America likes to think of itself as a land of opportunity and others
view it in much the same light. But while we can all think of examples
of Americans who rose to the top on their own, what really matters are
the statistics: to what extent do an individual's life chances depend on
the income and education of his or her parents?
Nowadays, these
numbers show that the American dream is a myth. There is less equality
of opportunity in the US today than there is in Europe, or indeed, in
any advanced industrial country for which there are data.
This is one of the reasons that the US has the highest level of inequality of any of the advanced
countries, and its gap with the rest has been widening. In the
'recovery' of 2009-10, the top 1% of US income-earners captured 93% of
the income growth. Other inequality indicators are as bad or even worse.
The trend is one of concentration of income at the top, the hollowing
out of the middle and increasing poverty at the bottom.
It would
be one thing if the high incomes of those at the top were the result of
greater contributions to society, but the Great Recession showed
otherwise: bankers who had led the global economy to the brink of ruin
received outsize bonuses.
A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained
their wealth by exercising monopoly power; others are CEOs who have
taken advantage of deficiencies in corporate governance to extract for
themselves an excessive share of corporate earnings; and still others
have used political connections to benefit from government munificence:
either excessively high prices for what the government buys (drugs), or
excessively low prices for what the government sells (mineral rights).
So, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. Those at the top are enriched at the expense of those at the bottom.
It
might not be so bad if there were even a grain of truth to trickle-down
economics, the quaint notion that everyone benefits from enriching
those at the top. But most Americans today are worse off, with lower
real incomes, than they were in 1997, a decade and a half ago. All of
the benefits of growth have gone to the top.
Defenders of US'
inequality argue that the poor and those in the middle shouldn't
complain. While they may be getting a smaller share of the pie than they
did in the past, the pie is growing so much, thanks to the
contributions of the rich and super-rich, that the size of their slice
is actually larger. The evidence contradicts this. Indeed, the US grew
far faster in the decades after World War II, when it was growing
together, than it has since 1980, when it began growing apart.
Rent-seeking
distorts the economy. Market forces, of course, play a role, too, but
markets are shaped by politics; and, in the US, with its quasi-corrupt
system of campaign finance and its revolving doors between government
and industry, politics is shaped by money.
For example, a
bankruptcy law that privileges derivatives over all else, but does not
allow the discharge of student debt, no matter how inadequate the
education provided, enriches bankers and impoverishes many at the
bottom. Where money trumps democracy, such legislation has become
predictably frequent.
But growing inequality is not inevitable. There
are market economies that are doing better, both in terms of GDP growth
and rising living standards. Some are even reducing inequalities.
America
is paying a high price for continuing in the opposite direction.
Inequality leads to lower growth and less efficiency. Lack of
opportunity means that its most valuable asset, its people is not being
fully used. Many at the bottom, or even in the middle, are not living up
to their potential, because the rich, needing few public services and
worried that a strong government might redistribute income, use their
political influence to cut taxes and curtail government spending.
This
leads to underinvestment in infrastructure, education and technology,
impeding the engines of growth. The Great Recession has exacerbated
inequality, with cutbacks in basic social expenditures and with high
unemployment putting downward pressure on wages. Moreover, inequality
leads to economic instability.
But, most importantly, US' inequality is undermining its values and identity. With inequality reaching such extremes,
it is not surprising that its effects are manifest in every public
decision. America has become a country not 'with justice for all', but
rather with favouritism for the rich and justice for those who can
afford it.
(The author is professor of economics at Columbia University)
curtsy-Ganashakti