<p>Louis Putterman has taught economics at Brown since 1980.&nbsp; During his tenure here, he has widely published about a variety of economic issues. His expert blog for PsychologyToday.com shares its title with that of his new book, <em>The Good, The Bad, and The Economy: Does Human Nature Rule Out a Better World?&nbsp; </em>This essay first appeared in <a href="http://digital.olivesoftware.com/Olive/ODE/ProJo/LandingPage/LandingPage.aspx?href=VFBKLzIwMTIvMDgvMjM.&amp;pageno=MTk.&amp;entity=QXIwMTkwMQ..&amp;view=ZW50aXR5" target="_blank">The Providence Journal.</a></p>

The Senate's recent passage of the Democrats’ plan to maintain Bush era tax cuts for all but the richest Americans is the latest salvo in what promises to be an active battle throughout the presidential campaign season over the equity of the U.S. fiscal system and, more broadly, the problems of widening inequality and of disproportionate political influence of the rich.  So far, mainstream Democrats and the White House have staked out only a fairly modest centrist position, with continued scathing criticism of the administration’s handling of the 2008 – 09 financial crisis coming from critics on the left, and with the usual countercharges about attacking “job creators” and “playing the class warfare card” coming from the right.

In his new, hard-hitting book, The Price of Inequality: How Today’s Divided Society Endangers Our Future (Norton, June 2012), Nobel Prize-winning economist Joseph Stiglitz, a professor at Columbia University who is President of the International Economic Association and a one-time economic adviser to Bill Clinton and Chief Economist at the World Bank, bemoans Obama’s failure to grasp the opportunity handed him in 2008 to begin reversing America’s thirty year trend of rising economic and political inequality.  Stiglitz argues that increasing inequality is not simply the result of market forces but also reflects the capture of government by financial and economic elites and resulting massive transfers of wealth from those of low and middle income to the top 0.1% via subsidies, bail-outs, and tax breaks.

 Right wing ideology claims that we need essentially unchecked inequality to spur economic activity because human nature makes private rewards the only effective motivator of effort.  Stiglitz’s book and a growing body of research in behavioral economics shows this to be a grossly oversimplified picture.  That research shows most people to care about fairness and to be willing to make sacrifices both to support the deserving poor and to punish unfairness.  And it shows that, rather than damaging productivity, arrangements such as the sharing of profits with workers actually stimulate output by enhancing teamwork and a sense of “buy in” to enterprise goals.  Historically, the U.S. has enjoyed faster economic growth in those periods in which it had a more progressive tax system, and globally, countries with more equal distributions of income have better performing economies than do more unequal ones.

The current ideological battle is partly over whether the system as a whole is fair, i.e. gives opportunities to those who work hard.  This is important because research shows that people support a strong social safety net if they believe that those in need are not there for lack of trying.  Economists and political scientists have long explained the greater support for progressive tax and expenditure systems in Europe than in the United States by the fact that Americans are more likely than are Europeans to believe that hard work pays off.  Stiglitz shows, however, that perceptions are greatly lagging realities, as the U.S. has become not only one of the most unequal of the high income democracies but also one with less opportunity for the children of the poor and middle class to advance economically.

Stiglitz shows convincingly that the vast majority of Americans would benefit from the restoration of a more progressive tax system and from a drastic reduction of corporate welfare and creation of a more competitive and less coddled financial system.  That polls show only a small majority favoring such measures is a reflection of the success of the right in convincing so many ordinary Americans that their own interests coincide with the interests of those at the narrow top of the income pyramid.   An important and ironic factor behind the right’s success is that starvation of the American education system for vast numbers of ordinary students has created fertile ground for disseminating disinformation, while helping to increase income inequality and reduce economic mobility.  Reducing inequality in our educational systems is thus a core task for those who would join Stiglitz in trying to reverse America’s slide into a divided society of haves and have-nots.