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Nobel Laureate: Wealth gap hurts everyone

Is inequality actually a problem?

In his new book, Nobel Prize-winning economist and Columbia Business School professor Joseph Stiglitz argues that growing inequality and economic unfairness could threaten the stability of the country in the long run.

His book, "The Price of Inequality," illustrates how the American economy has been engineered to benefit a few while taking from everyone else -- and why that's a problem. He also lays out ways to reduce the increasing wealth gap in society.

Bankrate spoke with Stiglitz about his new book.

Why does growing inequality matter? After all, we have all heard that people who are poor, they are poor for a reason. And people get rich because they work really hard.

We care about inequality partly because we pay a high price in terms of our economic performance. We care about it also because of the impact that it has in every other aspect of our society -- our democracy, our rule of law, our sense of identity or a land of opportunity -- because we aren't anymore.

The people at the top are not the people who made the most contributions to our society. Some of them are. But a very large proportion (is) simply people I describe as rent-seekers -- people who have been successful in getting a larger share of the pie rather than increasing the size of the pie.

Could you explain rent-seeking?

Rent is a return on income that you get not as a result of your contribution but because of your ownership of land. It was a notion that income does not have to rise out of effort or making a contribution.

But economists have generalized that to a much broader usage, which really includes any kind of activity, which is more directed at redistributing the existing pie nationally rather than enhancing national income.

The term got used a lot in the context of, say, Middle East oil countries or developing countries where there are natural resources and people fight over who gets claims on those natural resources.

While we look at these economies, these oil, mineral, resource-rich countries as distorted and think, "Oh, that is a problem of poor developing countries," we don't understand the extent to which our economy has really become a rent-seeking economy.

How has the financial sector contributed to the growing inequality?

Much of what goes on in the financial sector is this kind of rent-seeking.

The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top.

That is a case where they both affected two of the more important dimensions of our inequality, that is to say, the suffering of those at the bottom and the wealth of those at the top.

I don't want to say it was totally the banks but, in part, (they were) pushing mortgages that were inappropriate for these individuals. (Banks were) pushing them because they generated lots of fees and transaction costs that they were focusing on. (Banks were) not focusing on what would be appropriate for the customers. They were the experts who were supposed to make a judgment about risk management. And obviously, that wasn't what they were doing.

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