Nobel prize-winner Stiglitz: Three steps to solve income inequality

It's the hollowing out of the U.S. economy. The haves are getting more, the have nots are getting less.  And the middle class is disappearing.

Between 2000 and 2013, every single state in the United States saw its share of middle-class families shrink, according to analysis from the Pew Charitable Trusts. In some states like Wisconsin and Ohio, that number fell by more than 5 percentage points; middle-income families now make up less than half of those states' populations.

It’s not a new narrative but the modern story of inequality goes much deeper than stagnant wage growth. It's inequality of opportunity as well.  It's something Nobel-prize winning economist Joseph Stiglitz has studied and written about a great deal. He talks with Yahoo Finance Editor-in-Chief Andy Serwer in the video above.

In his new book, “The Great Divide: Unequal Societies and What We Can Do About Them,” Stiglitz traces the modern divide of inequality back to the Reagan era. Though inequality was a huge problem at the turn of the last century and in the lead up to the Great Depression, Stiglitz says the income divide in the U.S. was reduced after World War II and that the country “grew at its fastest pace” and “grew together.” He says the turning point was the Reagan Administration and its rolling out of supply-side economics, deregulation, and lower tax rates. The goal of these policies was to spur economic growth overall and make everyone wealthier. Stiglitz says it caused a divide instead.

Watch the full Stiglitz interview here

In his book, Stiglitz offers three ways to bridge this growing inequality gap. First, he says, reform the tax and transfer system in the U.S. to “make it at least fair that those at the top pay at least the same share,” that we don’t have these distorting provisions which weaken the economy and create more inequality.

Second, Stiglitz says we need to look at the basic structure of the economy and our laws and regulations. It is “the way our economy works that creates this inequality,” he says. Stiglitz points to “ineffective and ineffectively-enforced” anti-trust laws and corporate governance laws that, he says, allow those at the very top to seize a larger and larger share of the corporate pie. As a result, that leaves “less for investment, less for wages.” He says it's a structural problem that needs to be fixed because "effectively every law and regulation is tilted to create an untilted field."

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And finally, Stiglitz says, we need to provide equal access to education to bridge the inequality divide. “We spend more even in the public school on the children of the rich than we do the poor,” he says. This has long-lasting effects. “We are transmitting advantages and disadvantages across generations, and that is the most important factor in creating this inequality of opportunity.”

Also to his point about equal access, Stiglitz says the U.S. has to make it easier for people all along the income distribution spectrum to participate in the labor force. “It’s really hard if you’re poor to get to work. We don’t have good public transportation systems. We don’t have back ups [options] for women.”

Despite the size and scope of the issue -- and the challenge of getting politicians to work together to fix it -- Stiglitz says he is somewhat optimistic about the prospects for addressing income inequality. “I think it’s within our ability,” he says. “I think there is now a broad recognition, left and right, that there is a problem.”

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