The high cost of income inequality

The Global Post has a lengthy, dense interview with Joseph Stiglitz about inequality. According to the Nobel-prize winning economist, inequality is damaging not just for the poor, but for society as a whole:

Globalization, as it has been managed, has resulted in increased inequality, and as inequality increases, growth becomes weaker. The risk is that the middle class is going to be harder and harder hit, and that there will be prosperity for only the few at the top. But the middle class is important for stable growth and a strong democracy. When a society becomes more and more divided, it becomes increasingly class-driven, and it’s very hard for democratic processes to work well in that kind of society.

Inequality is also self reinforcing, as with wealth comes increased political power. This, in the long term, can damage the economy, as it opens the door to rent-seeking behavior:

America has become a rent-seeking society, a term of opprobrium we usually hear applied to oil-exporting countries. Rent-seekers extract profit from existing industries without contributing value – in the form of innovation, entrepreneurship, and growth – to the economy. They use their wealth to consolidate their power, by influencing regulations and government policies. This has happened in many instances – we see it in our military and drug companies, in our banks that succeeded in stripping away regulations, which allowed them to earn huge profits at the expense of the rest of society – and it's not a model for a competitive dynamic economy.

The median income of a male worker today is lower than it was in 1968; for the past 30 years, economic growth first concentrated at the top, and then we started seeing a slow, long decline of middle class wages.

This issue is specially damaging in Connecticut. CAHS and Connecticut Voices for Children, in a recent study (PDF) examined income inequality in our state. The results are highly discouraging.  The share of total state Adjusted Gross Income (AGI) going to the top 1 percent has soared over the last two decades, increasing from 17% to 28%. Connecticut’s inequality ranks second only to New York in the US. Income growth for those in the lowest quintile has been negative:

The numbers are even more dramatic when we consider that Connecticut used to be one of the most equalitarian states in the nation. From our report:

This stands in sharp contrast to the Connecticut of old.In 1977-79 the gap between the richest and the middle fifth was the 42nd largest in the country - in only 8 states were the rich and the middle closer together. In 2005-2007, the gap had grown to the 7th largest - the rich and the middle were the closer together in 43 other states.

Reasons behind these changes are many. The two main drivers of the change in the state have been the decline of middle class manufacturing jobs, and the emergence of finance and its fortunes. The main explanation for this shift in the economy and the rise of inequality nation-wide, however, is simple: policy. Stiglitz:

Our society took a turn around 1980 around the time when Reagan came into office. During World War II, our country fought together and was brought together by the war. In the decades after, the country grew together: the incomes of the people at the bottom grew more than those at the top. We passed the GI bill which provided our veterans with the opportunity for higher education, enabling them to get a better job, buy a home, and to move up in the world, and many seized that opportunity. During this time, our economy grew quickly and there was shared prosperity.

But then attitudes started to change and Americans were sold a bill of goods — that lower taxes, de-regulation, more corporate welfare, and less help for the poor would help our economy grow even faster, but it didn’t. Ultimately, they sold Americans on the bill of goods that if those at the top did well, the benefits would trickle down and everyone would benefit. But those in the middle and the bottom have not fared well. Instead, we became a more divided society. We passed bad bankruptcy laws, we didn’t enforce anti-trust laws as effectively as we should have. The effect of individual laws may have been small in and of themselves, but together they had a great impact. As I state in my book, inequality didn’t happen overnight. Instead, it grew as a result of a large number of seemingly small decisions.

All this can be changed, but it will take time and effort. Our first step, in any case, has to be to acknowledged that America is a place where the middle class is thriving.

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