As the protests which began on Wall Street spread around the country — including Stanford’s own White Plaza — many have sought to define the protests’ ever-elusive underlying message. Among the protesters it is likely that there are reasonable views with which we agree, reasonable views with which we disagree and views that are not so reasonable at all. Nevertheless, the topics the protests have highlighted, chief among them economic inequality and the failure to rein in unbridled financial sector risk-taking, provide an occasion to look at some of the crucial questions facing American society.

The unequal distribution of American incomes has reached staggering proportions. Out of 136 countries with data in the CIA World Factbook, 96 have more equal income distributions than the United States does, which comes in just after Iran, Nigeria and Uganda with a top-heaviness unrivaled by any other advanced nation. The top one percent of Americans now earns 24 percent of all income and hold 40 percent of the national wealth, up from nine percent and 20 percent in 1976. Since the late 1970s, the average income of the top one percent has roughly tripled, while the middle quintile has seen only a 21-percent increase and the bottom fifth, only a six percent increase. Essentially, the rich have gotten much richer while everyone else has seen their incomes stagnate.

While the exploding wealth of the wealthy might not be a problem in and of itself, the evidence indicates that high levels of inequality come with significant problems. New York Times columnist Nicholas Kristof has pointed out that among rich countries and the 50 American states, inequality — controlling for overall income levels — is associated with more mental illness, infant mortality, drug use, obesity, high school dropouts, teenage births and homicides. Inequality might also stifle wealth creation. A recent IMF study found that long-run economic growth has a greater correlation with egalitarian income distributions than with other traditionally important growth factors such as trade openness, political institutions, or foreign direct investment. Earlier International Monetary Fund (IMF) research suggests that inequality might also contribute to sparking financial crises. Interestingly, the only time in American history income was as unequal as it is in the present was 1929, right before the onset of the Great Depression.

Some suggest that rising inequality primarily reflects market forces. With the integration of global markets and technological change, the argument goes, the returns to education have increased dramatically and left a gulf between the rich and poor. But as political scientists Jacob Hacker and Paul Pierson point out in their book, Winner-Take-All Politics, roughly a quarter of Americans graduate from college, but only the top few percent have seen explosive income gains. Furthermore, other industrialized nations have experienced the same economic changes without anything approaching similar increases in inequality. The authors argue that U.S. policy, including changes in taxes, executive compensation and financial deregulation, has played a central role in facilitating this shift.

As the Wall Street protesters have suggested, the share of the economic pie accruing to the financial sector has increased in recent years. In 2004, the top 25 hedge fund managers earned more than all of the CEOs from the S&P 500. Financial sector profits rose to 41 percent of all profits in the 2000s, gradually rising up from less than 16 percent before 1985. Financial sector pay has reached 181 percent of the average for all domestic private industries after never exceeding 108 percent before 1982. Some of these gains are clearly attributable to the new demands of a globalized, technologically advanced world, but risky behavior has also played a role. Several economists have explained, for example, how traders can take advantage of negatively skewed probability distributions to earn good returns for awhile and collect hefty short-run bonuses, while leaving their firm, the government and the nation to clean up when things go catastrophically wrong.

Worse, efforts to reform the financial sector have been stonewalled by Republicans in Washington. Congress passed the Dodd-Frank financial regulation bill last summer, but less than a tenth of its rules have been implemented a year later. Republicans have vowed to repeal the law, worked to defund the Securities and Exchange Commission and other agencies tasked with implementing it and refused to confirm nominees to key positions. While some provisions of the law — such as higher capital requirements for systemically important financial institutions — are clearly indispensable, we do not pretend to know whether it would be enough to protect against future crashes or to argue that it is perfect. But the Republican position is not to replace Dodd-Frank with some other well-reasoned reforms; it is to bring back the broken system that brought us this mess to begin with. Arguing that everything was fine just the way it was seems like quite a stretch.

Observers smarter than us have sounded this alarm before. Tyler Cowen, a George Mason economics professor, wrote that the status quo in the financial sector is “distorting resource distribution and productivity” and could “again bring our economy to its knees.” Simon Johnson, former IMF chief economist, has warned about “the prospect of a national and global collapse…worse than the Great Depression.” We understand that reforming Wall Street to maintain a strong financial sector while reducing catastrophic risk will be complicated. The important, thing, however, is to understand the debate and refrain from casting our voices recklessly. Whether students support the Occupy Wall Street protests and their national counterparts or not is less relevant. The protests are valuable for drawing attention to an important issue, but it is only by understanding the underlying issues and why they cause so much contention that we can have a healthy debate about the nature of the economy and how it impacts society.