- Economic inequality is higher in the U.S. than in virtually all other advanced countries.
- The American political system, coupled with high initial inequality, gave the moneyed enough political influence to change laws to benefit themselves, further exacerbating inequality.
- Breaking this feedback loop by curbing the power of money in politics is essential to reducing inequality and restoring hope.
Americans are used to thinking that their nation is special. In many ways, it is: the U.S. has by far the most Nobel Prize winners, the largest defense expenditures (almost equal to the next 10 or so countries put together) and the most billionaires (twice as many as China, the closest competitor). But some examples of American Exceptionalism should not make us proud. By most accounts, the U.S. has the highest level of economic inequality among developed countries. It has the world’s greatest per capita health expenditures yet the lowest life expectancy among comparable countries. It is also one of a few developed countries jostling for the dubious distinction of having the lowest measures of equality of opportunity.
The notion of the American Dream—that, unlike old Europe, we are a land of opportunity—is part of our essence. Yet the numbers say otherwise. The life prospects of a young American depend more on the income and education of his or her parents than in almost any other advanced country. When poor-boy-makes-good anecdotes get passed around in the media, that is precisely because such stories are so rare.
Things appear to be getting worse, partly as a result of forces, such as technology and globalization, that seem beyond our control, but most disturbingly because of those within our command. It is not the laws of nature that have led to this dire situation: it is the laws of humankind. Markets do not exist in a vacuum: they are shaped by rules and regulations, which can be designed to favor one group over another. President Donald Trump was right in saying that the system is rigged—by those in the inherited plutocracy of which he himself is a member. And he is making it much, much worse.
America has long outdone others in its level of inequality, but in the past 40 years it has reached new heights. Whereas the income share of the top 0.1 percent has more than quadrupled and that of the top 1 percent has almost doubled, that of the bottom 90 percent has declined. Wages at the bottom, adjusted for inflation, are about the same as they were some 60 years ago! In fact, for those with a high school education or less, incomes have fallen over recent decades. Males have been particularly hard hit, as the U.S. has moved away from manufacturing industries into an economy based on services.
Deaths of Despair
Wealth is even less equally distributed, with just three Americans having as much as the bottom 50 percent—testimony to how much money there is at the top and how little there is at the bottom. Families in the bottom 50 percent hardly have the cash reserves to meet an emergency. Newspapers are replete with stories of those for whom the breakdown of a car or an illness starts a downward spiral from which they never recover.
In significant part because of high inequality, U.S. life expectancy, exceptionally low to begin with, is experiencing sustained declines. This in spite of the marvels of medical science, many advances of which occur right here in America and which are made readily available to the rich. Economist Ann Case and 2015 Nobel laureate in economics Angus Deaton describe one of the main causes of rising morbidity—the increase in alcoholism, drug overdoses and suicides—as “deaths of despair” by those who have given up hope.
Defenders of America’s inequality have a pat explanation. They refer to the workings of a competitive market, where the laws of supply and demand determine wages, prices and even interest rates—a mechanical system, much like that describing the physical universe. Those with scarce assets or skills are amply rewarded, they argue, because of the larger contributions they make to the economy. What they get merely represents what they have contributed. Often they take out less than they contributed, so what is left over for the rest is that much more.
This fictional narrative may at one time have assuaged the guilt of those at the top and persuaded everyone else to accept this sorry state of affairs. Perhaps the defining moment exposing the lie was the 2008 financial crisis, when the bankers who brought the global economy to the brink of ruin with predatory lending, market manipulation and various other antisocial practices walked away with millions of dollars in bonuses just as millions of Americans lost their jobs and homes and tens of millions more worldwide suffered on their account. Virtually none of these bankers were ever held to account for their misdeeds.
I became aware of the fantastical nature of this narrative as a schoolboy, when I thought of the wealth of the plantation owners, built on the backs of slaves. At the time of the Civil War, the market value of the slaves in the South was approximately half of the region’s total wealth, including the value of the land and the physical capital—the factories and equipment. The wealth of at least this part of this nation was not based on industry, innovation and commerce but rather on exploitation. Today we have replaced this open exploitation with more insidious forms, which have intensified since the Reagan-Thatcher revolution of the 1980s. This exploitation, I will argue, is largely to blame for the escalating inequality in the U.S.
After the New Deal of the 1930s, American inequality went into decline. By the 1950s inequality had receded to such an extent that another Nobel laureate in economics, Simon Kuznets, formulated what came to be called Kuznets’s law. In the early stages of development, as some parts of a country seize new opportunities, inequalities grow, he postulated; in the later stages, they shrink. The theory long fit the data—but then, around the early 1980s, the trend abruptly reversed.
Economists have put forward a range of explanations for why inequality has in fact been increasing in many developed countries. Some argue that advances in technology have spurred the demand for skilled labor relative to unskilled labor, thereby depressing the wages of the latter. Yet that alone cannot explain why even skilled labor has done so poorly over the past two decades, why average wages have done so badly and why matters are so much worse in the U.S. than in other developed nations. Changes in technology are global and should affect all advanced economies in the same way. Other economists blame globalization itself, which has weakened the power of workers. Firms can and do move abroad unless demands for higher wages are curtailed. But again, globalization has been integral to all advanced economies. Why is its impact so much worse in the U.S.?
Click here for the full article originally published on Scientific American as well as the accompanying video.