A Book Report: The Price of Inequality, by Joseph Stiglitz,
with references from Capital in the 21st Century, by Thomas Piketty
Submitted by Chip Sanders for CLUJP
September 8, 2015
Perhaps I would more readily grasp your attention if I were to offer a report on the popular novel and movie, Fifty Shades of Grey! I shall not, but I will admit to the following connection, which was made by Benjamin Dueholm in the August 19 Christian Century. Dueholm references an essay from the New Republic by Elizabeth Stoker Bruenig in which she “writes that Fifty Shades is at heart a film about negotiating our acceptance of dramatic economic inequality. (CC, 8/19/2015, p. 26)
Whether you agree with Bruenig or not, the reference underscores the broad reach of concern about economic inequality, the subject of this year’s CLUJP program. There is much to discuss!
My assignment today is to describe the recent book on this topic by Joseph E. Stiglitz. His Wikipedia entry lists some of his experiences and achievements that qualify him as a thoughtful scholar and expert.
Stiglitz “…is an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is a former senior vice president and chief economist of the World Bank and is a former member and chairman of the (US president’s) Council of Economic Advisers. He is known for his critical view[s] of the management of globalization, [of] free-market economists (whom he calls “free market fundamentalists“), and [of] some international institutions like the International Monetary Fund and the World Bank. …
“Based on academic citations, Stiglitz is the 4th most influential economist in the world today, and in 2011 he was named by Time magazine as one of the 100 most influential people in the world. Stiglitz’s work focuses on income distribution, asset risk management, corporate governance, and international trade. He is the author of several books, the latest being the best seller, The Great Divide: Unequal Societies and What We Can Do About Them (2015).” (Wikipedia for “Joseph Stiglitz”)
I can hardly improve on the cogent review of The Price of Inequality by Thomas Edsall in the New York Times Book Review. Edsall wrote that Stiglitz’s book “… is the single most comprehensive counterargument to both Democratic neoliberalism and Republican laissez-faire theories. While credible economists running the gamut from center-right to center-left describe our bleak present as the result of seemingly unstoppable developments – globalization and automation, a self-replicating establishment built on ‘meritocratic’ competition, the debt-driven collapse of 2008 – Stiglitz stands apart in his defiant rejection of such notions of inevitability. He seeks to shift the terms of the debate.”
A more trenchant review by Yvonne Roberts in British Guardian, calls spades spades: “… Stiglitz passionately describes how unrestrained power and rampant greed are writing an epitaph for the American dream…. In the process, Stiglitz methodically and lyrically (almost joyously) exposes the myths that provide justification for ‘deficit fetishism’ and the rule of austerity…. The Price of Inequality is a powerful plea for the implementation of what Alexis de Tocqueville termed ‘self-interest properly understood.’”
Let me say at this early point that I make no claims to economic expertise. Economics was not my field of study, so I have had to work at some of the concepts and approaches of Stiglitz and Piketty. Nevertheless, I shall attempt to offer a report to you that reflects their positions accurately.
I should note here that Stiglitz acknowledges that his data “rely heavily” on the work of Emmanuel Saez and Thomas Piketty. His footnote # 2 for chapter one lists the various sources compiled by Saez and Piketty, including tables and figures updated to 2014 on Saez’s impressive website, www.econ.berkeley.edu/~saez/ . Most of those data are included in Piketty’s recent book, Capital in the Twenty First Century. Four of his graphs have been copied and handed out for your reference during this report.
In a related item of note, the body of footnotes in Stiglitz’s book comprise one-quarter of the total of 523 pages! Many of those footnotes include additional commentary, supplementing the main text.
One additional note has to do with the distinction between income from labor and capital gains. Both income and capital gains are components of wealth, of course, but Piketty points out that different individuals are included in the high percentages of inequality resulting from income versus those resulting from capital gains. Piketty maintains that distinction carefully.
“For thirty years after World War II,” writes Stiglitz, “America grew together – with growth in income in every segment, but with those at the bottom growing faster than those at the top.” (p. 5) Thus, Stiglitz can say, “Some 30 years ago, the top 1 percent of income earners received only 12 percent of the nation’s income.” (ibid.) Barely 30 years later, “…the richest 20 percent of income earners earn in total after tax more than the bottom 80 percent combined.” (ibid.)
In another measure, the top 1 percent of income earners received some 60 percent of the gains during the country’s economic expansion between 1979 and 2007. (ch. 1, note 6) While the real after-tax household income of the 1 percent grew by 275 percent, the bottom fifth’s average real income rose only 18 percent. (ibid.) An outcome of these inequities is that “… the income of a typical full-time male worker has stagnated for well over a third of a century.” (p. 3) As a result, “… the ratio of CEO annual compensation to that of the typical worker by 2010 was … 243 to 1.” (p. 4)
After getting our attention, Stiglitz marshals more telling data to illustrate his main theme of inequality. “… over the last three decades those with low wages (in the bottom 90 percent) have seen a growth of only around 15 percent in their wages, while those in the top 1 percent have seen an increase of almost 150 percent and the top 0.1 percent of more than 300 percent.” (p. 9)
“Even after the wealthy lost some of their wealth as stock prices declined in the Great Recession, the wealthiest 1 percent of households had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983.” (p. 10) What he calls a polarization of the labor force means that “while more of the money is going to the top, more of the people are going toward the bottom.” (p. 11)
“The Great Recession,” Stiglitz avers, “thus represented a triple whammy for many Americans: their jobs, their retirement incomes, and their houses were all at risk.” (p. 16) “… almost one out of six Americans is now in poverty,” (p. 21) this in one of the wealthiest nations in all of world history.
And, in tandem with growing inequality is a decline in economic mobility or opportunity, one of America’s formerly special characteristics, at least according to our prevailing mythology…. Stiglitz cites studies that show that American children are more closely privileged by, or limited by, their parents’ education and economic status than is the case in even the countries of “Old Europe,” an unexpected finding. (p. 32)
Compounding the loss in opportunity is the absence of a strong safety net, such as exists in most advanced European societies. A major health care expense or a loss of a job can be a catastrophe in America, even for otherwise motivated and economically stable families. (p. 29)
How does such a state of affairs come to pass? Stiglitz and Piketty postulate several forces that have led to our present high levels of economic inequality. One factor, and a new bit of terminology for me, is the concept of “rent-seeking.” Stiglitz defines “rent-seeking” as “getting income not as a reward for creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort.” (pp. 39-40)
“Today,” Stiglitz writes, “… much of the wealth at the top in the United States – and some of the suffering at the bottom – stems from wealth transfers instead of wealth creation.” (p. 40) When others speak against proposed methods of redistribution, designed to share America’s wealth more broadly, we should ask them about the existing methods of redistribution that move wealth to the already wealthy…. (Stiglitz, p. 119)
“Rent seeking,” Stiglitz writes, “takes many forms: hidden and open transfers and subsidies from the government, laws that make the marketplace less competitive, lax enforcement of existing competition laws, and statutes that allow corporations to take advantage of others or to pass costs on to the rest of society.” (p. 48)
The word rent applies, of course, to the returns to land owners, or “rents.” The land owner receives these rents not because of effort but because of ownership. Rents are in direct contrast to wages, which are the “returns” a worker receives for his or her labor. Economists have extended the application of “rent” to include monopoly profits, “quota rents” from certain import rights or restrictions (e.g. for sugar), and the advantageous prices for extraction of natural resources at less than true market value. (pp. 49-50)
“Another form of rent seeking is the flip side,” Stiglitz writes: “selling [products] to government … at above market prices (noncompetitive procurement). The drug companies and military contractors excel in this form of rent seeking. Open government subsidies (as in agriculture) or hidden subsidies (trade restrictions that reduce competition or subsidies hidden in the tax system) are other ways of getting rents from the public.” (p. 50)
Included in Stiglitz’ concept of rent seeking are exploitation of customers by banks through abusive fees and predatory lending, whether in mortgage loans as in the recent debacles leading to “the Great Recession” or in debit and credit card abuses. He also includes the extraordinary compensation for CEO’s and other corporate officers which often derive from cronyism among the executives and their boards. (ibid.)
Stiglitz does not take issue with the fortunes made by great discoveries or from creative inventions. But he does point out that almost all of these discoveries and inventions were derived from the work and creativity of countless others whose contributions are not so highly remunerated. (p. 51)
We might ask if a case can be made for giving the whole of society some part in new wealth generation by virtue of a social environment which provides such support as roads and other infrastructure, safety and freedom, and the rule of law, upon all of which inventors and creators depend for their ultimate success.
Stiglitz takes to task the economists and theories of the Chicago school, such as Milton Friedman, who argue that “markets are naturally competitive and that there is little need for government interference.” Instead, Stiglitz avers, there are many ways to create monopoly conditions that can foster rent seeking. His primary example is Microsoft, which many of you know has been the subject of numerous anti-competitive accusations from other companies and from governments.
Next Stiglitz discusses the impact of politics and its influence on both laws and regulations as well as on high-level government appointees to cabinet and other executive positions. Here his examples include the prohibition on Medicare from negotiating drug prices and the protection of derivatives in cases of bankruptcy. He concludes that to describe the many forms of government approved rent seeking “would require another book!” (p. 64)
Still maintaining his conversational style of writing, Stiglitz addresses market forces, such as laws of supply and demand, that others cite for the rising levels of economic inequality. He includes “skill- based technological change (pp. 68 ff.); globalization (pp. 73 ff.); and societal changes such as the decline of unions, changing views on corporate governance, and discrimination (pp. 80 ff.) as reasons for increasing inequality.
But Stiglitz does not accept these forces as inevitable; rather, he points to governmental actions and laws that permit or even encourage the redistribution so well documented. “… almost every law has distributive consequences,” he writes (p. 72).
“The most important role of government, however, is setting the basic rules of the game, through laws …” (ibid.) that either permit or discourage the special advantages that result in growing inequality. Two particularly effective measures that increase inequality are the lower top marginal income tax rates and the lower tax rates for capital gains.
“The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton and down finally to 35 percent under George W. Bush. “ (p. 89) The capital gains tax rate declined under both Clinton and Bush to its present level of 15 percent, clearly advantaging capital accumulation over wages. (ibid.)
Perhaps adding insult to injury, the revised estate tax laws protect some capital gains income from ever being taxed while they insure that wealth, however gained, remains in the coffers of the wealthy person’s heirs. (p. 90)
A similar trend can be found in corporate tax laws. Here the stated tax rate of 35% is rarely achieved because of loopholes and special provisions. Corporate taxes have changed “… from providing 30 percent of federal revenues in the mid-1950s to less than 9 percent today.” (p. 92) This leads me to ask the question, Who is making up the difference, especially if the wealthy are paying a smaller share of their income than ever before? Any guesses…?
These and many other examples lead Stiglitz to conclude that “…inequality is, to a very large extent, the result of government policies that shape and direct the forces of technology and markets and broader societal forces.” (p. 102) Here Stiglitz waxes optimistic, since his analysis leads him to the conclusion that economic inequality is not inevitable but can be reduced by the same political bodies that created it. (ibid.) Of course, this same conclusion can just as easily be viewed pessimistically, given a political system that heeds the siren call of wealth more clearly than the cries of the disadvantaged.
So, from an economic perspective, why does any of this really matter? Stiglitz offers a number of reasons why a high level of economic inequality brings economic problems. As an issue of economic stability – I am reminded of the financial news mantra that “Markets hate uncertainty” – Stiglitz points out that the Great Depression of the 1930s and the Great Recession of the 2000s were both preceded by periods of very high inequality. (p. 106)
Then there are the negative impacts on a market economy of moving money from the bottom to the top. Such redistribution “… lowers consumption because higher-income individuals consume a smaller proportion of their income than do lower-income individuals (those at the top save 15 to 25 percent of their income, those at the bottom spend all of their income).” When income declines, economic demand, or consumption, also declines, leading to increases in unemployment and, subsequently, further economic decline.
As an aside, this spending/saving differential also explains why social programs that benefit poorer people also benefit the overall economy. Benefits to lower-income individuals are largely consumed immediately, giving a boost to the economy especially during economic downturns. Conservative opposition to social programs is economically self-defeating!
Another reason for the recent instability in the economy is the move toward deregulation, another product of “unbalanced politics.” (p. 112) “Regulations are the rules of the game that are designed to make our system work better – to ensure competition, to prevent abuses, to protect those who cannot protect themselves. Without restraints, … market failures … are rampant.” (ibid.)
Stiglitz offers the case of banking, in which the Glass-Steagall Act of 1933 prevented the kinds of abuses that in part led to the Great Depression. “With the dismantling of these regulations in 1999, the excesses returned with even greater force: bankers quickly put to use advances in technology, finance, and economics.” (p. 113) Then another economic crisis struck.
“The losses … associated with the Great Recession and other economic downturns are enormous,” Stiglitz writes. “Indeed, the sheer waste of resources brought on by the crisis caused by the private sector – a shortfall of trillions of dollars between what the economy could have produced and what it has produced – is greater than the waste of any democratic government, ever.” (ibid.)
Next Stiglitz discusses the economic effects of inequality. He quotes from a 2011 study by the International Monetary Fund: “We find that longer growth spells are robustly associated with more equality in the income distribution. … Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin.” (p. 114) Stiglitz then offers a variety of illustrative examples.
Addressing rent seeking, he states that “A byproduct of efforts toward getting a larger share of the pie is shrinkage of the pie. Monopoly power and preferential tax treatment for special interests have exactly this effect.” (p. 119) One reason for this is that government has failed to set proper rules or to enforce the existing ones. It has failed to continue to provide the soft and hard infrastructure that provides the conditions for economic growth.
Stiglitz points to oil and coal companies, who extract resources at below-market prices and have succeeded in getting legal protection from the damages their production creates. He mentions the bank bail-outs, of course, raising the “moral hazard” argument of government support even of foolish behavior. And he points out the relative limitations of America’s private-sector-based health system and the resulting negative impacts on the poor.
In sum, Stiglitz avers, there is a major misalignment between virtually unlimited private rewards and niggardly social returns, relative to other advanced economies. (p. 127) “Policy failures include those in macroeconomic stabilization, industry deregulation, and underinvestment in infrastructure, public education, social protection, and research.” (ibid.)
Stiglitz discusses the economic theories of “the political right” in which inequality is seen as “the inevitable consequence of any incentive system…. Any program of redistribution will accordingly necessarily attenuate incentives.”
But he goes on to point out that such theories require “a perfectly competitive economy with private rewards equal to social returns …” whereas what we have is “an economy marked by rent-seeking and other distortions. The Right underestimates the need for public (collective) action, to correct pervasive market failures. It overestimates the importance of financial incentives.
“And, as a result of all of these mistakes, the Right overestimates the costs and underestimates the benefits of progressive taxation. … Indeed, University of California professor Emmanuel Saez, Thomas Piketty of the Paris School of Economics, and Stefanie Stantcheva of the MIT Department of Economics, carefully taking into account the incentive effects of higher taxation and the societal benefits of reducing inequality, have estimated that the tax rate at the top should be around 70 percent – what it was before President Reagan started his campaign for the rich”. (pp. 132-3 and 143)
In a chapter entitled “A Democracy in Peril,” Stiglitz reminds us of the importance of money in today’s political environment. He points out that, “For those with money, spending it to shape the political process is not a matter of civic virtue; it is an investment, from which they demand (and get) a return.” (p. 151) Furthermore, the wealthy “have the resources to buy and control critical media outlets, and some of them are willing to do so at a loss; it’s an investment in maintaining their economic position.” (p. 161)
Of course Stiglitz cites the Supreme Court decision in Citizens United. That decision is “just another reflection of the success of the moneyed interests in creating a system of ‘one dollar, one vote.’” (p. 166) Adding to the disenfranchisement of the rest of us is the gerrymandering of voting districts that virtually insures the electoral success of incumbents. (ibid.)
Yet another market force encouraging inequality is globalization, at least as it is presently effected. “… managed for the 1 percent, globalization … provides a mechanism that simultaneously facilitates tax avoidance and imposes pressures that give the 1 percent the upper hand not just in bargaining within a firm … but also in politics. Increasingly, not only have jobs been offshored but so, in a sense, has politics.” (p. 171) Many examples are offered.
Time does not permit the explication of Stiglitz’ chapter on behavioral economics, which discusses propaganda and brainwashing that he attributes to the 1 percent. The chapter’s title will give you its core position: “1984 Is Upon Us.” Read it without despair, if you are able!
It reminds me of the comments by a key strategist early in President George W. Bush’s first term, as reported in The New York Times Sunday Magazine. As I recall, the interviewer expressed deep skepticism about the public’s acceptance of the reality portrayed by many of the new president’s policy justifications. “You don’t understand,” was the all-too candid response. “We create the reality.” Maybe “1984” is not too strong an analogy….
The following chapter on erosion of the rule of law is equally depressing. The success of moneyed interests in obtaining legal protection for what most of us would recognize as exploitation is unparalleled in our history. Stiglitz offers numerous unsettling examples.
In chapter 8, Stiglitz discusses the impacts of the federal budget process of the past decade or so. He references our huge defense budget, stating what others have also said, that U.S. “military expenditures totaled that of the entire rest of the world put together.” (p. 262)
“There is money for [an unneeded] fighter jet … but there’s no more money to help homeowners stay in their homes.” (p. 263) His comments remind me of one of Jim Wallis’ favorite statements, that a budget “is a moral document.” Stiglitz then offers his prescriptions for improving our economy, which will require major changes to the current sets of priorities that so clearly advantage the wealthy at the expense of the rest of us.
Hear the concluding words of Joseph Stiglitz: “Whether we will fall to the depths of some countries, where the gates [of the wealthy] grow higher and the societies split farther and farther apart, I do not know. It is, however, the nightmare toward which we are slowly marching.” (p. 362)
And now, in conclusion, I offer some personal observations. Yes, some economic inequality can be a natural result of such factors as ability, effort, and luck. The first of these is inherent; the second should be encouraged; and the third is simply beyond control. But inequality that results from governmental policy and tax laws is addressable and must be challenged, for reasons of social justice and civic engagement as well as for economic growth and stability.
The issue is not the old shibboleth of “redistribution,” a term thrown out by some in attacking government management of the economy. Redistribution has already occurred, in the existing legalized favoritism afforded corporations, financial institutions, and wealthy individuals. The real issues are economic fairness and economic health, and the methods we employ might be termed “un-distribution.”
We need to “un-distribute” the unfairly attained advantages of the wealthy, for their benefit as well as for all. Why should capital gains be taxed at a rate lower than income from labor? We have more than a couple of decades of experience that demonstrate that income from untaxed capital gains does not increase jobs. Where are all those privileged “job-creators”? Where are the jobs they were supposed to create?
Would not the common good be increased by giving a tax advantage to income from labor, providing the great majority of citizens with the means and desire to participate fully in a democratic society?
Why should not estates be taxed to capture the taxes dodged by laws of inheritance? Given that much wealth accumulation is the result of privileged rent seeking, why should inheritance not be taxed at some reasonable level?
To point out the increasing economic inequality in America is not to “start a class war.” That war has already started, and the wealthy are winning it – for now!
Thank you for your attentiveness! The floor is now open for questions, for comments, and for discussion.