Posted: August 20, 2012
ccupy Wall Street no longer occupies Wall Street, other public spaces around the country, or the nation's attention. Whatever accounts for the demise of that movement, which stopped moving without ever settling on a political destination, the culprit cannot be lack of encouragement from prominent writers. In 2010, as the Tea Party was poised to propel Republicans to big gains in the midterm elections, Timothy Noah, a journalist then working for Slate, lamented that despite growing economic inequality, "the prospect of class warfare is utterly remote." Why, he asked, isn't "the bottom 99 percent marching in the streets?" A year later, Occupiers were in the streets, and even calling themselves the 99%. Noah, by that time a senior editor of the New Republic, was enthused. "[P]rotesters are finally taking notice of America's 30-year income-inequality binge." Like American capitalism's need for reforms "more drastic than anything under current consideration within the polite mainstream," the emergence of a populist egalitarian movement to demand those reforms was "long overdue."
Columbia University's Joseph Stiglitz went further. The 2001 Nobel laureate in economics and chairman of the Council of Economic Advisors under President Clinton, Stiglitz addressed the Occupy protestors in New York City's Zuccotti Park in October 2011. He assured them that our present system, "where we've socialized losses and privatized gains," will deliver neither a "robust recovery" nor a "just society." We knew about financial practices like predatory lending before the financial crisis, he said. "There were some people who tried to stop it. But Wall Street used their political power to stop those who tried to stop them." In the event there's a second act in Occupy Wall Street's life, the reconstituted movement will find itself with not one but two manifestos, thanks to Noah and Stiglitz. Indeed, because book publishing remains an anachronistically deliberate process in our tweeted, hyperlinked age, Stiglitz's The Price of Inequality contains passages speaking of Occupy in the present rather than the past tense, hailing its broad support and congruence with most Americans' views. To banish doubts that Occupy isn't really an egalitarian vanguard, he cites the protestors' ability to gather 300,000 signatures to prevent—as it turned out, postpone—Occupy's eviction from Zuccotti Park, and some Oakland policemen's expressions of support for the protesters after disbanding their encampment.
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Noah and Stiglitz invest so heavily in the existence of a broad, popular movement to reduce economic inequality because the whole point of their books is that growing inequality is flagrantly undemocratic. Noah goes so far as to invoke The Epic of America (1931) by James Truslow Adams, which popularized the phrase the "American Dream." That dream, according to Adams, was of "a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position."
The claim that the present degree of economic inequality is undemocratic and un-American becomes dubious if the people supposedly hurt by inequality are more acquiescent than outraged. Occupy Wall Street appears to have catalyzed nothing but drum circles, even as 2011's furious demonstrations in Madison, Wisconsin, succeeded only in giving Governor Scott Walker a bigger victory when his opponents tried to recall him from office than he received when first elected. How can inequality be an affront to democracy if the demos reacts to it with a shrug?
The explanation does not appear to be a refusal to accept that the rich are getting richer. The evidence on this point, presented in both books, is strong. Noah writes that "the difference in America between being rich and being middle class became much more pronounced," beginning around 1979. This is the "Great Divergence" of his title, a term borrowed from Princeton economist and New York Times columnist Paul Krugman. As a result, according to Noah, "People with high incomes consumed an ever-larger share of the nation's total income, while people in the middle saw their share shrink."
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The Great Divergence marks a reversal of the "Great Compression": American household incomes grew more equal during the Depression, World War II, the war's immediate aftermath, and then entered a long period of stasis. According to the World Top Incomes Database, a research tool developed by economists Emmanuel Saez and Thomas Piketty and cited by both Noah and Stiglitz, Americans in the top 10% of the income distribution received 49.3% of total household income in 1928, before the start of the Great Depression. This proportion declined to 45.3% in 1940, 35.6% in 1950, 33.5% in 1960, and still equaled 33.5% in 1978. "The rich were getting richer," Noah writes approvingly, "but not disproportionately to everyone else."
In 1979 the top tenth's share rose to 34.2%...and then kept rising, to 40% in 1990, 47.6% in 2000, and a peak of 49.7% in 2007, the start of the Great Recession. In 2010, the latest year for which data are available, the top tenth—all households with a pre-tax income of at least $108,024, including capital gains—accounted for 47.9% of total household income. The Top World Incomes data also allow us to disaggregate this top tenth. The less affluent half of it (the 91st through the 95th percentiles of the income distribution) had incomes between $108,024 and $150,400, and received 12.2% of total household income. The next four percentiles, with incomes up to $352,055, accounted for 16% of total income.
Even the top percentile can be broken into smaller units—"fractiles." The lower half of that percentile, households with incomes above $352,055 and below $521,246, received 4.1% of all income in 2010. The next four-tenths of the top percentile (those in the 99.5% to 99.9% segment of the income distribution) received 6.2% of all income and made up to $1,492,175. The top thousandth can also be dissected. Its bottom 90%, making up to $7,890,307, received 4.9% of total income, while those with higher incomes—the top percent of the top percent, which is to say the most affluent ten-thousandth of the income distribution, designated by Noah as the "Stinking Rich"—received 4.6%.
As we look at successively smaller and more prosperous segments of the income distribution, the increases over the past three decades become increasingly dramatic. In 1979 the top twentieth of the income distribution received 22.9% of all income; in 2010 the proportion for this group was 35.7%, more than half again as large. For the most affluent 1% of the nation, the object of Occupy Wall Street's enmity, the proportion doubled from 10% in 1979 to 19.8% in 2010. For households in the top thousandth the income share nearly tripled, from 3.4% in 1979 to 9.5% in 2010. Finally, the top ten-thousandth's 4.6% share was more than three times the size of its 1.4% share in 1979.
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Well, so what? Income inequality used to be large, then diminished, then stayed about the same for a while, and subsequently increased. How does inequality, per se, harm those whose share of total income declines?
To ask the question in that way is to distinguish inequality, on the one hand, from poverty and economic insecurity, on the other. (Poverty and insecurity are two sides of the same coin, in that we want people who are poor to have ample opportunities to escape poverty, and people who aren't poor to have ample opportunities to avoid it.) In a stagnant economy more inequality will inevitably mean more poverty and insecurity, since wealth necessarily causes poverty in that no-growth, zero-sum dystopia.
In a growing economy, however, your gain does not have to be my loss. (According to my calculations from Census Bureau and Office of Management and Budget data, America's per capita Gross Domestic Product was $25,731 in 1979, when the Great Divergence began, and $42,215 in 2011, a 64% increase. To factor out inflation, the amounts are expressed in terms of the dollar's value in 2005.) Both of our incomes can increase in a dynamic economy. Even if yours grows more rapidly than mine, mine still grows. A smaller slice of a bigger pie could leave more on my plate than I formerly had with a bigger slice of a smaller pie.
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Noah and Stiglitz, in an attempt to address this problem, have each included a chapter titled, "Why It Matters." Neither, however, puts forward a compelling explanation for why the increasing wealth of the wealthy does matter, why it's necessarily injurious to those who aren't rich. Part of this failure is that both authors make clear that any reader who really needs to be persuaded that inequality is a problem is obtuse. Noah introduces his why-it-matters chapter, more than four-fifths of the way through Divergence, by writing, "Up to this point I've assumed the reader would instinctively believe that growing income inequality was inherently undesirable in a democratic society." The obligation to consider differing viewpoints can't hide Noah's irritation at their existence. He declares it "indisputable" that income inequality is "bad not only for people on the losing end but also for society at large," and elsewhere states, "You'd have to be blind not to see that we are headed in the wrong direction, and we've been heading that way for too long."
Stiglitz is equally insistent. An upbeat chapter, "1984 Is Upon Us," explains that conservative ideas about the fairness and efficiency of markets, or the unintended consequences of government intervention, are given political credence because of the 1%'s ability to use money and marketing to bamboozle the 99%. "The 1 percent has worked hard to convince the rest that an alternative world is not possible; that doing anything that the 1 percent doesn't want will inevitably harm the 99 percent." The wealthy have a "huge advantage" in the battle of ideas, since they possess "the instruments, resources, and incentives to shape beliefs in ways that serve their interests." An example of their power is that "deficit fetishism" has been embraced by conservatives and "even, alas, among many in the center." "The 1 percent has captured and distorted the budget debate" in order to "increase inequality" and "even used the occasion of the budget battle to argue for reduced progressivity in our tax system and a cutback in the country's already limited programs of social protection."
For Stiglitz, the ancient question cui bono?—"whom does it benefit?"—settles every argument. A sufficient guide to any public policy debate is whether the proposal helps or hurts the rich. Once we establish which dog the 1% has in that fight, and understand that their propaganda's sole purpose is to fool the 99% into supporting an agenda inimical to their own well-being, we know everything we need to know. The possibility that decent, reasonable people might have different, disinterested opinions about social welfare spending, progressive taxation, or government regulation isn't worth serious consideration.
Conservatives can do only so much, however, to make sure the facts don't "get in the way of a pleasant fantasy." Even the "American Right," according to Stiglitz, "can't deny that those at the bottom and in the middle are doing poorly and that those at the top are grabbing an increasing fraction of the nation's income—so much of a larger share that what's left over for the rest is diminished...." The emphasis is Stiglitz's, as is the assertion, "There has been a hollowing out of the middle class." Conservatives' lame response is to "quibble about the statistics."
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Noah has the same focus. During the Great Divergence, "People with high incomes consumed an ever-larger share of the nation's total income, while people in the middle saw their share shrink." We have, as a result, drifted further and further from the inclusive egalitarianism of the Great Compression, when there "probably was no better time to hold membership in America's middle class." His account of middle-class economic anxieties, however, is comparatively cautious. He writes early on that the Great Divergence is really two trends, not one. There is, first, "the ‘upper tail' trend of ever-growing high incomes," and then "the more complex societal changes plaguing the middle class." It's "not at all clear" that the former has much to do with the latter, since the fact that "two bad things happen at the same time doesn't mean they have a common cause." Still, "[t]he most dramatic difference" between life during the Great Divergence and the Great Compression "didn't involve the poor; it involved the middle class and the rich."
The middle class is even more important to Noah and Stiglitz's political cause than it is to their analysis. For all its organizational and intellectual disarray, Occupy Wall Street understood clearly that a coalition of the 99% would be irresistible in a democracy where the votes of a mere 50.01% can confer power. The problem for both Occupy Wall Street and Democrats has been to convince those making $75,000, or $250,000, or even $350,000, just below the top percentile threshold, that their interests and principles are better served by joining a bottom-up coalition than a top-down one with the rich. A 2010 column by the Boston Globe's Joshua Green argued that the key to Democrats' congressional victories in 2006 and '08 was the realization that they had been "deluding themselves" when complacently assuming their agenda spoke to middle-class concerns.
Most Democratic policies, such as the earned income tax credit or increasing the minimum wage, were geared not toward the middle class but the poor. When middle-class Americans heard Democrats describe their problems, it did not resonate because they were actually the problems of the working poor.
The hollowing out of the middle class would seem like a perfect opportunity for Democrats to persuade downwardly mobile refugees from the central regions of the income distribution to cast their lot with the people, against the powerful. Perhaps one reason Democrats' mid-decade gains continue to look tenuous after being reversed in 2010 is that this hollowing out has been more equivocal than Noah and Stiglitz allow. One does not have to be a conservative to quibble about this. In Rebound: Why America Will Emerge Stronger From the Financial Crisis (2011), Stephen Rose, an economist at Georgetown University who served as an advisor to Secretary of Labor Robert Reich during the Clinton Administration, argues that the decline of the middle class reflects people moving up rather than down. He shows a 14% increase, between 1979 and 2007, of households considered "well off"—that is, having an inflation-adjusted income of at least $105,000 for a family of three. That increase corresponds to a 12% decrease in "middle class" families, those making between $35,000 and $70,000, plus rounding-error declines for the poor and the near-poor (making less than $35,000), and the upper middle class (making between $70,000 and $105,000). Rose agrees with Noah and Stiglitz that "inequality has risen considerably, and this is a bad thing for America." Nonetheless,
The middle class "shrunk" because many Americans moved up to higher incomes. Notwithstanding the serious challenges that many Americans face, from paying for health care to sending their children to college, more middle-class Americans are enjoying higher living standards than ever before.
Stiglitz never mentions Rose's book. To his credit Noah does, conceding—after grousing about superior upward mobility in other times and places—that it "does continue to exist, and going up certainly beats going down or staying put." Having grudgingly allowed that most of the exodus from the middle class appears to be toward the top of the income distribution rather than the bottom, Noah quickly reverts to lamenting growing inequality as if Rose had never demonstrated his contention: "Still, a thriving middle class is rightly judged an important indicator of a society's overall health. The alternative is extremes of wealth and poverty, mutual alienation, and, at some point, political instability." As Professor Stiglitz might say, never let the facts get in the way of a useful horror story.
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The books also stack the deck to contend that wealth has caused poverty by asserting, rather than arguing, that widely inclusive economic progress doesn't matter much if some people prosper markedly compared to others. According to a 2008 report by the Brookings Institution's Project on Economic Mobility, "67 percent of Americans who were children in 1968 had higher levels of real family income in 1995-2002 than their parents had in 1967-1971." Adjust the figures to reflect that Americans had smaller households at the end of the century than in the 1960s, and the proportion better off than their parents increases to 81%. For a large majority of people to be living in better circumstances than the ones they grew up in sounds like a considerable achievement, notwithstanding that it transpired over decades when incomes were increasing especially rapidly at the top of the high end.
Noah takes note of the Brookings findings, too, but only one kind of mobility interests him. If my household income is 30% higher than my parents' when they were my age, I've had upward absolute mobility. If, however, most people my age have incomes that are 60% greater than their parents did, I've experienced downward relative mobility. I'm better off than my parents in terms of purchasing power, but worse off in the sense that the proportion of Americans with higher incomes than mine is larger than the proportion that once had higher incomes than my parents. The former counts for very little while the latter is crucial because, writes Noah, "We are social creatures and we establish our expectations in relation to one another."
Stiglitz agrees that we "cannot ignore relative deprivation." Who cares if most poor people in America have TVs? Even in "poor Indian and Chinese villages, there is, in general, access to TV." That anthropological data point hardly disposes of findings, like those by economists Bruce Mayer and James Sullivan, that between 1980 and 2009, "median after-tax income plus noncash benefits grew by 58 percent...." (The median is the amount received by a household at exactly the middle of the income distribution, where half of all households make more, and half less. As such, it differs from mean income in describing a population's economic center solely in terms of the number rather than the amount of larger incomes.) For Americans in the middle fifth of the income distribution over this 29-year period, their research shows that "living units are bigger and are much more likely to have air conditioning and other features. The quality of the cars that these families own has also improved considerably." Even for families in the bottom fifth of the income distribution, "living units became bigger, and the fraction with any air conditioning doubled. The share of households with amenities such as a dishwasher or clothes dryer also rose noticeably."
Noah and Stiglitz's position requires us to consider a disagreement that is not just empirical, but conceptual. There is more to be said than they allow for the proposition that a less equally prosperous country is likely to be a better place to live than a more equally impoverished one. The list of countries where the "Gini coefficient," the standard statistical measure of income inequality, is significantly lower than in America includes all the nations liberal egalitarians want the U.S. to emulate—basically, Europe's social democracies. It also includes, however, Bangladesh, Egypt, Niger, Pakistan, and other countries where the median income is a fraction of ours. It should not surprise us if few Americans are so intent on experiencing life in a more economically equal society that they would eagerly change places with the citizens of those nations. If we direct a thought-experiment over time instead of distance, it's equally doubtful that many Americans would disdain, because it did nothing to alleviate what Noah's subtitle calls our "growing inequality crisis," a future where every household's real disposable income was twice what it is today. Even if the income of today's 1% were to triple, while the 99%'s doubled, it's hard to believe many people would reject a much better standard of living simply because part of the package deal was that the gap between their income and a Fortune 500 CEO's would widen.
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Stiglitz and Noah's books are most similar in their closing chapters, which offer a list of public policies to mitigate the Great Divergence. Their agendas are familiar because they could be drawn from any recent Democratic Party platform, combined with proposals the platform committees found too provocative to include: increase regulation of business, especially finance; revive the labor movement; and spend much more on social welfare programs. Stiglitz calls for fiscal and monetary policies that make fighting unemployment a higher priority than reducing deficits and inflation. Noah wants the federal government to revive a program like the New Deal's Works Progress Administration to help the unemployed, and to impose price controls on colleges to prevent young people from being unable to afford the most important ladder to the middle class. The familiarity of such proposals supports the conclusion that egalitarianism is the ultimate rationale for everything the Democratic Party wants to do, but also the alternative interpretation that everything Democrats want to do anyway has the bonus effect of curbing inequality.
And, of course, Noah and Stiglitz want taxes to be far more progressive. If you instinctively believe that growing inequality is inherently undesirable in a democratic society, the obvious corrective is for the government to take away some of the rich's money. Both books treat President Obama's determination to raise the federal income tax rate on families with incomes over $250,000 from 35% to 39.6%, where it stood during Bill Clinton's presidency, as no more than "a good start," in Noah's words. Each author writes warmly of a 50% tax bracket that would begin at a higher income threshold, and a 70% rate—the one that obtained until Ronald Reagan passed his tax cuts in 1981—on still higher (and still unspecified) incomes. Stiglitz holds open the possibility that an additional bracket or two above 70% might be enacted. America would return to the good old days of the Great Compression in the 1940s and '50s when the highest income tax rates exceeded 90%, except without the tax code's maze of esoteric provisions where the rich, with help from their lawyers and accountants, could hide income from the tax collector.
Stiglitz sees a way that a more progressive tax system could make a silk purse out of the sow's ear of rising inequality.
The good news is that the wealthy take so much of the nation's income pie that a relatively small increase in their tax rates would yield large revenues. It used to be said that the top didn't have enough money to fill the hole in the deficit; but that's becoming less and less true.
There's a difference, however, between "less true" and "not true." In 2010 the federal deficit was $1.293 trillion, 37.4% of the federal government's total outlays of $3.456 trillion. According to my analysis of the Top World Incomes Database numbers for America in 2010, a new 100% tax bracket starting at $352,055, the threshold for the top percentile of the income distribution, would have yielded additional federal tax revenues of $1.042 trillion, filling 80.6% of the deficit hole.
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There could be problems with such an approach, however. For one thing, this deficit hole-filling endeavor isn't going to go well if we're digging the hole deeper at the same time we're trying to fill it. "Reducing the budget deficit...needs to be done," writes Noah, which may qualify him as a deficit fetishist in Stiglitz's eyes. In any case, the agenda endorsed by the authors—and liberal politicians and intellectuals across the country—calls for the government to spend more money on many things and less money on few things. (Really, just one thing: national defense.) The $3.6 trillion the federal government spent in 2011, or the $4.5 trillion the Obama Administration wants it to spend in 2017, get criticized because these amounts are too small, not too large. To the extent Democrats win arguments, elections, and Capitol Hill knife fights, the deficit hole will get deeper, reducing our ability to cut deficits by relying solely on higher taxes on the rich, even if we agree with Noah that every American in the top percentile of the income distribution is "Undeniably Rich."
Secondly, if we want the rich to bear a larger and larger portion of our national tax burden, it will become increasingly important for them to go on being rich and getting richer. "Some thirty years ago [1984, in fact], the top 1 percent of income earners received only 12 percent of the nation's income," Stiglitz writes (emphasis in the original). "That level of inequality should itself have been unacceptable; but since then the disparity has grown dramatically." If we had maintained 1984's unacceptable but less unacceptable distribution of income, however, the hypothetical 100% tax bracket on the top percentile would have yielded $625 billion in 2010. (This calculation assumes the amount of income in excess of $352,055 falls to the point where the total received by the top percentile declines from 19.8% to 12%, while that 7.8% of the total is redirected to the bottom and middle of the income distribution, leaving $352,055 as the top percentile's threshold.) This less unacceptable income distribution means the take-it-all tax bracket would now fill in only 48.3% of the 2010 federal deficit hole.
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The paradoxical result is that the revenue stream sustaining the liberal project will become increasingly dependent on the rich getting richer. If they stop, due to changing regulations or social norms that trigger a Second Great Compression of pre-tax incomes, the government's ability to fund its social welfare spending commitments will be severely compromised. Several states face a similar dilemma. They enacted heavy sales taxes on cigarettes, intending to encourage fewer people to start smoking and more to quit. Despite the disincentives, many residents continue to smoke, creating a dilemma for the state governments. The revenues from the "sin tax" surcharges wind up preventing budget cuts or increases in other taxes, making it hard for the politicians to tell citizens to go and sin no more.
Revenues from the cigarette taxes will also fall short of projections if the surtax is so high that some people find it worth their while to drive across state lines to buy their smokes in jurisdictions where the taxes are lower. Such tax avoidance points us to the third and most fundamental problem with relying on a confiscatory tax bracket to fund the government. In short order, such taxes will yield zilch instead of zillions, as people abandon the labors and investments that generate income, every dime of which will be taken by the Internal Revenue Service. Advocates of supply-side economics have established this point, at least, beyond dispute. "Of course," writes Stiglitz, "the Right is right in noting that if marginal tax rates were near 100 percent tax rates, incentives would be significantly weakened, but...we're nowhere near the point where this should be of concern."
If the goal of fiscal policy is to increase tax rates, and revenues, to the point just below where incentives to generate income subject to taxation would be significantly weakened, then it will still be difficult for progressive taxes to accomplish all that Stiglitz envisions. Assume that much higher but non-confiscatory tax rates have no effect on pre-tax income. The 2010 deficit of $1.293 trillion could have been reduced by $836 billion, nearly two thirds, with a 70% tax bracket beginning at the top percentile threshold of $352,055 (generating $356 billion), plus a 90% bracket on income above $1,492,175, the income threshold for the highest thousandth of the income distribution. (The latter bracket yields the government $480 billion.) Start those tax brackets at lower amounts and revenues expand. A 70% income tax rate applied to all income between $150,400 (the threshold for the top twentieth of the income distribution) and $352,055 would have raised $462 billion. Applying the 90% tax rate to all income above $352,055 yields an additional $937 billion, for a total of $1.399 trillion, eliminating the 2010 deficit with $106 billion left over for additional spending.
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Under the second scenario just described, a family with an income of $250,000 would receive, not President Obama's assurance that none of its federal taxes would increase, but an income tax surcharge of $69,720 on its $99,600 of income in excess of $150,400, causing it to send an additional 27.9% of its total income to the IRS. It will be noted that neither book prepares us for tax rates this high beginning at thresholds this low. Stiglitz believes "the top tax rate should be well in excess of 50 percent, and plausibly in excess of 70 percent," but doesn't specify the lower income boundaries of these tax brackets. Noah thinks "we should consider adding" a 70% top bracket "for annual incomes exceeding $20 million." In 2010 a 70% bracket beginning at $7,890,307, the threshold for the top ten-thousandth of the income distribution, would have generated $174 billion in government revenue, a sum equal to 5% of federal spending that year.
Assume, plausibly, that most members of this exclusive club had incomes greater than $7,890,307 but less than $20 million in 2010. Then: 1) The revenue increase for the government from a 70% tax starting at $20 million would have fallen far short of $174 billion, covering only a sliver of federal spending; and 2) Even Timothy Noah, scourge of the Stinking Rich, can't or won't recommend soaking more than a subset of them. Our most committed egalitarian polemicists, needing neither votes nor campaign contributions and facing no pressures to hold a coalition together, cannot bring themselves to come down harder on the rich, much less assert that those just inside the top 5% of the income distribution, whom Noah calls the "Basically Rich," should face tax rates historically applied to tycoons. Given such timidity by intellectuals, what hope is there for Democratic politicians to wage and win such battles?
This quandary is part of a larger ambiguity neither book resolves. On the one hand, our growing inequality is dreadful. "Economically speaking, the richest nation on Earth is starting to resemble a banana republic," according to Noah. "The experience of Latin America, the region of the world with the highest level of inequality," warns Stiglitz, "foreshadows what lies ahead: civil conflict for decades,...high levels of criminality and social instability." And yet the steps needed to avert this calamity always sound like painless, incremental modifications to our economy. The "real question," Noah states in the book's penultimate paragraph, is how we can align the distribution of income "a bit more successfully with our democratic ideals." Stiglitz describes his aspirations similarly. He cites Jonathan Chait, Noah's predecessor as the New Republic's inequality Savonarola, who endorsed policies "that leave in place skyrocketing inequality of income, just ever so slightly ameliorated by government." Writing in his own voice, Stiglitz declares, "I and, as far as I know, most progressives—do not argue for full equality.... The question is, how seriously would incentives be weakened if we had a little bit less inequality?"
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These reassurances fail to remove doubts not only about the egalitarian project's scope, but also about its justification. Stiglitz addresses questions about high incomes, and the regulatory and tax policies to reduce them "a bit," solely in terms of the incentives that affect the generation of more economic activity and taxable income. Thus, "A corporate CEO will not exert less effort to make the company work well simply because his take-home pay is $10 million a year rather than $12 million."
At the same time,
When government does its job well, the returns received by, say, a worker or an investor are in fact equal to the benefits to society that his actions contribute. When these are not aligned, we say there is a market failure, that is, markets fail to produce efficient outcomes.
The sort of inequality Stiglitz sees no need for government to correct would obtain if "inventors who have reshaped technology, or scientists who have reshaped our understanding of the laws of nature" were "at the top of the wealth distribution." Under those circumstances, benefits to society and benefits to the individuals who produce them are commensurate. Unfortunately, "the 1 percent are by and large not those who earned their incomes by great social contributions—the great thinkers who have transformed our understanding of the world or the great innovators who have transformed our economy." Instead, "many of the individuals at the top of the wealth distribution are, in one way or another, geniuses at business." Worse still, "more than a small part of their genius resides in devising better ways of exploiting market power and other market imperfections."
In short, government has the right and the duty to get very, very active in the fairness business. "Government never corrects market failures perfectly," the sort of market failures that leave great thinkers with too little income and geniuses at exploiting market power with too much, "but it does a better job in some countries than in others." America should disenthrall itself from its worship of the market, and strive to be the country where government does the best job of aligning individuals' financial rewards with their contribution to social benefits.
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This sounds like a big, never-ending project. It also sounds like a scary one, if government prosecutes it in the absence of clear, persuasive standards for translating nebulous concepts like "benefits to society" and "exploiting market power" into useable rules. Such standards won't be found in The Price of Inequality, which decries "outsize profits," "disproportionate executive compensation," and the wealthy's use of their political power "to benefit excessively the corporations they control," without elaborating the level of profits and compensation that would be the right size and merely proportionate.
To the contrary, the book instructs us to set aside our concerns about the legitimacy of government efforts to specify, then correct, the market's maldistribution of income. Stiglitz approvingly quotes two writers who contend that "if much of what we have comes to us as the free gift of many generations of historical contribution, there is a profound question as to how much can reasonably be said to be ‘earned' by any one person, now or in the future." The profound answer implied by that profound question is that our individual claims to the earnings we receive in exchange for our labors and investments are tenuous and frail, but the need for the government to promote benefits to society by redistributing income from the undeserving to the deserving is both urgent and abiding.
The absence of standards that would direct the government's comprehensive work in promoting fairness and social benefits wouldn't matter if we could entrust the day-to-day responsibilities to philosopher-kings who would make incisive, disinterested decisions. Unfortunately, the coincidence of perfect wisdom and unstinted power is no likelier in modern America than it was in ancient Greece. To give sweeping powers to those who claim, dishonestly or deludedly, to possess surpassing wisdom invites despotism—maybe soft, maybe not. The work of moving as many dollars as possible from the wallets of the disdained into the wallets of the admired, will turn into a rationale for crony capitalism that harms the adversaries and helps the friends of the people in charge of the wealth allocation apparatus.
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"Justice is the end of government," according to The Federalist, and "the end of civil society." Liberals and conservatives can both agree on that point—if kept at a high level of abstraction. The arguments start because liberals understand justice in terms of results, and conservatives believe it's about processes. Thus, liberals, believing that growing inequality is inherently undesirable, ask conservatives how they can justify—how they can accept—the income distribution's asymmetry, or the disparity between morally dubious X's vast income and morally deserving Y's modest one. Conservatives reply that, in general, a particular set of economic results is neither more nor less just than the processes that led to them. That is, it's not unjust that Albert Pujols has a 10-year, $240 million contract with the Los Angeles Angels while a nurse making $50,000 can't afford to take her son, the Angels' biggest fan, to more than a couple games a year. If both the first baseman and the nurse developed their talents and accepted the best offers they could find for their services, there is no moral imperative to adjust the results.
By the same token, it's not unjust that Arte Moreno, the Angels' owner, was in a position to sign Pujols eight years after buying the club for $183 million. Moreno's silver-spoon beginnings in our plutocratic age included growing up in Tucson as the oldest of 11 children, serving in Vietnam, and then enrolling in the University of Arizona. The G.I. Bill helped, but Moreno worked in a shoe store to cover expenses until he received his marketing degree. After graduating he went into the billboard business, relocating several times around the country while a salesman, before joining Outdoor Systems in Phoenix. Under his leadership, annual sales grew from $500,000 to $90 million within a decade. Outdoor Systems went public in 1996, shortly before Infinity Broadcasting bought it for $8.3 billion. In 2010 Forbes estimated that Moreno had a personal net worth of $1 billion.
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Where, conservatives ask, is the flagrant injustice in this biography crying out for government rectification? If, every step of the way, Moreno engaged in transactions unsullied by force or fraud, the only basis for taking away some of his money in the interests of justice is that he has "too much." But that charge is made by people who don't, won't, and can't eversay what amount would be "just right." Noah rejects demands that egalitarians "state precisely what the proper distribution of income ought to be," to excuse himself from stating even vaguely what it ought to be. Stiglitz asserts that 1984's level of inequality, when the top percentile received 12% of total income, should have been "unacceptable" without saying why, or indicating an acceptable level. (Since 1913 the 1%'s smallest share was 8.9% in 1976. Also unacceptable?)
In full cui bono mode, Stiglitz calls for resetting top marginal tax rates to where they were "before President Reagan started his campaign for the rich." This characterization makes sense only by assuming that it's not possible, at least through tax or regulatory policies, for the government to commit an injustice against a rich person. Conservatives reject the premise, and reject the policy arguments and agendas that flow from it. This rejection is done not for the sake of the rich, but for the sake of justice. Equality before the law is diminished, not enhanced, when government makes the pursuit of equality after tax audits its highest goal.
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Author Timothy Noah discusses William Voegeli's review in our online feature, Upon Further Review.
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