For a while now, mounting evidence has suggested that the United States' economy and society are moving toward the "winners" model, leaving more and more citizens feeling like "losers"—frustrated and resentful. We call the result of this trend income inequality—or just inequality.
Inequality is a lot like climate change: Many denied or ignored it until the data became irrefutable. Today reams of research confirm a 40-year decline in average hourly wages for the bottom 90%, even as GDP, corporate profits, and the incomes of the top 10% have risen. Best-selling economics tomes such as Robert Gordon's The Rise and Fall of American Growth and Thomas Piketty'sCapital in the Twenty-First Century have theorized about how and why inequality grows and put it in historical context. Most recently we have seen the societal and political effects playing out in a volatile U.S. presidential campaign, with candidates railing against a "rigged system" and preying on people's fears.
How did we get here, and what can we do? Three new books provide a deeper understanding of inequality, sharp arguments, and some ideas for fixing the problem.
Saving Capitalism, by Robert Reich, the former U.S. secretary of labor, should be read first, and it is likely to make you angry. The book (just out in paperback) aims to clear a persistent smoke screen that prevents constructive discussion of inequality—that is, the relentless refrain on one side that the "free market" can cure capitalism's ills and on the other that government must be more interventionist in restraining market forces and spreading the value they produce. Reich trenchantly deconstructs this "debate" and reveals a reality that many have recognized and reacted against: the "increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs." The real problem, he argues, is not an activist government that "intrudes" on the market by redistributing wealth downward through taxes and transfers; rather, it is the skewed pre-distribution of income inside the market, with an ever-increasing share moving to those who are already rich.
Rules are the key. As the Nobel Prize–winner Joseph Stiglitz has pointed out, inequality is a choice—not by those who suffer its pernicious effects, but by those who create the game and decide, or at least influence, how it is played. Saving Capitalism is not at all preachy, but one clearly feels the moral implications in its arguments and evidence. Reich compares the annual income of a top hedge fund manager ($2 billion– plus) with that of a good teacher (perhaps middle five figures) as a way of refuting the oft-made—and in his view, circular—argument that people are worth what they are paid because that's the value the market places on the work they do. Does the hedge fund manager actually "earn" that huge sum? Which person contributes more to the world? "If the rules governing how the market is organized took full account of the benefits to society of various roles…some people would be paid far more," he concludes.
He goes on to offer a range of thoughtful ideas for restoring what John Kenneth Galbraith called "countervailing power" to average people and leveling the playing field. Among these, not surprisingly, are a higher minimum wage and stronger antitrust laws. Reich also calls for a "reinvention" of the U.S. corporation toward a "stakeholder" model, in which organizations are responsible to employees, customers, and the community as well as shareholders.
A more unorthodox idea, mentioned at the end of the book—paying a basic minimum income to all citizens—is taken up in much more detail in Raising the Floor, by Andy Stern, former president of the Service Employees International Union. His big picture largely aligns with Reich's, but the focus is different. Stern sees rising inequality as an effect of the job losses caused by recent technological transformation, including automation. The resulting economic insecurity, felt by millions of families, has, he says, turned the U.S.A. into "the United States of Anxiety."
The book's key message is that we are at what Intel cofounder Andy Grove called a "strategic inflection point" in our society. The American Dream of getting ahead by "working hard and playing by the rules" no longer holds, and mere economic policy fixes don't address the core of the problem. What's required is a clear-eyed reexamination of the role of work in our lives. Stern thinks that if citizens' fundamental needs were met with a universal basic income (UBI), we could stop worrying about mere economic survival and instead engage in the long-ago-promised pursuit of happiness—or at least consider taking a job that may not pay a lot but is truly fulfilling. Sounds radical, right? Actually, the idea has a long history, with diverse admirers from Thomas Paine and Adam Smith to Milton Friedman and Martin Luther King Jr. It was almost adopted by the Nixon administration and has recently been debated in Silicon Valley circles.
While Stern zeroes in on a specific remedy for one country, economist Branko Milanovic's book Global Inequality zooms out to give the world view. Drawing on two centuries' worth of household survey data, the book provides an important empirical picture of inequality patterns within and among nations. Over the long term the Industrial Revolution in the West drove global inequality up; but more recently the remarkable growth of Asian economies has pushed it back down. Also, during the past 25 years, as inequality has decreased worldwide, it has increased within rich nations—the U.S. being example number one. These are the two forces at play: a convergence of mean incomes among countries and cycles of within-nation inequality.
Milanovic's marshaling and analysis of the data are an achievement in themselves. But I also appreciated his imaginative vision and probing sensibility, especially in the fascinating final chapter, in which he poses 10 big questions, offers predictions and proposals, and outlines a future filled with both possibility and peril. Will economic growth still matter? Will inequality disappear as globalization continues? Will winner-take-all remain the rule?
One thing becomes clear after reading these three books: Although it may be necessary to treat inequality as an economic problem, it is not sufficient. The U.S. as a country needs to ask, and answer, some basic questions—Who gets to set the rules? What values should they reflect? What's fair? What do we owe to one another?—and reshape our society accordingly.
Jeff Kehoe is a senior editor at Harvard Business Review
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