It is amazing how the “1%” epithet, a reference to the top 1% of earners, has caught on in the US and elsewhere in the developed world. In the US, this 1% includes all those with a 2006 household income of at least $386,000. In the popular narrative, the 1% is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge fund managers. Reading some progressive economists, it might seem that the answer to all of America’s current problems is to tax the 1% and redistribute to everyone else.
Of course, underlying this narrative is the view that this income is ill-gotten, made possible by the Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system. The 1% are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.
Clearly, this caricature is based on some truth. For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative’s reductionism.
File photo of job seekers register before entering a Job Prosper career fair in Philadelphia
It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favourite progressive economists. In other words, the rich today are more likely to be working than idle.
But what might be the most important overlooked fact is that the rise in income inequality is not just at the very top, though it is most pronounced there. Academic studies suggest that the top tenth percentile of income distribution in the US, and elsewhere, is also moving farther away from the median earner. This is an inconvenient fact for the progressive economist. “We are the 90%”, sounds less dramatic than “we are the 99%”. And, for some of the protesters, it may not even be true.
Perhaps most problematic, though, is that something other than plutocrat-friendly policies is largely responsible for the growing inequality. That something is education and skills. True, not every degree is a passport to a job. Freshly minted degree holders, especially from lower-quality programmes, are finding it particularly hard to get a job nowadays, because they are competing with experienced workers who are also jobless. Nevertheless, the unemployment rate for those with degrees is one-third the unemployment rate for those without a high school diploma.
Close examination suggests that the single biggest difference between those at or above the top tenth percentile of the income distribution and those below the 50th percentile is that the former have a degree or two, while the latter, typically, do not. Technological change and global competition have made it impossible for American workers to get good jobs without strong skills. As Harvard professors Claudia Golden and Larry Katz put it, in the race between technology and education, education is falling behind.
To acknowledge the fact that the broken educational and skills-building system is responsible for much of the growing inequality that ordinary people experience would, however, detract from the larger populist agenda of rallying the masses against the very rich. It has the inconvenient implication that the poor have a role in pulling themselves out of the morass. There are no easy and quick fixes to education—every US president since Gerald Ford in the mid-1970s has called for educational reforms, with little effect. In contrast, blaming the undeserving 1% offers a redistributive policy agenda with immediate effects.
The US has tried quick fixes before. Income inequality grew rapidly in the last decade, but consumption inequality did not. The reason: easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses. The ending, as everyone knows, was not a happy one. The less-well-off ultimately became even worse off as they lost their jobs and homes.
The US needs to improve the quality of its workforce by developing the skills that are relevant to the jobs that its firms are creating. Several steps can be taken towards these goals, including improving community attitudes towards education, reforming schools, tying the curriculum in community colleges and vocational institutions more closely to the needs of local firms, making higher education more affordable, and finding effective ways to retrain unemployed workers.
None of this is easy or likely to produce results quickly, and some of it may require more resources. While eliminating inefficient spending, especially inefficient tax subsidies, can generate some of these funds, more tax revenues may be needed. The rich can certainly afford to pay more, but if governments increase taxes on the wealthy, they should do it with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.
Raghuram Rajan is professor of finance at the Booth School of Business, University of Chicago
© 2011 Project Syndicate
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