The Price of Inequality

1. Inequality in America has reached unprecedented levels, threatening democracy and economic stability

Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term.

Staggering wealth disparity. The top 1% of Americans now own more wealth than the bottom 90% combined. This concentration of wealth has led to:

• Political influence: The wealthy can shape policies in their favor
• Economic instability: Reduced consumer spending and increased financial speculation
• Social tension: Erosion of social cohesion and trust in institutions

Consequences for democracy. Extreme inequality undermines democratic principles:

• Unequal political representation
• Decreased social mobility
• Erosion of the middle class, a key pillar of democracy

These trends threaten the very fabric of American society, potentially leading to social unrest and economic instability if left unchecked.

2. The top 1% have shaped policies to increase their wealth at the expense of the 99%

The 1 percent has captured and distorted the budget debate—using an understandable concern about overspending to provide cover for a program aimed at downsizing the government, an action that would weaken the economy today, lower growth in the future, and, most importantly for the focus of this book, increase inequality.

Policy manipulation. The wealthy have used their influence to shape policies that benefit them:

• Tax cuts for the rich
• Deregulation of financial markets
• Corporate subsidies and bailouts
• Weakening of labor unions

Rent-seeking behavior. Instead of creating wealth, many in the top 1% focus on extracting wealth through:

• Monopoly power
• Financial speculation
• Exploiting legal loopholes
• Lobbying for favorable regulations

This behavior diverts resources from productive activities and increases inequality, as the gains are concentrated at the top while the costs are spread across society.

3. Market forces alone do not explain inequality; politics plays a crucial role

We have argued in this chapter, to the contrary, that we could have a more efficient and productive economy with more equality.

Political influence on markets. While market forces contribute to inequality, political decisions shape these forces:

• Labor laws and minimum wage policies
• Trade agreements and globalization terms
• Financial regulations (or lack thereof)
• Tax policies favoring certain types of income

Myth of meritocracy. The idea that inequality simply reflects differences in productivity or merit ignores:

• Unequal access to education and opportunities
• Inherited wealth and connections
• Discrimination based on race, gender, and class

By recognizing the role of politics in shaping inequality, we can better understand how to address it through policy changes and democratic processes.

4. The financial sector's rent-seeking behavior has contributed significantly to inequality

The financial sector has developed expertise in a wide variety of forms of rent seeking itself.

Financialization of the economy. The financial sector has grown disproportionately large, extracting wealth rather than creating it:

• Complex financial instruments that obscure risk
• High-frequency trading that provides no real economic value
• Excessive fees and predatory lending practices

Socialized losses, privatized gains. The financial sector has benefited from:

• Government bailouts during crises
• Implicit "too big to fail" subsidies
• Tax policies favoring financial income

This rent-seeking behavior has redirected wealth from productive sectors of the economy to the financial sector, contributing significantly to overall inequality.

5. Globalization, as currently managed, exacerbates inequality and undermines democracy

Globalization, as it's been managed, is narrowing the choices facing our democracies, making it more difficult for them to undertake the tax and expenditure policies that are necessary if we are to create societies with more equality and more opportunity.

Race to the bottom. Current globalization policies have led to:

• Downward pressure on wages in developed countries
• Weakening of labor and environmental standards
• Tax competition between countries, reducing revenues

Democratic deficit. Globalization has shifted power from national governments to:

• Multinational corporations
• International financial institutions
• Unaccountable trade organizations

This has limited the ability of democratic governments to implement policies that benefit their citizens, particularly those aimed at reducing inequality.

6. The American dream of equal opportunity is increasingly a myth

America has always thought of itself as a land of equal opportunity. Horatio Alger stories, of individuals who made it from the bottom to the top, are part of American folklore. But, as we'll explain in chapter 1, increasingly, the American dream that saw the country as a land of opportunity began to seem just that: a dream, a myth reinforced by anecdotes and stories, but not supported by the data.

Declining social mobility. The United States now has lower intergenerational mobility than many other developed countries:

• Children's economic outcomes are increasingly tied to parental income
• Education, a key driver of mobility, is becoming less accessible to the poor

Persistent disadvantages. Certain groups face systemic barriers to success:

• Racial and ethnic minorities
• Children from low-income families
• Those born in economically depressed regions

Recognizing this reality is crucial for developing policies that can restore genuine equality of opportunity and revitalize the American dream.

7. Monetary policy and central banks have favored the wealthy, worsening inequality

The Federal Reserve and its chairmen like to pretend that they are above politics. It is convenient not to be accountable, to be independent. They see themselves as simply wise men and women, public servants, helping to steer the complex ship of the economy.

Inflation focus. Central banks' prioritization of low inflation over full employment has:

• Kept wages stagnant for many workers
• Benefited wealthy bondholders

Financial sector bias. The Federal Reserve has often acted in ways that benefit banks and financial institutions:

• Lax regulation leading to financial crises
• Bailouts that socialize losses while privatizing gains
• Low interest rates that boost asset prices owned by the wealthy

This approach to monetary policy has contributed to the concentration of wealth at the top while leaving many workers vulnerable to economic downturns.

8. Austerity measures and budget cuts disproportionately harm the middle class and poor

The advocates of austerity counter those who argue for more government spending by saying that such spending will not stimulate the economy. They begin their critique by observing that the almost $800 billion stimulus package enacted in February 2009 didn't save the economy from a deep recession—and neither would more government spending. But the stimulus did work: if it hadn't been for the stimulus, the unemployment rate would have peaked in excess of 12 percent, more than 2 percentage points higher than the levels eventually reached.

Misguided deficit focus. Austerity measures during economic downturns:

• Reduce aggregate demand, worsening recessions
• Cut social programs that support the vulnerable
• Decrease public investment in education and infrastructure

Counterproductive outcomes. Austerity often fails to achieve its stated goals:

• Slower economic growth leads to lower tax revenues
• Increased unemployment raises social spending
• The debt-to-GDP ratio may worsen due to economic contraction

Instead of austerity, targeted government spending can stimulate the economy and reduce inequality by creating jobs and supporting those most in need.

9. A more progressive tax system and increased public investment can reduce inequality

To take one example of how GDP can give a false impression of a country's success, GDP per capita mismeasures the value of goods and services produced in several sectors, including health and the public sector—two sectors whose importance today is much greater than when GDP first started to be measured a half century ago.

Tax reform. A more progressive tax system can reduce inequality by:

• Increasing rates on high incomes and wealth
• Closing loopholes and reducing tax avoidance opportunities
• Shifting the tax burden from labor to capital and pollution

Public investment. Increased spending on public goods can promote equality and growth:

• Education and job training programs
• Healthcare and social services
• Infrastructure and research & development

These investments can create a more level playing field, boost productivity, and generate shared prosperity that benefits all segments of society.

10. Reforming political processes and campaign finance is crucial to addressing inequality

In a democracy where there are high levels of inequality, politics can be unbalanced, too, and the combination of an unbalanced politics managing an unbalanced economy can be lethal.

Campaign finance reform. Reducing the influence of money in politics is essential:

• Limiting corporate and individual political contributions
• Increasing transparency in political spending
• Providing public funding for campaigns

Electoral reform. Ensuring fair representation and participation:

• Eliminating gerrymandering and voter suppression
• Implementing ranked-choice voting or proportional representation
• Increasing voter turnout through automatic registration and easier voting processes

By reforming these political processes, we can create a more responsive democracy that better represents the interests of all citizens, not just the wealthy elite.

Last updated: October 17, 2024