The Price of Inequality

Americans like to think of their country as the land of opportunity, an opinion shared by many others.

However, although it is easy to think of examples of Americans who have risen to the top by their own efforts, what really counts are the statistics. To what extent do opportunities enjoyed throughout one’s life depend on the income and education of one’s parents?

In actuality, these numbers show that the American dream is a myth. Today there is less equal opportunity in the United States than in Europe (and in fact, less than any developed industrialized country on which we have information).

This is one of the reasons the United States has the highest levels of inequity of any developed country, and the distance that separates them from the rest is not diminishing. During the “recovery” of 2009 and 2010, the one percent of Americans with the highest incomes retained a 93 percent increase in income. Other indicators of inequity (such as wealth, health and life expectancy) are just as bad, if not worse. There is a clear tendency for income and wealth to concentrate at the top, emptying out the middle classes and increasing the poverty on the bottom.

It would be different if the high incomes of those on top were allotted to those who contributed the most to society. However, the Great Depression showed that this is not the case – the very bankers who led the world economy and their own corporations to the edge of ruin received juicy bonuses.

If we examine the top of the pyramid in closer detail we will find an overabundance of income-seekers: There are those who gained their wealth exercising the power of monopoly, and others are executive directors who took advantage of structural deficiencies within corporate governance to retain an excessive quota of company profits. There are also others who used political connections to avail themselves of the generosity of the state, whether by claiming too much for what they buy (medication) or paying too little for what they sell (mineral exploration permits).

In the same way, part of the wealth of the financiers comes from the exploitation of the poor, through predatory loans and abusive credit card practices. In such cases, those on top enrich themselves directly from the pockets of those below.

Perhaps it wouldn’t be so bad if there was so much as a grain of truth in the theory of overflow – the peculiar idea that enriching those on top will result in benefits for all. Today however, the majority of Americans find themselves worse off, with less inflation-adjusted real income than in 1997, a decade and a half ago. All the benefits of growth flowed toward the top.

The defenders of American inequity argue that the poor and those in the middle class have no reason to complain. It’s possible that their slice of the pie is smaller than before. However, thanks to the contributions of the rich and super-rich, the pie is growing so much that in reality the size of slice is larger. However, the data once again wholly contradicts this supposition. In fact, the United States experienced more growth during the decades after World War II, when growth was joint, than later in 1980, when it started to diverge.

This is not surprising to anyone who understands the origins of the inequity. The pursuit of incomes distorts the economy. Of course, market forces also have an influence. However, the markets rely on policy. So in the United States, with its quasi-corrupt system of campaign financing and the constant interchanging of people who hold public office one day and then materialize in private enterprise the next and vice-versa, politics relies on money.

For example, when bankruptcy legislation benefits financial interests more than anyone else and when the forgiveness of student loans is barred (given the arguably negative returns on such student investments), it becomes a legislation that enriches bankers and leaves many on the bottom impoverished. In a country where money has more clout than democracy, the frequency with which such laws are passed becomes more understandable.

The increase in inequity is not inevitable, however. There are market economies that are doing better, both in terms of GDP growth and the standard of living for the majority of citizens. In some cases, inequities are effectively reduced.

The United States pays a high price for continuing to go in the other direction. The inequity reduces growth and efficiency. The lack of opportunity implies that the economy’s most important asset, its people, is not being fully utilized. Many of those at the bottom, and even in the middle, are not able to achieve their whole potential because the rich, who need few public services and who fear big government will redistribute their wealth, use their political influence to reduce taxes and reduce public spending. This results in an underinvestment in infrastructure, education and technology, which in turn slows down the wheels of growth.

The Great Depression aggravated inequality, causing cuts in basic social spending and a high level of unemployment that forced down salaries at the lower income levels. Additionally, both the Commission of Experts of the President of the U.N. General Assembly on Reforms of the International Monetary and Financial System that investigates the causes of the Great Depression, as well as the International Monetary Fund have warned that inequity leads to economic instability.

However, the most important thing is that the United States’ values and identity are corroding. At such extremes, it is not surprising that its effects are seen in all public decisions, from monetary policies to the assignation of the budget. The United States has become a country that deals in favoritism for the rich and justice for the highest bidder instead of “justice for all.” This was demonstrated during the mortgage crisis when the banks that had been touted as too big to fail were ostensibly too big to hold themselves responsible.

The United States cannot still be considered the land of opportunity that it was at some point. However, we must not resign ourselves to that – it is not too late to restore the American Dream.