The 1 Percent’s Problem
Why won’t America’s 1 percent—such as the six Walmart heirs, whose
wealth equals that of the entire bottom 30 percent—be a bit more . . .
selfish? As the widening financial divide cripples the U.S. economy,
even those at the top will pay a steep price.
By Joseph E. Stiglitz
LET’S START BY laying down the baseline premise: inequality in America
has been widening for decades. We’re all aware of the fact. Yes,
there are some on the right who deny this reality, but serious
analysts across the political spectrum take it for granted. I won’t
run through all the evidence here, except to say that the gap between
the 1 percent and the 99 percent is vast when looked at in terms of
annual income, and even vaster when looked at in terms of wealth—that
is, in terms of accumulated capital and other assets. Consider the
Walton family: the six heirs to the Walmart empire possess a combined
wealth of some $90 billion, which is equivalent to the wealth of the
entire bottom 30 percent of U.S. society. (Many at the bottom have
zero or negative net worth, especially after the housing debacle.)
Warren Buffett put the matter correctly when he said, “There’s been
class warfare going on for the last 20 years and my class has won.”
So, no: there’s little debate over the basic fact of widening
inequality. The debate is over its meaning. From the right, you
sometimes hear the argument made that inequality is basically a good
thing: as the rich increasingly benefit, so does everyone else. This
argument is false: while the rich have been growing richer, most
Americans (and not just those at the bottom) have been unable to
maintain their standard of living, let alone to keep pace. A typical
full-time male worker receives the same income today he did a third of
a century ago.
>From the left, meanwhile, the widening inequality often elicits an
appeal for simple justice: why should so few have so much when so many
have so little? It’s not hard to see why, in a market-driven age where
justice itself is a commodity to be bought and sold, some would
dismiss that argument as the stuff of pious sentiment.
Put sentiment aside. There are good reasons why plutocrats should care
about inequality anyway—even if they’re thinking only about
themselves. The rich do not exist in a vacuum. They need a functioning
society around them to sustain their position. Widely unequal
societies do not function efficiently and their economies are neither
stable nor sustainable. The evidence from history and from around the
modern world is unequivocal: there comes a point when inequality
spirals into economic dysfunction for the whole society, and when it
does, even the rich pay a steep price.
Let me run through a few reasons why.
The Consumption Problem
When one interest group holds too much power, it succeeds in getting
policies that help itself in the short term rather than help society
as a whole over the long term. This is what has happened in America
when it comes to tax policy, regulatory policy, and public investment.
The consequence of channeling gains in income and wealth in one
direction only is easy to see when it comes to ordinary household
spending, which is one of the engines of the American economy.
It is no accident that the periods in which the broadest cross
sections of Americans have reported higher net incomes—when inequality
has been reduced, partly as a result of progressive taxation—have been
the periods in which the U.S. economy has grown the fastest. It is
likewise no accident that the current recession, like the Great
Depression, was preceded by large increases in inequality. When too
much money is concentrated at the top of society, spending by the
average American is necessarily reduced—or at least it will be in the
absence of some artificial prop. Moving money from the bottom to the
top lowers consumption because higher-income individuals consume, as a
fraction of their income, less than lower-income individuals do.
In our imaginations, it doesn’t always seem as if this is the case,
because spending by the wealthy is so conspicuous. Just look at the
color photographs in the back pages of the weekend Wall Street Journal
of houses for sale. But the phenomenon makes sense when you do the
math. Consider someone like Mitt Romney, whose income in 2010 was
$21.7 million. Even if Romney chose to live a much more indulgent
lifestyle, he would spend only a fraction of that sum in a typical
year to support himself and his wife in their several homes. But take
the same amount of money and divide it among 500 people—say, in the
form of jobs paying $43,400 apiece—and you’ll find that almost all of
the money gets spent.
The relationship is straightforward and ironclad: as more money
becomes concentrated at the top, aggregate demand goes into a decline.
Unless something else happens by way of intervention, total demand in
the economy will be less than what the economy is capable of
supplying—and that means that there will be growing unemployment,
which will dampen demand even further. In the 1990s that “something
else” was the tech bubble. In the first decade of the 21st century,
it was the housing bubble. Today, the only recourse, amid deep
recession, is government spending—which is exactly what those at the
top are now hoping to curb.
The “Rent Seeking” Problem
Here I need to resort to a bit of economic jargon. The word “rent” was
originally used, and still is, to describe what someone received for
the use of a piece of his land—it’s the return obtained by virtue of
ownership, and not because of anything one actually does or produces.
This stands in contrast to “wages,” for example, which connotes
compensation for the labor that workers provide. The term “rent” was
eventually extended to include monopoly profits—the income that one
receives simply from the control of a monopoly. In time, the meaning
was expanded still further to include the returns on other kinds of
ownership claims. If the government gave a company the exclusive right
to import a certain amount of a certain good, such as sugar, then the
extra return was called a “quota rent.” The acquisition of rights to
mine or drill produces a form of rent. So does preferential tax
treatment for special interests. In a broad sense, “rent seeking”
defines many of the ways by which our current political process helps
the rich at the expense of everyone else, including transfers and
subsidies from the government, laws that make the marketplace less
competitive, laws that allow C.E.O.’s to take a disproportionate share
of corporate revenue (though Dodd-Frank has made matters better by
requiring a non-binding shareholder vote on compensation at least once
every three years), and laws that permit corporations to make profits
as they degrade the environment.
The magnitude of “rent seeking” in our economy, while hard to
quantify, is clearly enormous. Individuals and corporations that excel
at rent seeking are handsomely rewarded. The financial industry, which
now largely functions as a market in speculation rather than a tool
for promoting true economic productivity, is the rent-seeking sector
par excellence. Rent seeking goes beyond speculation. The financial
sector also gets rents out of its domination of the means of
payment—the exorbitant credit- and debit-card fees and also the less
well-known fees charged to merchants and passed on, eventually, to
consumers. The money it siphons from poor and middle-class Americans
through predatory lending practices can be thought of as rents. In
recent years, the financial sector has accounted for some 40 percent
of all corporate profits. This does not mean that its social
contribution sneaks into the plus column, or comes even close. The
crisis showed how it could wreak havoc on the economy. In a
rent-seeking economy such as ours has become, private returns and
social returns are badly out of whack.
In their simplest form, rents are nothing more than re-distributions
from one part of society to the rent seekers. Much of the inequality
in our economy has been the result of rent seeking, because, to a
significant degree, rent seeking re-distributes money from those at
the bottom to those at the top.
But there is a broader economic consequence: the fight to acquire
rents is at best a zero-sum activity. Rent seeking makes nothing grow.
Efforts are directed toward getting a larger share of the pie rather
than increasing the size of the pie. But it’s worse than that: rent
seeking distorts resource allocations and makes the economy weaker. It
is a centripetal force: the rewards of rent seeking become so outsize
that more and more energy is directed toward it, at the expense of
everything else. Countries rich in natural resources are infamous for
rent-seeking activities. It’s far easier to get rich in these places
by getting access to resources at favorable terms than by producing
goods or services that benefit people and increase productivity.
That’s why these economies have done so badly, in spite of their
seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re
not Congo. But the rent-seeking dynamic is the same.
The Fairness Problem
People are not machines. They have to be motivated to work hard. If
they feel that they are being treated unfairly, it can be difficult to
motivate them. This is one of the central tenets of modern labor
economics, encapsulated in the so-called efficiency-wage theory, which
argues that how firms treat their workers—including how much they pay
them—affects productivity. It was, in fact, a theory elaborated nearly
a century ago by the great economist Alfred Marshall, who observed
that “highly paid labour is generally efficient and therefore not dear
labour.” In truth, it’s wrong to think of this proposition as just a
theory: it has been borne out by countless economic experiments.
While people will always disagree over the precise meaning of what
constitutes “fair,” there is a growing sense in America that the
current disparity in income, and the way wealth is allocated in
general, is profoundly unfair. There’s no begrudging the wealth
accrued by those who have transformed our economy—the inventors of the
computer, the pioneers of biotechnology. But, for the most part, these
are not the people at the top of our economic pyramid. Rather, to a
too large extent, it’s people who have excelled at rent seeking in one
form or another. And, to most Americans, that seems unfair.
People were surprised when the financial firm MF Global, headed by Jon
Corzine, suddenly collapsed into bankruptcy last year, leaving victims
by the thousands as a result of actions that may prove to have been
criminal; but given Wall Street’s recent history, I’m not sure people
were all that surprised to learn that several MF Global executives
would still be getting their bonuses. When corporate C.E.O.’s argue
that wages have to be reduced or that there must be layoffs in order
for companies to compete—and simultaneously increase their own
compensation—workers rightly consider what is happening to be unfair.
This in turn affects their efforts on the job, their loyalty to the
firm, and their willingness to invest in its future. The widespread
sense by workers in the Soviet Union that they were being mistreated
in exactly this way—exploited by managers who lived high on the
hog—played a major role in the hollowing out of the Soviet economy,
and in its ultimate collapse. As the old Soviet joke had it, “They
pretend to pay us, and we pretend to work.”
In a society in which inequality is widening, fairness is not just
about wages and income, or wealth. It’s a far more generalized
perception. Do I seem to have a stake in the direction society is
going, or not? Do I share in the benefits of collective action, or
not? If the answer is a loud “no,” then brace for a decline in
motivation whose repercussions will be felt economically and in all
aspects of civic life.
For Americans, one key aspect of fairness is opportunity: everyone
should have a fair shot at living the American Dream. Horatio Alger
stories remain the mythic ideal, but the statistics paint a very
different picture: in America, the chances of someone’s making it to
the top, or even to the middle, from a place near the bottom are lower
than in the countries of old Europe or in any other advanced
industrial country. Those at the top can take comfort from knowing
that their chances of becoming downwardly mobile are lower in America
than they are elsewhere.
There are many costs to this lack of opportunity. A large number of
Americans are not living up to their potential; we’re wasting our most
valuable asset, our talent. As we slowly grasp what’s been happening,
there will be an erosion of our sense of identity, in which America is
seen as a fair country. This will have direct economic effects—but
also indirect ones, fraying the bonds that hold us together as a
The Mistrust Problem
One of the puzzles in modern political economy is why anyone bothers
to vote. Very few elections actually turn on the ballot of a single
individual. There is a cost to voting—no state has an explicit penalty
for staying home, but it takes time and effort to get to the polls—and
there is seemingly almost never a benefit. Modern political and
economic theory assumes the existence of rational, self-interested
actors. On that basis, why anyone would vote is a mystery.
The answer is that we’ve been inculcated with notions of “civic
virtue.” It is our responsibility to vote. But civic virtue is
fragile. If the belief takes hold that the political and economic
systems are stacked, individuals will feel released from their civic
obligations. When that social contract is abrogated—when trust between
a government and its citizens fails—disillusionment, disengagement, or
worse is sure to follow. In the United States today, and in many other
democracies around the world, mistrust is on the ascendant.
It’s even built in. The head of Goldman Sachs, Lloyd Blankfein, made
it perfectly clear: sophisticated investors don’t, or at least
shouldn’t, rely on trust. Those who bought the products his bank sold
were consenting adults who should have known better. They should have
known that Goldman Sachs had the means, and the incentive, to design
products that would fail; that they had the means and the incentive to
create asymmetries of information—where they knew more about the
products than the buyers did—and the means and the incentive to take
advantage of those asymmetries. The people who fell victim to the
investment banks were, for the most part, well-off investors. But
deceptive credit-card practices and predatory lending have left
Americans more broadly with a sense that banks are not to be trusted.
Economists often underestimate the role of trust in making our economy
work. If every contract had to be enforced by one party taking the
other to court, our economy would be in gridlock. Throughout history,
the economies that have flourished are those where a handshake is a
deal. Without trust, business arrangements based on an understanding
that complex details will be worked out later are no longer feasible.
Without trust, each participant looks around to see how and when those
with whom he is dealing will betray him.
Widening inequality is corrosive of trust: in its economic impact,
think of it as the universal solvent. It creates an economic world in
which even the winners are wary. But the losers! In every
transaction—in every encounter with a boss or business or
bureaucrat—they see the hand of someone out to take advantage of them.
Nowhere is trust more important than in politics and the public
sphere. There, we have to act together. It’s easier to act together
when most individuals are in similar situations—when most of us are,
if not in the same boat, at least in boats within a range of like
sizes. But growing inequality makes it clear that our fleet looks
different—it’s a few mega-yachts surrounded by masses of people in
dugout canoes, or clinging to flotsam—which helps explain our vastly
differing views of what the government should do.
Today’s widening inequality extends to almost everything—police
protection, the condition of local roads and utilities, access to
decent health care, access to good public schools. As higher education
becomes more important—not just for individuals but for the future of
the whole U.S. economy—those at the top push for university budget
cuts and tuition hikes, on the one hand, and cutbacks in guaranteed
student loans, on the other. To the extent that they advocate student
loans at all, it’s as another opportunity for rent seeking: loans to
for-profit schools, without standards; loans that are
non-dischargeable even in bankruptcy; loans designed as another way
for those at the top to exploit those aspiring to get out of the
The “Be Selfish” Solution
Many, if not most, Americans possess a limited understanding of the
nature of the inequality in our society. They know that something has
gone wrong, but they underestimate the harm that inequality does even
as they overestimate the cost of taking action. These mistaken
beliefs, which have been reinforced by ideological rhetoric, are
having a catastrophic effect on politics and economic policy.
There is no good reason why the 1 percent, with their good educations,
their ranks of advisers, and their much-vaunted business acumen,
should be so misinformed. The 1 percent in generations past often knew
better. They knew that there would be no top of the pyramid if there
wasn’t a solid base—that their own position was precarious if society
itself was unsound. Henry Ford, not remembered as one of history’s
softies, understood that the best thing he could do for himself and
his company was to pay his workers a decent wage, because he wanted
them to work hard and he wanted them to be able to buy his cars.
Franklin D. Roosevelt, a purebred patrician, understood that the only
way to save an essentially capitalist America was not only to spread
the wealth, through taxation and social programs, but to put
restraints on capitalism itself, through regulation. Roosevelt and the
economist John Maynard Keynes, while reviled by the capitalists,
succeeded in saving capitalism from the capitalists. Richard Nixon,
known to this day as a manipulative cynic, concluded that social peace
and economic stability could best be secured by investment—and invest
he did, heavily, in Medicare, Head Start, Social Security, and efforts
to clean up the environment. Nixon even floated the idea of a
guaranteed annual income.
So, the advice I’d give to the 1 percent today is: Harden your hearts.
When invited to consider proposals to reduce inequality—by raising
taxes and investing in education, public works, health care, and
science—put any latent notions of altruism aside and reduce the idea
to one of unadulterated self-interest. Don’t embrace it because it
helps other people. Just do it for yourself.
Adapted from The Price of Inequality, by Joseph Stiglitz, to be
published in June by W.W. Norton & Company, Inc. (U.S.), and in July
by Allen Lane (U.K.); © 2012 by the author.