The Price of Inequality

Stiglitz presents his argument for why America’s level of inequality is not sustainable over the long term. He then refutes the idea that inequality promotes economic growth and any attempts to fix it will “harm the economy” (84).

Inequality will harm the US economy in the long run because with wealth concentrated at the top, inequality lessens overall demand (the 99 percent consume less) and causes unemployment (less demand means less supply). Stiglitz writes that if only 5% of the top 1 percent’s share of US income was shifted to the 99 percent, in 2012 the US unemployment rate would have been two points less. But government responses to downturns, like the tech bubble in the 1990s and the housing bubble in the 2000s, are weak; policymakers fail to enact proper regulations to protect the consumer, which leads to more inequality. The result is underutilized resources, which adds up to significant losses to the US economy.

Inequality also makes the economy inefficient and less productive. Political gridlock hurts the public sector because it causes less investment in infrastructure, which leaves the 99 percent with fewer services, less hope, and higher anxiety, as they constantly worry about making ends meet, putting social cohesion at risk and lowering productivity. The economy itself becomes imbalanced, as rent seeking not only enriches the rent seekers to the detriment of all others but also leads to monopoly power and tax breaks, even though their social contribution does not equal profits. As the rent seekers gain wealth, it causes an imbalance in labor as talent moves to the financial sector and so does all innovation. This transfer of resources will cause monopolies to expand beyond tech into healthcare, so that research will become rent seeking too. The lack of competition means waste, and profits coming from inadequate monopoly-based services like cell phones or credit cards with high rates and poor service.

Stiglitz argues that those on the Right who seek a “perfectly competitive economy with private rewards equal to social returns” underestimate the need for public action to correct market failures, and they “overestimate the importance of financial incentives,” and therefore fail to see the “benefits of progressive taxation” (107).

Given the damage that Stiglitz believes rent seeking does to the economy, he argues for ending rent seeking and making private rewards equal to social contribution, because the redistribution of income would improve efficiency and reduce inequality. He makes this argument because a trade-off between inequality and inefficiency is a fiction. The market is not efficient, given that CEOs earn bonus pay regardless of outcome. Clearly, the system is failing. Finally, Stiglitz notes that the Rights fails to see how progressive taxation engenders equality. But a fairer tax system would close loopholes, and the 1 percent would lose their “special provisions in the tax code” (115), all of which would increase fairness and trust in the system as well as productivity.

When the Occupy Wall Street protests started in response to the government’s failure to adequately address economic inequality after the Great Recession, the Right claimed that they supported equality of opportunity, unlike the protesters and the Democrats; the Democrats in this story were committed to quality of outcomes. Stiglitz rejects this claim because America does not practice equality of opportunity, and progressives/Democrats are not for equality of outcomes but instead support policies that reduce inequality. According to Stiglitz, no one in America can make it on their own, and inequality caused a change in American identity in which “fair play, equality of opportunity, and a sense of community” (117) are less important. And worse, the odds that a poor American will rise decrease as inequality continues to weaken the economy.