in inequality can be reversed. A few other countries have managed to do so. Brazil has had one of the highest levels of inequality in the world—but in the 1990s, it realized the perils, in terms both of social and political divisiveness and of long-term economic growth. The result was a political consensus across society that something had to be done. Under President Fernando Henrique Cardoso, there were massive increases in education expenditures, including for the poor. Under President Luiz Inácio Lula da Silva, there were social expenditures to reduce hunger and poverty.17 Inequality was reduced, growth increased,18 and society became more stable. Brazil still has more inequality than the United States, but while Brazil has been striving, rather successfully, to improve the plight of the poor and reduce gaps in income between rich and poor, America has allowed inequality to grow and poverty to increase. ([Location 887](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=887)) > But this book shows that both the magnitude of America’s inequality today and the way it is generated actually undermine growth and impair efficiency. Part of the reason for this is that much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others. It is thus not surprising that our growth has been stronger in periods in which inequality has been lower and in which we have been growing together.19 This was true not only in the decades after World War II but, even in more recent times, in the 1990s.20 Trickle-down economics 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. As we’ve seen, higher inequality has not led to more growth, and most Americans have actually seen their incomes sink or stagnate. What America has been experiencing in recent years is the opposite of trickle-down economics: the riches accruing to the top have come at the expense of those down below.21 One can think of what’s been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone else gets a smaller slice. 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 Young men (aged twenty-five to thirty-four) who are less educated have an even harder time; those who have only graduated from high school have seen their real incomes decline by more than a quarter in the last twenty-five years.23 But even households of individuals with a bachelor’s degree or higher have not done well—their median income (adjusted for inflation) fell by a tenth from 2000 to 2010.24 (Median income is the income such that half have an income greater than that number, half less.) 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. ([Location 911](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=911)) > 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. The incomes of the middle class are stagnating or falling, and the difference between them and the truly rich is increasing. ([Location 938](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=938)) > These broad-spectrum numbers, while alarming, can fail to capture the current disparities with sufficient force. For an even more striking illustration of the state of inequality in America, consider the Walton 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 numbers may not be as surprising as they seem, simply because those at the bottom have so little wealth. ([Location 956](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=956)) > America has always thought of itself as a middle-class country. No one wants to think of himself as privileged, and no one wants to think of his family as among the poor. But in recent years, America’s middle class has become eviscerated, as the “good” middle-class jobs—requiring a moderate level of skills, like autoworkers’ jobs—seemed to be disappearing relative to those at the bottom, requiring few skills, and those at the top, requiring greater skill levels. Economists refer to this as the “polarization” of the labor force. ([Location 962](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=962)) > The Great Recession thus represented a triple whammy for many Americans: their jobs, their retirement incomes, and their homes were all at risk. ([Location 1043](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1043)) > 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. And even the net worth of the typical white American household was down substantially, to $113,149 in 2009, a 16 percent loss of wealth from 2005.53 ([Location 1057](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1057)) > Lack of health insurance is one factor contributing to poorer health, especially among the poor. Life expectancy in the United States is 78 years, lower than Japan’s 83 years, or Australia’s or Israel’s 82 years. According to the World Bank, in 2009 the United States ranked fortieth overall, just below Cuba.54 Infant and maternal mortality in the United States is little better than in some developing countries; for infant mortality, it is worse than Cuba, Belarus, and Malaysia, to name a few.55 And these poor health indicators are largely a reflection of the dismal statistics for America’s poor. For instance, America’s poor have a life expectancy that is almost 10 percent lower than that of those at the top. ([Location 1065](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1065)) > 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. ([Location 1087](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1087)) > Indeed, according to the Economic Mobility Project, “there is a stronger link between parental education and children’s economic, educational, and socio-emotional outcomes” in the United States than in any other country investigated, including those of “old Europe” (the UK, France, Germany, and Italy), other English speaking countries (Canada and Australia), and the Nordic countries Sweden, Finland, and Denmark, where the results were more expected.73 A variety of other studies have corroborated these findings. ([Location 1140](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1140)) > There are many other ways of summarizing the disadvantageous position of the poor. The journalist Jonathan Chait has drawn attention to two of the most telling statistics from the Economic Mobility Project and research from the Economic Policy Institute.79 •  Poor kids who succeed academically are less likely to graduate from college than richer kids who do worse in school.80 •  Even if they graduate from college, the children of the poor are still worse-off than low-achieving children of the rich. ([Location 1161](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1161)) > A stark reflection of the inequality of educational opportunity in our society is the composition of students in America’s highly selective colleges. Only around 9 percent come from the bottom half of the population, while 74 percent come from the top quarter. ([Location 1173](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1173)) > While inequalities in parental income and education translate directly into inequalities of educational opportunity, inequalities of opportunity begin even before school—in the conditions that poor people face immediately before and after birth, differences in nutrition and the exposure to environmental pollutants that can have lifelong effects.84 So difficult is it for those born into poverty to escape that economists refer to the situation as a “poverty trap.” ([Location 1177](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1177)) > Even as the data show otherwise, Americans still believe in the myth of opportunity. A public opinion poll by the Pew Foundation found that “nearly 7 in 10 Americans had already achieved, or expected to achieve, the American Dream at some point in their lives.” ([Location 1181](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1181)) > Even as a myth, the belief that everyone had a fair chance had its uses: it motivated people to work hard. It seemed we were all in the same boat; even if some were, for the moment, traveling first-class while others stayed in steerage. On the next cruise positions might be reversed. The belief enabled the United States to avoid some of the class divisions and tensions that marked some European countries. By the same token, as the reality sinks in, as most Americans finally grasp that the economic game is stacked against them, all of this is at risk. Alienation has begun to replace motivation. Instead of social cohesion we have a new divisiveness. ([Location 1184](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1184)) - Tags: [[favorite]] > Numbers on compensation of corporate executives—including those who brought on the crisis—tell the story. 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 and even markedly higher than it was in the United States a quarter century ago.88 The old U.S. ratio of 30 to 1 now seems quaint by comparison. It strains credulity to think that over the intervening years CEOs as a group have increased their productivity so much, relative to the average worker, that a multiple of more than 200 could be justified. Indeed, the available data on the success of U.S. companies provide no support for such a view. ([Location 1197](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1197)) > The United States was the most unequal of the advanced industrial countries in the mid-1980s, and it has maintained that position.92 In fact, the gap between it and many other countries has increased: from the mid-1980s France, Hungary, and Belgium have seen no significant increase in inequality, while Turkey and Greece have actually seen a decrease in inequality. 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. ([Location 1213](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1213)) > The UNDP (the UN Development Program) has developed a standard measure of “human development,” which aggregates measures of income, health, and education. It then adjusts those numbers to reflect inequality. Before adjustment for inequality, the United States looked reasonably good in 2011—fourth, behind Norway, Australia, and Netherlands. But once account is taken of inequality, the United States is ranked twenty-third, behind all of the European countries. The difference between the rankings with and without inequality was the largest of any of the advanced industrial countries. ([Location 1222](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1222)) > All of the Scandinavian countries rank much higher than the United States, and each provides not only universal education but also health care to its citizens. The standard mantra in the United States claims that the taxes required to finance these benefits stifle growth. Far from it. Over the period 2000 to 2010, high-taxing Sweden, for example, grew far faster than the United States—the country’s average growth rates have exceeded those of the United States—2.31 percent a year versus 1.85 percent. ([Location 1226](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1226)) > As a former finance minister of one of these countries told me, “We have grown so fast and done so well because we had high taxes.” Of course, what he meant was not that the taxes themselves led to higher growth but that the taxes financed public expenditures—investments in education, technology, and infrastructure—and the public expenditures were what had sustained the high growth—more than offsetting any adverse effects from the higher taxation. ([Location 1231](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1231)) > The American Right finds the facts described in this chapter inconvenient. The analysis runs counter to some cherished myths that it would like to propagate: that America is a land of opportunity, that most people have been benefiting from the market economy, especially in the era since Reagan deregulated the economy and downsized government. Members of the Right would like to deny the facts, but the accumulation of data makes it hard to do so. ([Location 1277](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1277)) > Nor can the Right really deny the fact that government can help ameliorate poverty—it has done so especially effectively among the elderly. And that means that cutbacks in government programs, including Social Security, unless they are very carefully designed, are likely to increase poverty. ([Location 1283](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1283)) > In response, the Right offers four retorts. The first is that in any year someone will be down and out and someone else will enjoy a bonanza. What really matters is lifetime inequality. Those with the lowest incomes will, by and large, have higher incomes in later years, so lifetime inequality is less than these data suggest. Economists have taken a hard look at differences in lifetime income—and, unfortunately, the wish of the Right doesn’t conform to today’s reality: lifetime… ([Location 1285](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1285)) > 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 Chinese TVs mean that even the poor can afford them—and indeed, even in poor Indian and Chinese villages, there is in general access to TV. In today’s world, this is not a mark of affluence.… ([Location 1290](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1290)) > The third response is to quibble about the statistics. Some might claim that inflation may be overestimated, so growth in incomes may be underestimated. But, if anything, I suspect that the numbers underestimate the travails facing the typical American family. As family members work longer hours to maintain their standard of living—“for the family”—family life often suffers. Earlier in this chapter, we described the increasing level of insecurity that the poor and the middle class in America face—and this, too, is not reflected in the income statistics. Plausibly, true inequality may be far larger than the measures of inequality of income would suggest. Indeed, as we noted… ([Location 1298](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1298)) > The final retort by the Right makes reference to an economic and moral justification of inequality, accompanied by a claim that attempting to do anything about it will simply “kill the golden goose,” and so weaken America’s economy that even the poor will suffer.106 As Mitt Romney put it, inequality is the kind of thing that should be discussed quietly and privately.107 The poor, in this land of opportunity, have only themselves to blame. In later chapters we’ll address these arguments. We’ll show that, for the most part, not only should we not blame the poor for their plight but also that the claim of those at the top, that they earned their money “on their own,” doesn’t have much merit. We’ll see that the 1 percent are by and large not those who earned their incomes by great social contributions—they are not the… ([Location 1305](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1305)) > AMERICAN INEQUALITY DIDN’T JUST HAPPEN. IT WAS created. ([Location 1321](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1321)) > By understanding the origins of inequality, we can better grasp the costs and benefits of reducing it. The simple thesis of this chapter is that even though market forces help shape the degree of inequality, government policies shape those market forces. ([Location 1326](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1326)) > 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. ([Location 1335](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1335)) > Distinct as the inequality we face today is, inequality itself is not something new. The concentration of economic and political power was in many ways more extreme in the precapitalist societies of the West. At that time, religion both explained and justified the inequality: those at the top of society were there because of divine right. To question that was to question the social order, or even to question God’s will. ([Location 1338](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1338)) > However, for modern economists and political scientists, as also for the ancient Greeks, this inequality was not a matter of a preordained social order. Power—often military power—was at the origin of these inequities. Militarism was about economics: the conquerors had the right to extract as much as they could from the conquered. In antiquity, natural philosophy in general saw no wrong in treating other humans as means for the ends of others. As the ancient Greek historian Thucydides famously said, “right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.” ([Location 1341](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1341)) > Technology, of course, determines the productivity of different skills: in a primitive agriculture economy, physical strength and endurance is what mattered; in a modern hi-tech economy, brainpower is more relevant. ([Location 1356](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1356)) > Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity. This should not come as a surprise: we have a political system that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large “gifts.” 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 give a fuller definition of the concept of rent seeking later in the chapter.) Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation. ([Location 1379](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1379)) > Jean-Baptiste Colbert, the adviser to King Louis XIV of France, reportedly said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” So, too, for the art of rent seeking. ([Location 1386](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1386)) > Indeed, as we shall shortly see, some of the most important innovations in business in the last three decades have centered not on making the economy more efficient but on how better to ensure monopoly power or how better to circumvent government regulations intended to align social returns and private rewards. ([Location 1443](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1443)) > Making markets less transparent is a favorite tool. The more transparent markets are, the more competitive they are likely to be. Bankers know this. That’s why banks have been fighting to keep their business in writing derivatives, the risky products that were at the center of AIG’s collapse,8 in the shadows of the “over the counter” market. ([Location 1446](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1446)) > While lack of transparency results in more profits for the bankers, it leads to lower economic performance. Without good information, capital markets can’t exercise any discipline. Money won’t go to where returns are highest, or to the bank that does the best job of managing money. No one can know the true financial position of a bank or other financial institution today—and shadowy derivative transactions are part of the reason. ([Location 1453](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1453)) > The financial sector has developed expertise in a wide variety of forms of rent seeking. We’ve already mentioned some, but there are many others: taking advantage of asymmetries of information (for instance, selling securities that they had designed to fail, but knowing that buyers didn’t know that);10 taking excessive risk—with the government holding a lifeline, bailing them out and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could; and getting money from the Federal Reserve at low interest rates, now almost zero. ([Location 1465](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1465)) > But the form of rent seeking that is most egregious—and that has been most perfected in recent years—has been 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. ([Location 1470](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1470)) - Tags: [[favorite]] > After all, considerable amounts of resources were used up in the process of moving money from the poor to the rich, which is why it’s a negative-sum game. 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 contributions, and the investments paid off. ([Location 1474](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1474)) > Winning in the game of rent seeking has made fortunes for many of those at the top, but it is not the only means by which they obtain and preserve their wealth. The tax system also plays a key role, as we’ll see later. 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. ([Location 1485](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1485)) > Rent seeking takes many forms: hidden and open transfers and subsidies from the government, laws that make the marketplace less competitive, lax enforcement of existing competition laws, and statutes that allow corporations to take advantage of others or to pass costs on to the rest of society. The term “rent” was originally used to describe the returns to land, since the owner of land receives these payments by virtue of his ownership and not because of anything he does. This stands in contrast to the situation of workers, for example, whose wages are compensation for the effort they provide. The term “rent” then was extended to include monopoly profits, or monopoly rents, the income that one receives simply from the control of a monopoly. Eventually the term was expanded still further to include the returns on similar ownership claims. If the government gave a company the exclusive right to import a limited amount (a quota) of a good, such as sugar, then the extra return generated as a result of the ownership of those rights was called a “quota-rent.” ([Location 1503](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1503)) > Another form of rent seeking is the flip side: selling to government products at above market prices (noncompetitive procurement). The drug companies and military contractors excel in this form of rent seeking. Open government subsidies (as in agriculture) or hidden subsidies (trade restrictions that reduce competition or subsidies hidden in the tax system) are other ways of getting rents from the public. ([Location 1526](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1526)) > Chicago school economics argues that markets are presumptively competitive and efficient. If entry were easy, the dominant firm would gain nothing from driving out a rival, because the firm that is forced out would be quickly replaced by another firm. But in reality entry is not so easy, and predatory behavior does occur. ([Location 1612](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1612)) > It deployed a strategy known as FUD (fear, uncertainty, and doubt), creating anxiety about compatibility among users by programming error messages that would randomly appear if Netscape was installed on a Windows computer. ([Location 1626](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1626)) > monopolists are not good innovators. ([Location 1641](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1641)) > 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. Economists refer to this as “regulatory capture.” ([Location 1662](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1662)) > Sometimes, however, the capture is not just motivated by money. Instead, the mindset of regulators is captured by those whom they regulate. This is called “cognitive capture,” and it is more of a sociological phenomenon. ([Location 1667](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1667)) > Sometimes gifts are hidden in obscure provisions of legislation. A provision of one of the key bills deregulating the financial derivative market—ensuring that no regulator could touch it, no matter how great the peril to which it exposed the economy—also gave derivatives claims “seniority” in the event of bankruptcy. If a bank went under, the claims on the derivatives would be paid off before workers, suppliers, or other creditors saw any money—even if the derivatives had pushed the firm into bankruptcy in the first place.49 (The derivatives market played a central role in the 2008–09 crisis and was responsible for the $182 billion bailout of AIG.) ([Location 1687](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1687)) > The threat of capital outflow, should workers get too demanding about rights and wages, keeps workers’ wages low. ([Location 1888](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1888)) > There is a broader “race to the bottom,” trying to ensure that business regulations are weak and taxes are low. In one arena, finance, this has proven especially costly and especially critical to the growth in inequality. ([Location 1890](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1890)) > Indeed, even the IMF (the International Monetary Fund, the international agency responsible for ensuring global financial stability) has now recognized the dangers of unencumbered and excessive financial integration:22 a problem in one country can rapidly spread to ([Location 1897](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1897)) > In earlier crises, not only did the IMF (typically with the support of the U.S. Treasury) insist on huge budget cuts from troubled nations, converting downturns into recessions and depressions, but it also demanded the fire sales of assets, and the financiers then swooped in to make a killing. In my earlier book Globalization and Its Discontents, I described how Goldman Sachs was one of the winners in the 1997 East Asia crisis, as it was in the 2008 crisis. ([Location 1905](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1905)) > 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. ([Location 1908](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1908)) > The way globalization has been managed, however, has itself led to still lower wages because workers’ bargaining power has been eviscerated. With capital highly mobile—and with tariffs low—firms can simply tell workers that if they don’t accept lower wages and worse working conditions, the company will move elsewhere. To see how asymmetric globalization can affect bargaining power, imagine, for a moment, what the world would be like if there was free mobility of labor, but no mobility of capital.26 Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in, and that’s partly because the 1 percent doesn’t want it to be that way. ([Location 1917](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1917)) > As corporations have pushed a political agenda that shapes market forces to work for them, they have not, of course, revealed their hand. They don’t argue for globalization—for free capital mobility and investment protections—saying that doing so will enrich them at the expense of the rest of society. Rather, they make specious arguments about how all will benefit. ([Location 1926](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1926)) > As globalization proceeds, there will be further downward pressures on their wages. I don’t think markets work so well that wages will be fully equalized, but they will move in that direction, and far enough to be of serious concern.29 The problem is particularly severe today in the United States and Europe: at the same time that labor-saving technological change has reduced the demand for many of the “good” middle-class blue-collar jobs, globalization has created a global marketplace, putting the same workers in direct competition with comparable workers abroad. Both factors depress wages. ([Location 1946](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1946)) > Among the winners from globalization in the United States and some European countries, as it’s been managed, are the people at the top. Among the losers are those at the bottom, and increasingly even those in the middle. ([Location 1963](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1963)) > 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. ([Location 1970](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1970)) > That the American labor market performed so poorly in the Great Recession and that American workers have done so badly for three decades should cast doubt on the mythical virtues of a flexible labor market. ([Location 1982](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1982)) > One of the interpretations of these data is that in effect, during the periods when wages grew so much slower than productivity, corporate managers seized a larger share of the “rents” associated with corporations. ([Location 1990](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=1990)) > In some circles, so engrained did these schizophrenic attitudes to “fairness” become that early in the Great Recession an Obama administration official could say, with a straight face, that it was necessary to honor AIG bonuses, even for the officials who had led the company to need a $182 billion bailout, because of the sanctity of contracts; minutes later he could admonish autoworkers to accept a revision of their contract that would have lowered their compensation enormously. ([Location 2016](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2016)) > Game-theoretic models, for instance, have shown how tacit collusive behavior of a dominant group (whites, men) can be used to suppress the economic interests of another group. Individuals who break with the discriminatory behavior are punished: others will refuse to buy from their store, work for them, supply them inputs; social sanctions, like ostracism, can also be effective. Those who don’t punish transgressors are subjected to the same punishment. ([Location 2045](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2045)) > A striking example, from a study by the sociologist Devah Pager, is of the stigmatizing effect of a criminal record.50 In her field study, matched pairs of twenty-three-year-olds applied for real entry-level jobs in order to test the degree to which a criminal record (a nonviolent drug offense) affects subsequent employment opportunities. All the individuals presented roughly identical credentials, including a high school diploma, so that differences experienced among groups can be attributed to the effects of race or criminal status. After an invited interview, the ratio of callbacks for white nonoffenders to white ex-offenders is 2:1, this same ratio for blacks is nearly 3:1. And a white man with a criminal record is slightly more likely to be considered for a job than a black man with no criminal past. Thus, on average, being black reduces employment opportunities substantially, and more so for ex-offenders. These effects can represent important barriers to black men trying to become economically self-sufficient, since roughly one in three black men will spend time in prison in his lifetime. ([Location 2063](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2063)) > Health statistics, for instance, are telling: life expectancy at birth for blacks in 2009 was 74.3 compared with 78.6 for whites. ([Location 2073](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2073)) > The irony is that just as markets started delivering more unequal outcomes, tax policy asked less of the top. The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton and down finally to 35 percent under George W. Bush.54 This reduction was supposed to lead to more work and savings, but it didn’t.55 In fact, Reagan had promised that the incentive effects of his tax cuts would be so powerful that tax revenues would increase. And yet, the only thing that increased was the deficit. George W. Bush’s tax cuts weren’t any more successful: savings did not increase; instead the household savings rate fell to a record low (essentially zero). ([Location 2094](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2094)) > 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. ([Location 2103](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2103)) > 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.56 Furthermore, if the assets are passed on at death, the capital gains made during the individual’s lifetime escape taxation. ([Location 2104](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2104)) > While the average tax rate has decreased little since 1979—going from 22.2 percent to 20.4 percent, that of the top 1 percent has fallen by almost a quarter, from 37 percent to 29.5 percent.62 ([Location 2125](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2125)) > What is striking about the United States is that while the level of inequality generated by the market—a market shaped and distorted by politics and rent seeking—is higher than in other advanced industrial countries, it does less to temper this inequality through tax and expenditure programs. And as the market-generated inequality has increased, our government has done less and less. ([Location 2160](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2160)) > Among the more disturbing findings recited in chapter 1 is that the United States has become a society in which there is less equality of opportunity, less than it was in the past, and less than in other countries, including those of old Europe. ([Location 2165](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2165)) > As the wealthy get wealthier, they have more to lose from attempts to restrict rent seeking and redistribute income in order to create a fairer economy, and they have more resources with which to resist such attempts. It might seem strange that as inequality has increased we have been doing less to diminish its impact, but it’s what one might have expected. It’s certainly what one sees around the world: the more egalitarian societies work harder to preserve their social cohesion; in the more unequal societies, government policies and other institutions tend to foster the persistence of inequality. This pattern has been well documented. ([Location 2205](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2205)) > Another theme of this book is that of “adverse dynamics,” “vicious circles.” We saw in the last chapter how greater inequality led to less equality of opportunity, leading in turn to more inequality. In the next chapter, we’ll see some further examples of downward spirals—how more inequality undermines support for collective action, the kinds of actions that ensure that everyone lives up to his or her potential, as a result, for instance, of good public schools. We’ll explain how inequality fosters instability, which itself gives rise to more inequality. ([Location 2298](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2298)) > In a 2011 study, the IMF concluded, “We find that longer growth spells are robustly associated with more equality in the income distribution. . . . Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin.” ([Location 2457](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2457)) > In April of that year its then–managing director, Dominique Strauss-Kahn, emphasized, “Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda.” ([Location 2459](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2459)) > For several decades America has suffered from underinvestment in infrastructure, basic research, and education at all levels. Further cutbacks in these areas lie ahead, given the commitment by both parties to bringing down the deficit and the refusal of the House of Representatives to raise taxes. The cuts come despite evidence that the boost these investments give to the economy far exceeds the average return in the private sector, and is certainly higher than the cost of funds to the government. ([Location 2484](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2484)) > Our failure to make these critical public investments should not come as a surprise. It is the end result of a lopsided wealth distribution in society. The more divided a society becomes in terms of wealth, the more reluctant the wealthy are 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. ([Location 2491](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2491)) > While the wealthiest Americans may complain about the kind of government we have in America, in truth many like it just fine: too gridlocked to redistribute, too divided to do anything but lower taxes. ([Location 2497](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2497)) > The main waste of resources is only on lobbying: there are more than 3,100 lobbyists working for the health industry (nearly 6 for every congressperson), and 2,100 lobbyists working for the energy and natural resources industries. All told, more than $3.2 billion was spent on lobbying in 2011 alone.25 The main distortion is to our political system; the main loser, our democracy. ([Location 2524](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2524)) > The magnitude of “rent seeking” and the associated distortions in our economy, while hard to quantify precisely, are clearly enormous. Individuals and corporations that excel at rent seeking are amply rewarded. They may garner immense profits for their firms. But this does not mean that their social contribution is even positive. In a rent-seeking economy such as ours is becoming, private and social returns are badly misaligned. ([Location 2530](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2530)) > Rent seeking distorts our economy in many ways—not the least of which is the misallocation of the country’s precious talent. It used to be that bright young people were attracted to a variety of professions—some to serving others, as in medicine or teaching or public service; some to expanding the frontiers of knowledge. ([Location 2541](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2541)) > Economists marvel at our health care sector and its ability to deliver less for more: health outcomes are worse in the United States than in almost all other advanced industrial countries, and yet the United States spends absolutely more per capita, and more as a percentage of GDP, by a considerable amount. ([Location 2556](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2556)) > We’ve been spending more than one-sixth of GDP on health care, while France has been spending less than an eighth. Per capita spending in the United States has been two and a half times higher than the average of the advanced industrial countries. ([Location 2559](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2559)) > Sometimes the distortions of the rent seekers are subtle, not well captured in the diminution of GDP. This is because GDP doesn’t adequately capture costs to the environment. It doesn’t assess the sustainability of the growth that is occurring. When GDP arises from taking resources out of the ground, we should make note that the country’s wealth is diminished, unless that wealth is reinvested above ground in human or physical capital. But our metrics don’t do that. Growth that arises from depleting fish stocks or groundwater is ephemeral, but our metrics don’t tell us that. ([Location 2580](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2580)) > Our price system is flawed, because it doesn’t reflect accurately the scarcity of many of these environmental resources. And since GDP is based on market prices, our GDP metrics are also flawed. ([Location 2584](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2584)) > Many years ago Keynes posed a question. For thousands of years, most people had to spend most of their time working just to survive—for food, clothing, and shelter. Then, beginning with the Industrial Revolution, unprecedented increases in productivity meant that more and more individuals could be freed from the chains of subsistence living. For increasingly large portions of the population, only a small fraction of their time was required to provide for the necessities of life. The question was, How would people spend the productivity dividend? ([Location 2702](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2702)) > A central thesis of this book is that rent seeking is pervasive in the American economy, and that it actually impairs overall economic efficiency. The large gaps between private rewards and social returns that characterize a rent-seeking economy mean that incentives that individuals face often misdirect their actions, and that those who receive high rewards are not necessarily those who have made the largest contributions. ([Location 2735](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=2735)) > 6. The top 1 percent of income earners received some 60 percent of the gains during the country’s economic expansion between 1979 and 2007. While the real after-tax household income of the 1 percent grew by 275 percent in that period, the bottom fifth’s average real after-tax household income rose only 18 percent. Indeed, the bottom 90 percent of earners got just a fourth of what the top 0.1 percent gained. Based on data from, Piketty and Saez, “Income Inequality in the United States, 1913–1998,” and the updates on Saez’s website, cited in n. 2, above. See EPI Briefing Paper, October 26, 2011, cited in n. 3, above; and Josh Biven, “Three-Fifths of All Income Growth from 1979–2007 Went to the Top 1%,” Economic Policy Institue, October 27, 2011, available at http://www.epi.org/publication/fifths-income-growth-1979-2007-top-1/ (accessed February 28, 2012). The CBO 2011 study, cited in n. 1, above, presents a similar picture. ([Location 6195](https://readwise.io/to_kindle?action=open&asin=B007MKCQ30&location=6195))