Don't Drink the Tea. Think With the WE.
Jan
2013
24

“The hollowing out of the middle class means that they are unable to invest in their future.”

Joseph Stiglitz



In a recent Op-Ed for The New York Times, Nobel laureate Joseph E. Stiglitz argues that inequality is holding back the recovery and that the growing gap between the 99 and 1 percents is setting up an unsustainable future for the United States.

As Stiglitz notes, nearly one fifth of American children currently live in poverty, a figure that makes the U.S. second worst of all advanced economies behind nations such as Bulgaria, Latvia and Greece. 

The argument is well-crafted and his points are polished. Yet, many of the tenets of Stiglitz’s piece were embodied by the Occupy movement. Did we not believe them then?

Stiglitz lays out four major reasons why the recovery is stagnating from income inequality.

There are four major reasons inequality is squelching our recovery. The 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 percent of income earners took home 93 percent 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 the bottom 80 percent consuming about 110 percent of their income.

Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that 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. The 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 that the government cannot make the vital investments in infrastructure, education, research and health that 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 the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson.

Observers on all sides of the economic downfall debate admit that serious mistakes were made in the last decade. The priorities of the government appeared to shift when it used the entirety of its political capital to bail out financial institutions while leaving the victims of vengeful bank practices to fend for themselves. It was a turning point for many Americans, the moment they realized they were living in an America where elected officials would no longer make pretenses about doing what was best for their constituents. Stiglitz notes that the bank bailout is the point where inequality became the “new normal.”

Instead of pouring money into the banks, we could have tried rebuilding the economy from the bottom up. We could have enabled homeowners who were “underwater” — those who owe more money on their homes than the homes are worth — to get a fresh start, by writing down principal, in exchange for giving banks a share of the gains if and when home prices recovered.

We could have recognized that when young people are jobless, their skills atrophy. We could have made sure that every young person was either in school, in a training program or on a job. Instead, we let youth unemployment rise to twice the national average. The children of the rich can stay in college or attend graduate school, without accumulating enormous debt, or take unpaid internships to beef up their résumés. Not so for those in the middle and bottom. We are sowing the seeds of ever more inequality in the coming years.

To to look to the future without firmly coming to grips with the past is misguided. The American Dream of upward mobility is fast becoming a relic, an outdated fantasy more than an attainable reality. The trend of high inequality is not sustainable and must be reversed if how things will be is ever going to resemble the way it was.

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