Vast majority have lessons to learn from the 'undeserving' 1 per cent

It is amazing how the 'one per cent' epithet, a reference to the top 1 per cent of earners, has caught on in the US and elsewhere in the developed world, writes Raghuram Rajan.

It is amazing how the "one per cent" epithet, a reference to the top 1 per cent of earners, has caught on in the US and elsewhere in the developed world.

Finance:

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In the US, this 1 per cent includes all those with a 2006 household income of at least US$386,000 (Dh1,417,469). In the popular narrative, the 1 per cent is thickly populated with unscrupulous corporate titans, greedy bankers and insider-trading hedge-fund managers. Reading some progressive economists, it might seem the answer to all of America's problems is to tax the 1 per cent and redistribute to everyone else.

Of course, underlying this narrative is the view 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 1 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. Corporations, especially in the financial sector, reward too many executives richly despite mediocre performances. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative's reductionism.

It ignores the fact many of the truly rich are entrepreneurs. It likewise ignores the fact many of the wealthy are sports or entertainment stars or professionals such as doctors and lawyers; 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, although it is most pronounced there. Academic studies suggest 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. 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. Nevertheless, close examination suggests the single biggest difference between those at or above the top 10th percentile of the income distribution and those below the 50th percentile is the former have a degree or two while the latter, typically, do not.

Technological change and global competition have made it impossible for US workers to get good jobs without strong skills. In the race between technology and education, education is falling behind.

To acknowledge the fact the broken educational and system is responsible for the growing inequality 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 quick fixes to education.

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. 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 afford to pay more, but if governments increase taxes on the wealthy, they should do so with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.

Raghuram Rajan is a professor of finance at the Booth School of Business, University of Chicago, and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy

* Project Syndicate