Inequality Is Holding Back the Recovery

The Great DivideThe re-election of President Obama was like Rorschach test, subject to many interpretations. In this election, each side debated issues that deeply worry me: the long malaise into which economy seems to be settling, and the growing divide between the 1% and the rest, inequality not only of outcomes but also of opportunity. To me, these problems are two sides of same coin: with inequality at its highest level since before Depression, robust recovery will be difficult in the short term, and American dream, a good life in exchange for hard work, is slowly dying. Politicians typically talk about rising inequality and sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues, as it did in a special feature in October, that the magnitude and nature of the country’s inequality represent serious threat to America, we should know something has gone horribly wrong. And yet, after four decades of widening inequality and the greatest economic downturn since the Depression, we haven’t done anything about it. There are four major reasons inequality is squelching our recovery. Most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1% of income earners took home 93% of the growth in incomes in 2010, the households in the middle, who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators, have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable, it was reliant on bottom 80% consuming about 110% of their income. Second, the hollowing out of the middle class since 1970s, a phenomenon interrupted only briefly in the 1990s, means they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses. Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. Recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean government cannot make the vital investments in infrastructure, education, research and health are crucial for restoring long-term economic strength. Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s, the last time inequality of income and wealth in the United States was so high, ended with the Great Crash and Depression. International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson. Our skyrocketing inequality, so contrary to our meritocratic ideal of America as a place where anyone with hard work and talent can “make it”, means those who are born to parents of limited means are likely never to live up to their potetial (…..)



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8 Responses to Inequality Is Holding Back the Recovery

  1. Professor Uziel Nogueira says: Prof Joseph Stiglitz became one of my favorite economists since I read his papers and attended his lectures in Washington DC circuit. His strong views on income inequality in America makes him popular overseas and among college students. However, I doubt very much his message on the growing divide between the 1% and the rest can gain traction one day at the center of power and decision a.i., the Congress and White House.

  2. The best Inaugural Addresses make an argument for something. President Obama’s second one, which surely has to rank among the best of the past half-century, makes an argument for a pragmatic and patriotic progressivism. His critics have sometimes accused him of being an outsider, but Obama wove his vision from deep strands in the nation’s past. He told an American story that began with the Declaration and then touched upon the railroad legislation, the Progressive Era, the New Deal, the highway legislation, the Great Society, Seneca Falls, Selma and Stonewall. Turning to the present, Obama argued that America has to change its approach if it wants to continue its progress. Modern problems like globalization, technological change, widening inequality and wage stagnation compel us to take new collective measures if we’re to pursue the old goals of equality and opportunity. Obama wasn’t explicit about why we have failed to meet these challenges. But his critique was implicit. There has been too much “me” — too much individualism and narcissism, too much retreating into the private sphere. There hasn’t been enough “us,” not enough communal action for the common good. The president then described some of the places where collective action is necessary: to address global warming, to fortify the middle class, to defend Medicare and Social Security, to guarantee equal pay for women and equal rights for gays and lesbians. During his first term, Obama was inhibited by his desire to be postpartisan, by the need to not offend the Republicans with whom he was negotiating. Now he is liberated. Now he has picked a team and put his liberalism on full display. He argued for it in a way that was unapologetic. Those who agree, those who disagree and those of us who partly agree now have to raise our game. We have to engage his core narrative and his core arguments for a collective turn (…..) Obama made his case beautifully. He came across as a prudent, nonpopulist progressive. But I’m not sure he rescrambled the debate. We still have one party that talks the language of government and one that talks the language of the market. We have no party that is comfortable with civil society, no party that understands the ways government and the market can both crush and nurture community, no party with new ideas about how these things might blend together. But at least the debate is started. Maybe that new wind will come.

  3. I listen to presidential speeches with an ear to the parts about personal finance. In President Obama’s second inaugural address, he made a few interesting points. The first reference came when he said, “For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it.” I immediately wondered: Do we as a nation really understand this? (…..) I don’t believe enough people, as Obama claimed, “recognize that no matter how responsibly we live our lives, any one of us at any time may face a job loss or a sudden illness or a home swept away in a terrible storm.” Income inequality is increasingly dividing our country. Many haves think people only need to pull themselves up by their bootstraps. They arrogantly believe they have achieved success on their own. And many have-nots often don’t help their case when they act financially irresponsibly. And yet even when they do make mistakes, we should have compassion and fight to maintain the social safety nets — Medicaid, Medicare, Social Security — that, as Obama said, “do not sap our initiative. They strengthen us.” Obama still has hope. “We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else,” he said. I was that little girl. I’ve known hunger. I nearly ended up in foster care. But I believed that I could succeed. And I did it. But not alone. I had help. I had my grandmother. And she had help through the state medical assistance program that she relied on so I could get treatment for rheumatoid arthritis. Rising tides do lift all boats. Maybe soon, we the people will agree.

  4. “We are the ones we’ve been waiting for. We are the change we seek,” candidate Barack Obama said in 2008. At the time, his comments came in for criticism: They were narcissistic; they were tautological; they didn’t make a whole lot of sense. But in the aftermath of Obama’s 2012 reelection and his second inaugural address, his 2008 remarks seem less a statement of self-absorption than one of prophecy. There is an Obama majority in American politics, symbolized by Monday’s throng on the Mall, whose existence is both the consequence of profound changes to our nation’s composition and values and the cause of changes yet to come. That majority, as the president made clear in his remarks, would not exist but for Americans’ struggles to expand our foundational belief in the equality of all men. The drive to expand equality, he said in his speech’s most historically resonant line, “is the star that guides us still, just as it guided our forebears through Seneca Falls and Selma and Stonewall.” Our history, Obama argued, is one of adapting our ideals to a changing world. His speech (like recent books by Michael Lind and my Post colleague E.J. Dionne Jr.) reclaimed U.S. history from the misrepresentations of both constitutional originalists and libertarian fantasists. “Fidelity to our founding principles requires new responses to new challenges,” the president said. “Preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today’s world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias” (…..) The Obama Majority — its existence and mobilization — is what enabled the president to deliver so ideological an address. No such inaugural speech has been delivered since Ronald Reagan took office in 1981, demanding the curtailment of government programs and secure in the knowledge that much of the white working class had shifted its allegiance away from the Democrats and supported his attack on the public sector and minority rights. On Monday, Obama, secure in the knowledge that the nation’s minorities had joined with other liberal constituencies to form a new governing coalition, voiced their demands to ensure equality and to preserve and expand the government’s efforts to meet the nation’s challenges. As he left the stage, he stopped and turned to marvel at the crowd, at the new American majority they represented. They were the ones he, and we, were waiting for.

  5. In his essay “Politics as a Vocation,” the German sociologist Max Weber famously wrote that “politics is a strong and slow boring of hard boards.” In this sense, it seems possible that Barack Obama has finally come to embrace the vocation of politics as he begins his second term as president. I’m saddened by some of what Obama has learned on the way to becoming the politician who can drill those hard boards. I like his voice better when he tries to speak to all Americans, including those who didn’t vote for him, than when he offers a programmatic agenda, as he did in his second inaugural speech. I found his speech to mourners in Newtown, Conn., more presidential than his address Monday at the Capitol, precisely because it was less political (…..) The Obama who came into the White House in 2009 was a hothouse flower. What he concealed, as Maraniss wrote, was his inexperience. This personality has now learned and evolved; he’s been in bitter fights with an implacable GOP leadership, Russian president and Israeli prime minister.

    The dreamer is gone, replaced by the politician. That’s the tougher, more doctrinaire person we watched take the oath of office Monday.

    Weber gave his celebrated lecture about politics in 1919 in Munich to an audience that had just come through a shattering war and was trying to find its bearings. He gave a companion talk about “Science as a Vocation” that emphasized its independence from politics. “The primary task of a useful teacher is to teach his students to recognize ‘inconvenient’ facts — I mean facts that are inconvenient for their party opinions.” But the person who would succeed in politics must have something different, an inner certainty born, sometimes, of failure. As Weber wrote: “Only he has the calling for politics who is sure that he shall not crumble when the world from his point of view is too stupid or too base for what he wants to offer.” This strikes me as an apt description of Obama, circa 2013.

  6. The confrontation of two views of modern capitalism – neoliberal capitalism and state capitalism – will determine the social market economy that forms the New Pragmatism in the future. Even the International Monetary Fund, for many years the hub of economic orthodoxy, admits that policy should be focused on increasing tax revenue, rather than on cutting budget expenditure (at cost of socioeconomic inequality). How to reconcile the practical approach with an approach which is fundamentally principled? Is it possible to practice economic pragmatism and remain a man of principle? Is it worth it? It is, indeed, both possible and worthwhile. If we want to live in a world of peace and harmonious development – and we certainly do – new values must be introduced to the process of economic reproduction, however without disregarding the requirements of pragmatism, which is a fundamental and indispensable feature of rational economic management. We need to adopt a more pragmatic approach, favoring multiculturalism and one emanating from a system of values that promote participatory globalization, social cohesion and sustainable development. There is no contradiction, as the core values underlying the social management process and its economic purposes are concordant to a large extent. The most important aspect of the two approaches is a balanced, long-term socio-economic development. Its equilibrium should be three-fold: (1) sustainable economic growth, or growth associated with goods and capital markets, as well as investment, finance and labor; (2) socially sustainable growth, or growth associated with a fair, socially acceptable distribution of income and an appropriate participation of the main population groups in basic public services; (3) environmentally sustainable growth, or growth associated with maintaining adequate relations between our economic activity and nature. Therefore, we do not have to sacrifice basic principles on the altar of short-term economic matters or tactical issues but, instead, adapt practical strategic activities to these principles. This imperative charts the evolutionary path for the political economy of the future.

    Income relations are of key importance for long-term economic growth. The latter is particularly enhanced by a balanced distribution of income. This conclusion is drawn from a comparative study of long time series and is indisputable. Economic growth is more sustainable in countries with relatively low income inequalities. What is more, income relations in these countries proved more important for their economic growth than the liberalization of trade or the quality of political institutions. This observation points at aspects to which future development policies should pay particular attention (…..)

  7. President Obama’s second Inaugural Address used soaring language to reaffirm America’s commitment to the dream of equality of opportunity: “We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else, because she is an American; she is free, and she is equal, not just in the eyes of God but also in our own.” The gap between aspiration and reality could hardly be wider. Today, the United States has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity. This is especially tragic: While Americans may differ on the desirability of equality of outcomes, there is near-universal consensus that inequality of opportunity is indefensible. The Pew Research Center has found that some 90 percent of Americans believe that the government should do everything it can to ensure equality of opportunity. Perhaps a hundred years ago, America might have rightly claimed to have been the land of opportunity, or at least a land where there was more opportunity than elsewhere. But not for at least a quarter of a century. Horatio Alger-style rags-to-riches stories were not a deliberate hoax, but given how they’ve lulled us into a sense of complacency, they might as well have been. It’s not that social mobility is impossible, but that the upwardly mobile American is becoming a statistical oddity. According to research from the Brookings Institution, only 58 percent of Americans born into the bottom fifth of income earners move out of that category, and just 6 percent born into the bottom fifth move into the top. Economic mobility in the United States is lower than in most of Europe and lower than in all of Scandinavia. Another way of looking at equality of opportunity is to ask to what extent the life chances of a child are dependent on the education and income of his parents. Is it just as likely that a child of poor or poorly educated parents gets a good education and rises to the middle class as someone born to middle-class parents with college degrees? Even in a more egalitarian society, the answer would be no. But the life prospects of an American are more dependent on the income and education of his parents than in almost any other advanced country for which there is data (…..)

  8. Professor Uziel Nogueira says: I have tremendous respect for Prof Joe Stiglitz academic expertise on the highly sensitive question of income inequality in the US. He was the first high profile economist to tackle the question during his tenure at the White House and the World Bank. The 99% versus the 1% became THE topic of debate between Obama and Romney during last election. The American electorate took the side of Obama in the question. As Prof Stiglitz succinctly put it : “The gap between aspiration and reality could hardly be wider. Today, the United States has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity”. Prof Joe Stiglitz shows that equality of opportunity in education is no longer the great equalizer of US society. The game is stacked against the poor and middle class. Is time to address the issue.


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