The Price of Inequality: How Today's Divided Society Endangers Our Future (2 page)

There is a corresponding myth—rags to riches in three generations—suggesting that those at the top have to work hard to stay there; if they don’t, they (or their descendants) quickly move down. But as chapter 1 will detail, this too is largely a myth, for the children of those at the top will, more likely than not, remain there.

In a way, in America and throughout the world, the youthful protesters took what they heard from their parents and politicians at face value—just as America’s youth did fifty years ago during the civil rights movement. Back then they scrutinized the values
equality
,
fairness
, and
justice
in the context of the nation’s treatment of African Americans, and they found the nation’s policies wanting. Now they scrutinize the same values in terms of how our economic and judicial system works, and they have found the system wanting for poor and middle-class Americans—not just for minorities but for
most
Americans of all backgrounds.

If President Obama and our court system had found those who brought the economy to the brink of ruin “guilty” of some malfeasance, then perhaps it would have been possible to say that the system was functioning. There was at least some sense of accountability. In fact, however, those who should have been so convicted were often not charged, and when they were charged, they were typically found innocent or at least not convicted. A few in the hedge fund industry have been convicted subsequently of insider trading, but this is a sideshow, almost a distraction. The hedge fund industry did not cause the crisis. It was the banks. And it is the bankers who have gone, almost to a person, free.

If no one is accountable, if no individual can be
blamed
for what has happened, it means that the problem lies in the economic and political system.

From social cohesion to class warfare

The slogan “we are the 99 percent” may have marked an important turning point in the debate about inequality in the United States. Americans have always shied away from class analysis; America, we liked to believe, is a middle-class country, and that belief helps bind us together. There should be no divisions between the upper and the lower classes, between the bourgeoisie and the workers.
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But if by a class-based society we mean one in which the prospects of those at the bottom to move up are low, America may have become even more class-based than old Europe, and our divisions have now become even greater than those there.
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Those in the 99 percent are continuing with the “we’re all middle class” tradition, with one slight modification: they recognize that we’re actually not all moving up together. The vast majority is suffering together, and the very top—the 1 percent—is living a different life. The “99 percent” marks an attempt to forge a new coalition—a new sense of national identity, based not on the fiction of a universal middle class but on the reality of the economic divides within our economy and our society.

For years there was a deal between the top and the rest of our society that went something like this: we will provide you jobs and prosperity, and you will let us walk away with the bonuses. You all get a share, even if we get a bigger share. But now that tacit agreement between the rich and the rest, which was always fragile, has come apart. Those in the 1 percent are walking off with the riches, but in doing so they have provided nothing but anxiety and insecurity to the 99 percent. The majority of Americans have simply not been benefiting from the country’s growth.

Is our market system eroding fundamental values?

While this book focuses on equality and fairness, there is another fundamental value that our system seems to be undermining—a sense of
fair play.
A basic sense of values should, for instance, have led to guilt feelings on the part of those who were engaged in predatory lending, who provided mortgages to poor people that were ticking time bombs, or who were designing the “programs” that led to excessive charges for overdrafts in the billions of dollars. What is remarkable is how few seemed—and still seem—to feel guilty, and how few were the whistleblowers. Something has happened to our sense of values, when the end of making more money justifies the means, which in the U.S. subprime crisis meant exploiting the poorest and least-educated among us.
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Much of what has gone on can only be described by the words “moral deprivation
.
” Something wrong happened to the moral compass of so many of the people working in the financial sector and elsewhere. When the norms of a society change in a way that so many have lost their moral compass, it says something significant about the society.

Capitalism seems to have changed the people who were ensnared by it. The brightest of the bright who went to work on Wall Street were like most other Americans except that they did better in their schools. They put on hold their dreams of making a lifesaving discovery, of building a new industry, of helping the poorest out of poverty, as they reached out for salaries that seemed beyond belief, often in return for work that (in its number of hours) seemed beyond belief. But then, too often, something happened: it wasn’t that the dreams were put on hold; they were forgotten.
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It is thus not surprising that the list of grievances against corporations (and not just financial institutions) is long and of long standing. For instance, cigarette companies stealthily made their dangerous products more addictive, and as they tried to persuade Americans that there was no “scientific evidence” of their products’ dangers, their files were filled with evidence to the contrary. Exxon similarly used its money to try to persuade Americans that the evidence on global warming was weak, though the National Academy of Sciences had joined every other national scientific body in saying that the evidence was strong. And while the economy was still reeling from the misdeeds of the financial sector, the BP oil spill showed another aspect of corporate recklessness: lack of care in drilling had endangered the environment and threatened jobs of thousands of those depending on fishing and tourism in the Gulf of Mexico.

If markets had actually delivered on the promises of improving the standards of living of most citizens, then all of the sins of corporations, all the seeming social injustices, the insults to our environment, the exploitation of the poor, might have been forgiven. But to the young
indignados
and protestors elsewhere in the world, capitalism is failing to produce what was promised, but is delivering on what was not promised—inequality, pollution, unemployment, and,
most important of all
, the degradation of values to the point where everything is acceptable and no one is accountable.

Failure of political system

The political system seems to be failing as much as the economic system. Given the high level of youth unemployment around the world—near 50 percent in Spain and 18 percent in the United States
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—it was perhaps more surprising that it took so long for the protest movements to begin than that protests eventually broke out. The unemployed, including young people who had studied hard and done everything that they were supposed to do (“played by the rules,” as some politicians are wont to say), faced a stark choice: remaining unemployed or accepting a job far below that for which they were qualified. In many cases there was not even a choice: there simply were no jobs, and hadn’t been for years.

One interpretation of the long delay in the arrival of mass protests was that, in the aftermath of the crisis, there was hope in democracy, faith that the political system would work, that it would hold accountable those who had brought on the crisis and quickly repair the economic system. But years after the breaking of the bubble, it became clear that our political system had failed, just as it had failed to prevent the crisis, to check the growing inequality, to protect those at the bottom, to prevent the corporate abuses. It was only then that protesters turned to the streets.

Americans, Europeans, and people in other democracies around the world take great pride in their democratic institutions. But the protesters have called into question whether there is a
real
democracy. Real democracy is more than the right to vote once every two or four years. The choices have to be meaningful. The politicians have to listen to the voices of the citizens. But increasingly, and especially in the United States, it seems that the political system is more akin to “one dollar one vote” than to “one person one vote.” Rather than correcting the market’s failures, the political system was reinforcing them.

Politicians give speeches about what is happening to our values and our society, but then they appoint to high office the CEOs and other corporate officials who were at the helm in the financial sector as the system was failing so badly. We shouldn’t have expected the architects of the system that has not been working to rebuild the system to make it work, and especially work for most citizens—and they didn’t.

The failures in politics and economics are related, and they reinforce each other. A political system that amplifies the voice of the wealthy provides ample opportunity for laws and regulations—and the administration of them—to be designed in ways that not only fail to protect the ordinary citizens against the wealthy but also further enrich the wealthy at the expense of the rest of society.

This brings me to one of the central theses of this book: while there may be underlying economic forces at play, politics have shaped the market, and shaped it in ways that advantage the top at the expense of the rest. Any economic system has to have rules and regulations; it has to operate within a legal framework. There are many different such frameworks, and each has consequences for distribution as well as growth, efficiency, and stability. The economic elite have pushed for a framework that benefits them at the expense of the rest, but it is an economic system that is neither efficient nor fair. I explain how our inequality gets reflected in every important decision that we make as a nation—from our budget to our monetary policy, even to our system of justice—and show how these decisions themselves help perpetuate and exacerbate this inequality.
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Given a political system that is so sensitive to moneyed interests, growing economic inequality leads to a growing imbalance of political power, a vicious nexus between politics and economics. And the two together shape, and are shaped by, societal forces—social mores and institutions—that help reinforce this growing inequality.

What the protesters are asking for,
and what they are accomplishing

The protesters, perhaps more than most politicians, grasped what was going on. At one level, they are asking for so little: for a chance to use their skills, for the right to decent work at decent pay, for a fairer economy and society, one that treats them with dignity. In Europe and the Unites States, their requests are not revolutionary, but evolutionary. At another level, though, they are asking for a great deal: for a democracy where people, not dollars, matter; and for a market economy that delivers on what it is supposed to do. The two demands are related: unfettered markets do not work well, as we have seen. For markets to work the way markets are supposed to, there has to be appropriate government regulation. But for that to occur, we have to have a democracy that reflects the general interests—not the special interests or just those at the top.

The protesters have been criticized for not having an agenda, but such criticism misses the point of protest movements. They are an expression of frustration with the political system and even, in those countries where there are elections, with the electoral process. They sound an alarm.

In some ways the protesters have already accomplished a great deal: think tanks, government agencies, and the media have confirmed their allegations, the failures not just of the market system but of the high and
unjustifiable
level of inequality. The expression “we are the 99 percent” has entered into popular consciousness. No one can be sure where the movements will lead. But of this we can be sure: these young protesters have already altered public discourse and the consciousness of ordinary citizens and politicians alike.

C
ONCLUDING
C
OMMENTS

In the weeks following the protest movements in Tunisia and Egypt, I wrote (in an early draft of my
Vanity Fair
article),

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: when will it come to America? In important ways, our own country has become like one of these distant, troubled places. In particular, there is the stranglehold exercised on almost everything by that tiny sliver of people at the top—the wealthiest 1 percent of the population.

It was to be but a few months before those protests reached the shores of this country.

This book attempts to fathom the depths of one aspect of what has happened in the United States—how we became a society that was so unequal, with opportunity so diminished, and what those consequences are likely to be.

The picture I paint today is bleak: we are only just beginning to grasp how far our country has deviated from our aspirations. But there is also a message of hope. There are alternative frameworks that will work better for the economy as a whole and, most importantly, for the vast majority of citizens. Part of this alternative framework entails a better balance between markets and the state—a perspective that is supported, as I shall explain, both by modern economic theory and by historical evidence.
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In these alternative frameworks, one of the roles that the government undertakes is to redistribute income, especially if the outcomes of market processes are too disparate.

Critics of redistribution sometimes suggest that the cost of redistribution is too high. The disincentives, they claim, are too great, and the gains to the poor and those in the middle are more than offset by the losses to the top. It is often argued on the right that we could have more equality, but only at the steep price of slower growth and lower GDP. The reality (as I will show) is just the opposite: we have a system that has been working overtime to move money from the bottom and middle to the top, but the system is so inefficient that the gains to the top are far less than the losses to the middle and bottom. We are, in fact, paying a high price for our growing and outsize inequality: not only slower growth and lower GDP but even more instability. And this is not to say anything about the other prices we are paying: a weakened democracy, a diminished sense of fairness and justice, and even, as I have suggested, a questioning of our sense of identity.