One percent of Americans earn about a quarter of the income and own 40% of the wealth. "Twenty-five years ago, the corresponding figures were 12% and 3%," writes Nobel laureate economist Joseph Stiglitz.

I spent last week at the Buttonwood Gathering in New York, hosted by The Economist, where Stiglitz was joined by former President Reagan advisor and Harvard economist Martin Feldstein to debate the issue of inequality.

"One thing most Americans feel strongly about is opportunity," Stiglitz said. Not equality of outcomes, he said, but what is important is equality of opportunity. He notes that the data suggests that the feeling of America as the land of opportunity has become a myth. Among advanced nations, not only is the U.S. the country with the most inequality of income, but it's among the countries with the least amount of opportunity -- by this, I believe Stiglitz is referring to income mobility, or the odds of being born into a low-income group and moving into a higher one, and vice versa.


That has two important messages, Stiglitz says. One, the fact that different countries have different levels of economic opportunity shows that what's going on isn't just a factor of market forces. The decisions that have been made in different countries have led to remarkably different outcomes, he notes. Second, the amount of inequality is such that regardless of moral attitudes of what is a good or fair distribution of income, the level of inequality is bad for the economy, he says. "If you are concerned with how well our economy functions, it [inequality] has reached a level which is destructive."

What's he mean by that? "We aren't using our human resources as well as we should," Stiglitz says. If you're born at the bottom of the income distribution, your likelihood of reaching the top isn't very high, largely because the odds of receiving a good education is tied to your parents' income. And a lot of the largest fortunes have to do with rent-seeking activities -- monopolies and distortions resulting from inequalities in political influence, he said. He cites bankruptcy laws that say credit default swaps are the first in line for payouts, but student loans can't be discharged in bankruptcy, as a good example of "our legal framework [providing] scope for an increase in inequality."

Now it's Martin Feldstein's turn for the other side of the story.

Inequality is really important, Feldstein says. It's substantively important. The issue isn't just about politics, but ethics, he says. But the statistics that get thrown around -- comparisons of the top 10% or top 1% of earners with everyone else -- are not the important aspect of inequality. "To me, the important part is poverty, low income, and low wealth," he says. "Most Americans simply have no wealth at all. They count on Social Security for retirement and unemployment insurance for support if they lose their job, but they have no liquid wealth. That's a serious problem."

Feldstein agrees with Stiglitz that wealth generated from cronyism and special monopoly privileges "is a bad thing." "To the extent that that is a problem, there is some concern," he says. He later says he doesn't see a lot of it happening, however.

A huge issue for Feldstein is poverty among senior citizens. He points out that we spend half a trillion dollars a year on Social Security, yet poverty among seniors is rampant. The other issue is young people. "Our educational system is not preparing people of lesser ability for decent jobs where they can support a family. That's a serious problem," he says.

But we focus on the wrong issues, he says, when the debate demonizes the top rather than focusing on the bottom in poverty. "Do you want Congress focusing on the top 16,000 families, or the bottom half of them?" he asks.

This is especially true when people talk about fixing the inequality with higher taxes. If we do need additional tax revenue to address budget deficits, Feldstein is in favor of structural reforms to the tax code -- eliminating and reducing deductions -- rather than higher rates. "It's not that the world comes to an end if we raise taxes by five percentage points, but every little bit has adverse effects," he said. "What determines growth over the next 10 years will depend on many things, but I think if you ask, 'Will the economy perform better with higher tax rates?' it's not a good idea. Some are already paying nearly 50% of their income in taxes with local and state taxes," he said.

So, what do we do about inequality?

Stiglitz said he's focus on three things. One, a better education system that offers more opportunity is the most important. Second, "our tax system is not as progressive as I think it should be," and it's more distorted than he thinks it should be, which leads to a distorted economy. Third, he'd like to see better regulations that discourage rent-seeking activities that can contribute to poverty.

Feldstein also says education is highest on the list. But he clarifies that education means trying to educate and train people for market-oriented jobs -- not necessarily a bachelor's degree, in other words. Second, he'd focus on poverty, particularly in old age. Third, we should encourage liquid savings for lower-income people, providing a personal safety net that reduces reliance on others.

What would you do?

The article A Smart Talk on Wealth Inequality originally appeared on Fool.com.

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LVTfan

That 3% in the first sentence was intended to be 33%.

I want Congress focusing on the structures that create this situation. They might start with a reading of Henry George's books "Progress and Poverty" (theory) and "Social Problems" (essays) and then turn to Walt Rybeck's recent "Re-Solving the Economic Puzzle.

Of course, finding people who regard their role as representing ordinary folks might be a bit difficult, but perhaps the next Congress can be convinced.

We've permitted some ridiculous structures to arise which funnel the fruits of many people's labor into the pockets of a relative few of us.

October 28 2012 at 8:55 PM Report abuse rate up rate down Reply