The New York Times debate on inequality in America and the means to curb it.

Political Causes, Political Solutions

 Joseph E. Stiglitz

The International Monetary Fund is absolutely right that inequality is bad for stability. But even before the I.M.F. documented this relationship, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System identified increasing inequality as one of the most important factors contributing to the Great Recession of 2008.

In “The Price of Inequality,” I explain the channels through which inequality commonly leads to instability. Both were in evidence in our recent crisis.

Well before the crisis, there was ample evidence that financial market deregulation was systematically associated with instability. One is that inequality leads to weak aggregate demand — or demand that would be weak in the absence of countervailing actions, say by the Federal Reserve. The reason is simple: Those at the bottom and middle consume essentially all of their income; those at the top save 15 percent, 20 percent, or more. When money shifts from the bottom to the top — as has occurred in recent decades in the United States — this low demand would lead to unemployment and an anemic economy. The Fed, though, stepped in, with low interest rates and lax regulation. It worked, creating a bubble, which supported a consumption boom. But it was clear that it was only a temporary palliative.

Another channel is the link between economic inequality (at least in the extreme form that it has reached in the United States) and political inequality, imbalances in politics that have allowed corporations undue influence in shaping our laws and regulations, especially those pertaining to financial markets.

Well before the crisis, there was ample evidence in experiences throughout the world that financial market deregulation was systematically associated with instability. I saw it up close as chief economist of the World Bank. So, too, for the United States. The allure of the extra profits that would accrue to the banks from deregulation was irresistible, and they invested heavily. Their returns on these political investments — in deregulation and bailouts — were far higher than their return on their more conventional investments. Financial market deregulation led to more instability, not higher sustained growth.

A policy basket that addresses inequality would be multifaceted. A large component would be a more equitable tax system – including closing the loopholes that benefit the wealthiest, and making capital gains taxed at the same rate as wages and salaries -- the pay that people get from their work. Much of the excesses at the top are a result of lack of enforcement of competition laws, deficiencies in corporate governance, and inadequate regulation of the financial industry. Better and more equal access to education -- including more Pell Grants and better student loan programs -- are essential if we are to strengthen incomes in the middle and bottom. So too are stronger unions and more effective enforcement of anti-discrimination laws. And stronger systems of social protection are necessary if we are to reduce poverty.

The critical decisions are taken in the political arena -- and that's why the most important reform is stronger protections of our democracy against the disproportionate influence of money in politics.

Unfortunately, the policies advocated by one of the candidates in this election would almost surely make inequality worse. Meanwhile, the recession has increased inequalities, both in income and wealth. This does not bode well for our future.

A Big Gap Means There Is Room to Move Up

Diana Furchtgott-Roth

Increasing income inequality isn’t an obstacle to economic growth; it’s a natural result of economic growth. And growth is unlikely to reduce inequality. As economies grow, people get richer, and some people get much richer — think Steve Jobs of Apple or Mark Zuckerberg of Facebook. At the same time, low-wage jobs allow unskilled workers, like teenagers, to get their foot on the first rung of the career ladder — think summer jobs as a lifeguard or scooping ice cream at Baskin Robbins.

What’s important to economic growth and to social cohesion is job mobility. Can ice cream scoopers become accountants or successful entrepreneurs? For this we need to dramatically improve our education system and raise high school graduation rates above the current level of 75 percent.

A Pew Research Center survey released on Tuesday indicates that almost half the adults in China are concerned about inequality. But 70 percent say they’re better off than they were five years earlier, and 92 percent say they have higher standards of living than their parents. No one believes that the Chinese would be better off poorer and more equal.

In America, growing inequality has been caused partly by rising numbers of two-earner couples. In the 1980s, women moved into previously male-dominated professions. At the same time, Americans delayed marriage and divorces increased. In 2011, 75 percent of households in the top fifth of the income distribution had two income earners, and 22 percent had one income earner. In the lowest fifth, only 5 percent of households have two income earners, and 95 percent have one or no income earners.

No one is suggesting that women stay home or remain in their traditional professions, like teaching and nursing. But one of the fastest ways to create more equality would be to rule that only one member of a family is allowed to work full-time.

What’s important to economic growth is job mobility. It's fine if the ladder is tall, as long as someone on the bottom rung can climb. Redistributionist measures to reduce inequality, like higher taxes, discourage growth. Two years ago, Britain raised its top tax rate to 50 percent from 40 percent, but will lower it to 45 percent next year. The chancellor of the exchequer, George Osborne, said the higher rate was not raising revenue as forecast. “No chancellor can justify a tax rate that damages our economy and raises next to nothing,” he said. “It’s as simple as that.”

Working Harder, and Earning Less

Michael C. Dawson

The social consequences of extraordinary levels of economic inequality within the United States directly and indirectly harm the prospects for economic growth. The direct effects are substantial. The country’s ability to remain economically competitive is undermined when four million qualified young people are, for economic reasons, unable to attend a four-year college. This is a growing pool of talented individuals who should be, but will not be, fulfilling their potential, and therefore will not be contributing as much as they could to economic growth. There is an indirect obstacle as well: As we have seen in Western Europe, these young people will become increasingly disenchanted, which brings the increased probability of social unrest, which in turn also undermines growth.

How much longer can economic growth be sustained if it does not benefit the overwhelming majority of Americans? The rise in the number of qualified students unable to attend school is correlated with the devastating shrinking of programs like Pell grants to provide adequate aid for academically able but economically distressed youth. We have all seen that the huge tax cuts enacted during the Bush administration have fueled vast gains for the very richest Americans while providing virtually no gains to the bottom 60 percent of the income distribution. But we should remember that those cuts also have made it harder and harder for the government to invest in the country’s youth and in our future prosperity.

Another correlate of the growing income inequality has been the increasing swath of the American public that is becoming permanently detached from labor markets. Growing income inequality has led black and Latino workers to suffer sustained unemployment at a disastrous level. Once again, the result of sustained economic distress is most likely an increase in civil unrest that is not only socially and politically costly to the polity, but fiscally costly as well.

Those at the bottom have greater health problems and are more likely to use expensive medical services, and in general they need more aid from the state. By the standards of modern industrialized countries, our nation’s health care system is both ungenerous and expensive; the rise of health care spending for these permanently devastated populations will serve as another brake on economic growth.

The harmful effects of economic inequality on growth go on and on, but I will make only one final point: Economists are analyzing what some have called the “decoupling” of productivity from economic gains. Americans today work more than any of their counterparts abroad — a lot more. Yet wages have remained stagnant, while greater percentages of wealth go to the very wealthy here than do in other nations or than went to wealthy Americans in past eras.

Social mobility is much less common in the U.S. than it once was, and much less common than in other economic powers today. How long will middle- and working-class Americans be willing to work so much harder than their peers if the American dream largely no longer applies to the great majority of citizens? How much longer can economic growth be sustained if it does not benefit the overwhelming majority of citizens within the United States?

All Will Benefit If More Are Secure

Jacob S. Hacker

In the wake of the financial crisis, an increasing number of thoughtful analysts are arguing that inequality threatens growth. Yet the biggest effects of rising inequality are probably not on growth itself, but on the ability of growth to translate into rising living standards, opportunity and security for the broad middle class.

And the most likely reason for these negative effects is that rising inequality distorts our politics — leading to weaker representation for the middle class and increased gridlock — so that sensible policy choices are more difficult.

Economic inequality creates political inequality, making it harder to increase middle-class living standards, security, opportunity and, yes, growth.

Let’s start with the facts. Over the last generation, less equal countries like the U.S. do not seem to have grown consistently faster. If rising inequality doesn’t lead to higher growth, then, by definition, it lowers middle-class income gains. In the United States, overall productivity has grown relatively strongly. The rewards of this growth, however, have gone mostly to the top.

Yet even this understates the problem. In addition to income growth, Americans also care about opportunity and security. And both have stalled or declined despite growing productivity. Long-term upward mobility has stagnated as inequality has grown. Intergenerational mobility — how kids do relative to their parents — is lower in the United States than in almost any other rich nation.

At the same time, economic security has eroded. Private health insurance is less common, income instability has risen, people’s private safety net of wealth has been decimated, and Americans are less well prepared for retirement.

These are not insoluble problems, and recent research and historical experience strongly indicate that tackling them would accelerate, not hinder, overall growth. As we have argued in a recent report titled, “Prosperity Economics,” such win-win policies include immediate investments in productive physical capital like infrastructure (which would put people back to work and increase future growth) as well long-term investment in pre-K and college education.

They would also include measures to tackle health costs and give workers (particularly in low-wage sectors) greater bargaining power and more professionalized career paths. And they would require a serious assault on special deals for industries like the financial and energy sectors that impose risks and costs onto our society for which they don’t have to pay.

The problem of course is the politics, and here we come to most fundamental means by which rising inequality has affected the economic lives of most Americans — for the worse.

As growing inequality has translated into rising political inequality, it has been harder and harder to act on sensible prescriptions that would increase middle-class living standards, security and opportunity, as well as overall economic growth. Ensuring that today’s economic winners don’t dominate our political process may be the most important way to improve the quality of economic life for all Americans.

Inequality Is Not What We Imagine

Scott Winship

Rising inequality in America, according to a number of economists and many more pundits and political actors, has hurt economic growth. By reducing economic mobility, it is said to have inefficiently allocated talent. Similarly, outsize salaries in the financial sector are said to distort career decisions of college graduates. Inequality, others say, reduces worker motivation and happiness and social trust, which affect productivity. It lowers aggregate demand because the rich consume a lower percentage of their income and in ways that do not promote future growth. It reduces entrepreneurship by saddling college graduates with student debt.

These contentions make intuitive sense and are eminently plausible. The problem with most analyses of rising inequality is that they do not take the all-important step of actually examining the evidence. Such ad hoc hypotheses about inequality’s effects on growth are easy to spin. From the right, Edward Conard and others have just as plausibly argued that rising inequality gives people the incentives to take risks and work hard — elements crucial for robust economic growth; if it would induce more people to pursue Steve Jobs levels of innovation, maybe we need higher inequality still!

The evidence does not give much reason to worry that inequality saps growth, or much reason to think that it increases it.

What does the evidence show? The liberal Center for American Progress recently released a report purporting to show how inequality hurts the economy. If the research on the link between inequality and growth persuasively showed a strong connection, you can be sure that the center would have trumpeted it. Here is what the authors, Heather Boushey and Adam S. Hersh, instead wrote:

There is, of course, a rich literature on the relationship between inequality and growth. Although there are many conflicting views, there is ample evidence that inequality can, in fact, hurt growth under many circumstances. But this literature focuses mostly on the experience of developing countries, and its applicability to the challenges currently facing the United States is not entirely clear.

Widely cited research by I.M.F. economists — embraced by the chairman of the Council of Economic Advisors, Alan Krueger, in a speech in January and highlighted by Annie Lowrey in The New York Times this week — has this very problem of focusing primarily on developing countries. Inequality in dictatorships and oligarchies with mass poverty is a very different matter than inequality in rich democracies.

Indeed, research by Christopher Jencks of Harvard University looking at the experience of 12 developed countries over the past century indicates no relationship across those countries between the share of income received by the top 1 percent and economic growth rates. Since 1960, however, countries with higher inequality have experienced more growth. Boushey and Hersh do not cite Jencks’s study but nevertheless conclude that, “Ultimately, data and methodological issues mean that analyses are too imprecise to deliver definitive answers to this old and central question in economics research.”

Studies that look at some of the specific hypotheses mentioned above also are inconclusive or refute the idea that inequality is harmful to growth. Inequality does not appear to lead to financial crises. Its link to opportunity is highly questionable. The evidence that it distorts political outcomes is similarly thin and again based largely on developing countries.

It is not enough to construct arguments about why inequality might matter; in the end this is a question we can subject to empirical testing. The evidence does not give much reason to worry that inequality saps growth, or much reason to think that it increases it.

We Need Latin American Style Affirmative Action

Tanya Katerí Hernández

While the public conversation in the United States has only recently broached the concern that income inequality is an obstacle to economic growth, the rest of the Americas have been much more cognizant of the deleterious effects of income inequality. In fact, because Latin America has one of the highest levels of inequality in the world, its efforts to address inequality offer a useful comparison. Notably, part of the growing Latin American discussion about income inequality has been the observation that the social exclusion of persons of African and indigenous ancestry has inextricably linked race and class in ways that impede economic growth. Indeed, the Organization of American States has stated that the pervasive existence of racial discrimination in the region will hinder the ability to meet the objectives of the United Nations Millennium Development Goals for 2015, which each nation committed to in 2000 as a precise and measurable manner of reducing extreme poverty.

The U.S. could benefit from policies that address both race and class barriers to economic growth.

This has led some Latin American countries to institute national policies that overtly address the intersection of class-based and race-based inequality. For example, in August 2012 Brazilian legislators enacted “The Law of Social Quotas” which requires public federal universities to reserve half of all new admission spots for public high school graduates who meet the socio-economic threshold requirement. In addition the law requires that the 50 percent quota reserve spots for Afro-descendants and persons of indigenous ancestry in number proportional to their relative populations within each state.

The race requirement in the legislation is an acknowledgement that solely a class-based approach to racial disparities (as some U.S. scholars have proposed in their lobby for a unitary class-based affirmative action policy) cannot fully resolve the income inequality that results from the continued conscious and unconscious racially biased decision-making across all sectors of the society. Another Latin American context like Cuba serves as the example of how unitary class-based equality policies are an incomplete remedy for the continued unequal status of many Afro-Cubans.

In short, Latin America provides a useful comparison for the United States to consider the importance of reducing its own income inequality in ways that can effectively address the combined race and class barriers to economic growth.

  

Revive Labor’s Power

Timothy Noah

The simplest thing government could do to reverse the 33-year growth in income inequality is to make it easier to start and maintain a union.

Although income inequality is growing in comparable nations around the world, it is more extreme and growing more rapidly here. A big reason is that labor unions, which have faced rough times everywhere with the rise of globalization, have declined much more in the United States.

You can't even discuss solving inequality without considering how government can help rebuild — really, stop suppressing — unions.

Private-sector union density peaked in the early 1950s at almost 40 percent. Today it’s down to 7 percent, which is about where it was when Franklin Roosevelt entered office. It’s as if the New Deal, which made possible the rise of America’s labor movement, never happened.

Revitalizing labor is not a popular cause nowadays, even among liberals, but there’s little point in even discussing how to solve the inequality problem if you won’t consider ways the government could help rebuild — really, stop suppressing — unions. If you graph a line charting the decline in union membership and then superimpose another line charting the decline in middle-class income share, the lines will be nearly identical. That is not a coincidence.

The uniquely American decline of organized labor was brought about in large part by the slow-working effects of the 1947 Taft-Hartley Act, which made it considerably more difficult to organize. (The "card-check" bill that labor failed to push through Congress in 2009, which would have reduced obstacles to unionization, was aimed at repealing one of Taft-Hartley’s more onerous provisions.) Repealing Taft-Hartley would be the best single thing Congress could do to reverse income inequality, but that’s a tall order.

Richard Kahlenberg and Moshe Marvit have proposed passing a law that would make organizing a civil right protected under federal law. That would allow any worker fired for trying to start a union to sue the boss. As things stand now, such firings are illegal, but the penalties are so minuscule that it’s economically irrational for businesses to obey the law.

Another helpful step — one more easily within reach — would be for Congress to raise the minimum wage (preferably to $10 an hour; it's now $7.25). As a candidate in 2008, Barack Obama promised to raise the minimum wage, but he never followed through, even though raising the minimum wage would be one stimulus that wouldn’t cost the government a dime. An economic consensus is emerging that whatever negative effect increasing the minimum wage has on hiring is easily counterbalanced by a rise in productivity; workers, it turns out, perform better on the job when they’re treated with at least minimal decency.

Mitt Romney actually favors indexing the minimum wage to inflation, which is a terrific idea. Lately he’s hedged a bit to justify not raising the minimum wage just now, but it’s notable that he hasn’t abandoned this position entirely.

  

Train Americans to Make Their Own Safety Nets

Douglas Holtz-Eakin

The seminal economic event of the early 21st century is the entry to the global labor market of billions of workers in China, India, and elsewhere around the globe. The simplest economics suggest that this plentitude will lower the earnings of unskilled laborers and raise the return to higher-skilled workers and capital investment. This is bad news for poor wage-earners and an advantage to those with human and financial capital.

Focus on building human capital. And rather than relying on government relief, create accounts where all can accumulate wealth

Some will be tempted to react by ramping up pure redistribution using the traditional tools of high-income taxes and low-income spending programs, attempting to empower unionized labor or closing borders to flows of goods, capital and labor. Global market forces will overwhelm such ill-conceived government attempts to reverse the fundamentals at play.

A better strategy is to harness these very forces by building human and financial capital. The merits of fundamental reforms to the K-12 education system that emphasize choice and competition that reward performance and attainment are no longer a source of partisan divide. But a more thoroughgoing focus on building human capital at every stage of the career is necessary.

From a budgetary perspective, the goal should be not only to rein in the over-promises of existing entitlements, but also to reverse the basic strategy. Why provide an entitlement for retirement income, health care and elder assistance? Why not provide the entitlement early in life so that pre-K school, primary education, nutrition and preventive care provide the capacity for strong returns to human capital and the capacity to finance those same old-age needs in a vibrant market setting?

Why structure unemployment insurance, food stamps, Temporary Assistance for Needy Families and other low-income programs as cash flows, conditional on meeting eligibility criteria? Those programs send checks based on income and/or work status, regardless of the individuals' economic past or future. Why not integrate these programs with individual-specific accounts that can be managed to accumulate wealth and provide strong incentives for reliance on work and timely exit from support. Staying at work would mean more wealth in the future. If work is interrupted and individuals are running down their own nest egg, they will not overstay their time on unemployment rolls or other support programs.

Critics have focused on the supposed inability of participants to manage financial accounts and the riskiness of financial investments. The greater risk is to fail to build the human capital needed to address the former and to forgo forever the potential returns to the latter.

Fairness is at the heart of the debate over inequality, and that misses the fundamental economic and moral challenges.

When Too Many People Are in Prison

Tehama Lopez Bunyasi

If we’re worried about rising income inequality further dampening the nation’s economic growth, then we need to do something about the 2.2 million people behind bars in the country — 60 percent of whom are people of color — and the fact that once they serve their time they find little recourse for rebuilding their lives. Their absence from the economy, the voting booth, and most of all, their homes, has reverberating effects for their children, partners and fellow community members.

The huge population of men of color who are currently in prison means they are absent from the economy, the voting booth and their families.

To address the huge incarceration rate in the U.S., Congress should repeal the Anti-Drug Abuse Act of 1986 that instituted mandatory minimum penalties for drug offenses, and produced the infamous 100 to 1 disparity between distributions of powder versus crack cocaine. Both practices have disproportionately affected black and brown communities, keeping these groups relatively impoverished in comparison to whites and ultimately increasing the inequality gap.

The Fair Sentencing Act of 2010 reduced the disparity to 18 to 1 but this is not enough. We need to bring the ratio down to 1 to 1, make it retroactive and release more people from prison so they can become productive, working members of society.

For fresh ideas on how to put ex-felons to work, our legislators could learn from the efforts of Homeboy Industries in Los Angeles which helps the prison-bound and the formerly incarcerated by developing their social and professional skills so that they can compete in a challenging economy.

By keeping more people out of prison and rehabilitating those who were in prison, growth is bound to follow.

All Growth Is Not Created Equal

Sheldon H. Danziger

Poverty and inequality can’t be reduced without economic growth. But in the U.S., it has been 40 years since the rising tide lifted all boats. We need substantial government help to raise the economic prospects and family incomes for those who benefit little from today’s economic growth. Their higher incomes together with increased support for their children’s educational attainment, from preschool through college, would increase social mobility and contribute to more rapid, less-unequal growth in the future.

Many still believe that a growing economy raises wages and family incomes across the board, so that the rich, poor and middle class prosper together. The economy did work like this during the “golden age” from the end of World II until the early 1970s, when prosperity was widely shared and income inequality declined.

In the U.S., it has been 40 years since the rising tide lifted all boats. Government could help struggling Americans, and we all would benefit.

For the last 40 years we have experienced a “gilded age of inequality.” The rich have gotten fabulously richer, while the middle class has struggled and more workers have fallen into poverty. We now have record numbers of professionals with annual compensation in the millions and record numbers of families worth billions. The news media report on working families struggling to pay rent and utility bills, and on million-dollar birthday parties for the 1 percent.

Most economists cite several factors that have contributed to rising inequality -- labor-saving technological changes, the globalization of labor and product markets, immigration of less-educated workers, the declining real value of the minimum wage, and declining unionization. Many of these factors are at work in other nations, but most of those nations have government programs that do more to reduce market-induced inequalities.

The best examples for reducing poverty and inequality can be found in the American Recovery and Reinvestment Act of 2009 -- the much-maligned stimulus. It contained many policies that kept poverty and inequality from increasing even more after the Great Recession than they did. These include expansions of unemployment insurance, food stamps and the earned-income tax credit for working low-income families, and funds for state and local governments to subsidize firms to hire welfare recipients and the long-term unemployed. These policies increased consumption and kept growth from being even lower and poverty and inequality from being even higher.

The act also expanded Pell grants, funding for Head Start and Early Head Start and other policies to promote educational attainment and social mobility for low-income children and young adults. These policies will contribute to higher productivity and economic growth when these young people enter the labor market.

Unfortunately, these growth-enhancing provisions have expired or will soon expire, leaving us in our gilded age in which economic growth does little to reduce poverty and inequality.