"This dichotomy (inequality) is bound to have social and political consequences."

A book review from The Economist, reprinted in its entirety.

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Economics: An ordinary Joe (from the print edition of The Economist)

The Price of Inequality: How Today’s Divided Society Endangers our Future. By Joseph Stiglitz. 

THE American dream is that any child can make it from the bottom to the top. That may still be true in politics; the son of a Kenyan immigrant, raised partly by his grandparents, is now president of the United States. But it is much less true, in economic terms, than most Americans think. Social mobility is less easy in America than in other countries. For example, three-quarters of Danes born in the lowest-earning 20% of the population escape their plight in adulthood. Seven out of ten poor children in supposedly class-ridden Britain achieve the same feat. But fewer than six in ten Americans do so.

Similarly, with rags-to-riches stories. It is far less common for Americans from the bottom 20% in childhood to move into the top 20% in adulthood than it is in Denmark or in Britain. On the whole, America’s wealthy prosper while the average citizen struggles; the richest 1% of Americans gained 93% of the additional income created in 2010. The pay workers get has failed to move in line with productivity in the past 30 years. But Americans have yet to realise the extent of this tectonic shift. In a survey conducted in 2011 the average respondent thought that the richest fifth of the population had 60% of the wealth, not 85% as is the case. The respondents’ ideal income distribution would be for the top quintile to have just 30% of the wealth.

Joseph Stiglitz, a Nobel prize-winner in economics and a regular critic of liberal capitalism, addresses this issue in his new book, which he wrote in response to the Occupy Wall Street protesters. Indeed, he argues that their slogan, “We are the 99%”, echoes an article entitled, “Of the 1%, by the 1%, for the 1%”, that he wrote in Vanity Fair in May 2011.

To Mr Stiglitz, this inequality is the result of public policy being captured by an elite who have feathered their own nests at the expense of the rest. They have used their power to distort political debate, pushing through tax cuts to favour the rich and adjusting monetary policy to favour the banks. Many of the new rich are not entrepreneurs but “rent-seekers”, he says, who use monopoly power to boost profits.

Mr Stiglitz’s views are representative of clever, leftish America and Mr Stiglitz is (mostly) skilled at making his argument. Imagine, he says, what it would be like if the world had free movement of labour, but not of capital. “Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital.” The result would be a much more equal society.

Mr Stiglitz’s argument would benefit, however, from a better sense of history and geography. He points to the period between 1950 and 1980 as one where inequality was much reduced. But that was a highly unusual time. For much of recorded history there has been a huge gap between a wealthy landowning class and the rest; the Rockefellers and Carnegies were much richer (in real terms) than any modern plutocrat. Mr Stiglitz also views the housing boom and bust as another result of misguided American policy, but Spain and Ireland had property bubbles too—and they are much more equal societies.

When it comes to solutions to the inequality problem, Mr Stiglitz wants a top income tax rate of “well in excess of” 50%, targeted fiscal stimulus and greater bank regulation. Here, perhaps, he might have been more open about the trade-offs. Controls on bank leverage, caps on interest rates and greater protection for bankrupts are all likely to reduce bank lending at a time when there already is a credit squeeze. He admits that the 2009 fiscal stimulus was “not as well designed as it could have been”, but blithely hopes that the convoluted American budget-setting process will result in much better stimulus packages in future.

Whether or not he has the right answers, Mr Stiglitz is surely right to focus on the issue. Across the developed world, the average worker is suffering a squeeze in living standards while bankers and chief executives are still doing very nicely. This dichotomy is bound to have social and political consequences.