KENNEDY: The luck of the (economic) draw

Nobel Prize-winning economist Joseph Stiglitz recently testified before a Senate committee on the issue of America’s growing inequality. His observations were sobering.

“As disturbing as the data on the growing inequality in income are, those that describe the other dimensions of America’s inequality are even worse: Inequalities in wealth are even greater than income, and there are marked inequalities in health, reflected in differences, for instance, in life expectancy.

“But perhaps the most invidious aspect of U.S. inequality is the inequality of opportunity. America has become the advanced country not only with the highest level of inequality, but is among those with the least equality of opportunity—the statistics show that the American dream is a myth; that the life prospects of a young American are more dependent on the income and education of his parents than in other developed countries.

“We have betrayed one of our most fundamental values,” Stiglitz continued. “And the result is that we are wasting our most valuable resource, our human resources: millions of those at the bottom are not able to live up to their potential.”

Stiglitz made a point that is too often obscured by our “makers versus takers” mind-set: America’s inequality is the result of policy choices we made, either deliberately or inadvertently.

From our education system and the manner in which it is financed, a health system that provides “boutique” care for the privileged and an emergency room for the uninsured, tax loopholes for those who can afford lobbyists, bankruptcy and anti-trust laws that favor the “haves”—his list was extensive. Policies in each of these areas enrich the top at the expense of the rest.

Stiglitz also noted that the 1 percent are “not those who have made the major innovations that have transformed our economy and society.” They are disproportionately the manipulators and rent-seekers, speculators and financiers—not the producers, entrepreneurs or “makers” many believe themselves to be.

Among other observations: The economic theory referred to as “trickle-down”—the belief that gains at the top will eventually raise the prospects of those on the bottom—has been thoroughly discredited. The recent Great Recession has exacerbated—but not caused—our growing inequality.

And most important: Jobs are not created when wealthy individuals get to keep more of their money—they are created by demand, and when middle-class folks don’t have discretionary income, demand remains weak.

In a recent column, Paul Krugman, also a Nobel Prize winning economist, explained why improving demand is so critical:

“Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand.

“The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know [or should know] that depressed economies behave quite differently from economies that are at or near full employment.”

If increased demand is the economic driver, a recent analysis may illuminate our situation: Had the minimum wage simply kept pace with income gains enjoyed by the top 1 percent since 1968—that is, if there had simply been parity in the rate of increase—minimum-wage workers would now be making $31.45 per hour.

Think about that when companies report slow sales.•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com. Send comments on this column to ibjedit@ibj.com.