COMMENTARY
This article is an example of a big reason why the modern economy is not functioning well. It is written by a Professor of Finance at the Booth School of Business, University of Chicago and really says absolutely nothing of much use. From my perspective it is an article written in an ivory tower with not much contact with the real world.

My view of the economy is that wealth that is earned is very different from wealth that is merely transferred from another segment of society. The University of Chicago is famous for its belief in the free market, but in my experience most of the markets are now gamed by people and systems so that the more efficient they are the worse they work as an economic regulator.

The US Occupy Movement is not asking for higher taxation on the top 1% as a way to solve the economic dysfunction ... as I understand it, Occupy is asking for something much deeper. There is nothing wrong with entrepreneurs being successful, but the sad problem is that only profit entrepreneurs get rich and social entrepreneurs are likely to be broke. The modern capitalist market economy allocates resources to economic activities that will earn profit, but it fails totally to allocate resources to things that have value but are not per se profitable. Education and infrastrucure are examples. The capitalist market economy has no way to get resources to satisfy needs except those that are profitable. A value market economy would be somewhat different, and could make the global economy substantially better.

Another issue is that efficient markets are going to make workers poorer and poorer, and the owners of financial capital risher and richer. This is not an outcome that will work in the long run. I think it was Henry Ford that observed that he wanted his workers to be able to buy the cars they were building ... and economists then started to talk about prosumers ... people that produced and consumed. The world has become financial unstable in the last few years in part because demand has been artificially increased by silly financial arrangements that seemed to make the banks profit, but in fact was making them broke. Lucky for them the taxpayers around the world has bailed out the banks ... but not much has been done for ordinary people who have had their savings looted.
Peter Burgess

The undeserving one per cent? Ideas about who qualifies to be in the one per cent and how they made their money may be flawed, says economist.

IMAGE In the US, the one per cent includes all those with a 2006 household income of at least $386,000 [GALLO/GETTY]

It is amazing how the 'one per cent' epithet, a reference to the top one per cent of earners, has caught on in the United States and elsewhere in the developed world.

In the US, this one per cent includes all those with a 2006 household income of at least $386,000. In the popular narrative, the one per cent 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 one per cent and redistribute to everyone else.

Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system and the conflict-of-interest-ridden financial system. The one per cent 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.

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 10th 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 per cent', sounds less dramatic than 'we are the 99 per cent'. 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.

Broken education system

Close examination suggests that the single biggest difference between those at or above the top 10th 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.

QUOTE 'In the race between technology and education, education is falling behind.' - Claudia Golden and Larry Katz, Harvard professors

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 one per cent 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, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

A version of this article was first published on Project Syndicate.

Source: Project Syndicate