Nobel winner Stiglitz: "American Dream is a myth"

The quintessential American hero peppered Horatio Alger's novels: poor boys who, through scrappy hard work and ingenuity, climbed the economic ladder.

Those days are long gone, according to Nobel Prize-winning economist Joseph Stiglitz, who looks at America's growing income inequality in his new book "The Great Divide: Unequal Societies and What We Can Do About Them," published by W.W. Norton.

America may have once been known for providing opportunities to poor and rich alike, Stiglitz writes, but the country has now been hamstrung by growing inequality, which is creating a "vicious circle" where the rising power of the top 1 percent of American earners leads to greater political inequality, which then reinforces more economic inequality.

"America is no longer the land of opportunity that it (and others) like to think it is," writes Stiglitz, former chief economist at the World Bank and a professor at Columbia University. He won the Nobel Prize in economics in 2001. "To a large extent, the American Dream is a myth."

The chances of making it to the top for young Americans today "are far lower than for young persons in other advanced countries," Stiglitz writes, noting that some "very talented immigrants" do still achieve economic success.

His book comes on the heels of research from economists such as Thomas Piketty and groups including the Organization for Economic Co-operation and Development that have found income inequality in the U.S. is much worse than in other developed countries.

Where is the middle class heading?

That's making it harder for children from low-income families to scale the economic ladder, research from the University of New Hampshire's Carsey School of Public Policy found last month. Poorer families aren't able to afford the type of enrichment and educational policies as wealthier households, which helps explain why children from families with incomes of at least $120,000 generally score significantly higher on the SATs than their peers from households earning $20,000 or less.

This SAT gap has widened since 1980, along with the divergent fortunes of rich and poor families. The top 1 percent of Americans now take home 20 percent of all pretax income, or double their share in 1980. For most middle-class and lower-income families, income has either stagnated or fallen.

"For men with only high-school degrees, the decline has been precipitous -- 12 percent in the last quarter-century alone," Stiglitz writes. "In terms of income inequality, American lags behind any country in the old, ossified Europe that President George W. Bush used to deride."

The lopsided nature of America's current income distribution may spell a dire outcome for the country's common goals, Stiglitz notes. "The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs," he writes. Shared access to services such as medical care and schools aren't as important to the rich because they can buy private access to both, making it less likely that they'll want to invest in either for the common good.

While some economists and social scientists have sought to explain America's growing inequality by looking at the impact of capital's higher rates of return or the decline in unions and manufacturing, which Stiglitz also discusses, he also focuses on the role of politics, especially through policy decisions such as lowering the tax rates on capital gains. The top 400 earners in America, who brought in average income of $335.7 million in 2012, paid only 16.7 percent of their adjusted gross income in taxes, far below the rate paid by many middle-class Americans, for instance.

"Lowering tax rates on capital gains ... has given the wealthiest Americans close to a free ride," Stiglitz writes.

How can America fix the problem?

Tax reform and rethinking the transfer system in the U.S. could help, he told Yahoo! Finance. "Make it at least fair that those at the top pay at least the same share," he said. On top of that, corporate governance and "ineffective" antitrust laws should be examined because they're "tilted" and create more inequality.

Providing equal access to education will also help narrow the inequality gap, he said. "We spend more even in the public school on the children of the rich than we do the poor," he said. "We are transmitting advantages and disadvantages across generations, and that is the most important factor in creating this inequality of opportunity."

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