As I traveled around the world and as reviews of the book came in over the last year, I was heartened at how little challenge there was to the book’s central theses. The magnitude of the inequality and the lack of opportunity was hard to deny. As usual, academics quibble: levels of inequality might look a little better depending on how we value the benefits supplied by Medicare, Medicaid, and employer-provided health insurance. While spending on these has gone up, much of this increase can be attributed to rising medical costs. It’s not that the benefits themselves have increased. On the other hand, the numbers would look considerably worse if we took into account the increased economic insecurity. It was equally hard to deny that the United States was no longer the land of opportunity portrayed by Horatio Alger stories of “rags to riches”. Nor was there any attempt to deny that much of America’s concentration of wealth, at the top was a result of rent seeking-including monopoly profits and the excessive compensation of some CEOs, and, especially, that of the financial sector. As expected, a few critics (including a former head of the Confederation of British Industry) suggested that I paid less attention to market forces that I should have and, correspondingly, gave too much weight to rent seeking. As I explain in the text, it is essentially impossible to single out any one factor’s relative contribution, given how intertwined the various forces shaping inequality are; there can be honest differences of opinion. But as I emphasize in chapter 2, markets don’t exist in a vacuum. They are shaped by our politics, often in ways that benefit those at the top. Moreover, while we may be able to do only a little to change the direction of market forces, we can circumscribe rent seeking. Or at least we could, if we managed to get our politics right.
Most heartening to me was the fact that even more conservative publications joined the discussion. In an excellent special report, the Economist highlighted the extent of the increase in inequality and the reduction in opportunity, and agreed with most of our diagnosis and many of our prescriptions. Noting, as I had, that much of America’s inequality, especially at the top, was due to rent seeking, the Economist concluded, in particular, that “inequality has reached a stage where it can be inefficient and bad to growth.” Sharing our concern about the lack of opportunity in the United States, the report cites results obtained by Sean Reardon of Stanford that the “gap in test scores between rich and poor American children in roughly 30-40% wider than it was 25 years ago.” Not surprisingly, the Economist’s recommendations began with an “attack on monopolies and vested interests” and then moved on to ways of improving economic mobility, where the “target should be pre-school education, as well as more retraining for the jobless.” It even recognized the need for more progressive taxation, including “narrowing the gap between tax rates and wages and capital income; and relying more on efficient taxes that are paid disproportionately by the rich, such as some property taxes.”
The debate was more intense, though, around an argument (made explicitly in a book published shortly after mine) that was based on another variant of trickle-down economics. In this new version of an old myth, the rich are the job creators; give more money to the rich, and there will be more jobs. The irony was that the author of this book, like the presidential candidate whom he supported, was from a private-equity firm with a well-established business model that involved taking over companies, piling on debt, “restructuring” by firing large number of workers, and selling out one’s stake (it was hoped) before the firm subsequently went bankrupt. There were, of course, real innovators in the economy, and they did create jobs; but even the firm that had become iconic of America’s success, Apple, whose market value in 2012 was larger than that of General Motors at its peak, had only 47,000 employees in market value had become entirely separated from creating employment. There was no reason to believe that giving more money to America’s downturn, returns often look higher for investments in the emerging markets. And even when there is investment related to job creation: much of the investment is in machines designed to replace labor, to destroy jobs.
Remarkably, in the heyday of unbridled capitalism, the early years of this century, a period in which inequality at the top increased at historic rates, there was no private-sector job creation. And if we exclude construction- based on a real estate bubble- the record looks even worse.
Not only doesn’t the money given to the top not necessarily go into “job creation” and innovation; same of it foes into distorting our politics, especially in this new era of unbridled campaign contributions ushered in by Citizen United. What we have seen quite clearly is that a common use of wealth is to gain advantage in rent seeking, perpetuating inequalities through the political process. Later in this preface I’ll describe some of the telling examples of rent seeking that have come to light just in the past year.
The same old “myth” that we should celebrate
the wealth of those at the top because we all benefit from it had been used to
justify the maintenance of low taxes on capital gains. But most capital gains
accrue not from job creation but from one form of speculation or another. Some
of this speculation is destabilizing, and played a role in the economic crisis
that has cost so many jobs.