Excerpts from Joseph Stiglitz new book The Price of Inequality
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America is no longer a land of opportunity
US inequality is at its highest point for nearly a century. Those at the top – no matter how you slice it – are enjoying a larger share of the national pie; the number below the poverty level is growing. The gap between those with the median income and those at the top is growing, too. The US used to think of itself as a middle-class country – but this is no longer true.
Economists have justified such disparities by citing “marginal productivity theory”, which explains higher incomes through greater societal contributions. But those who have really transformed our society, by providing the knowledge that underpins the advances in technology, earn a relative pittance. Just think of the inventors of the laser, the Turing machine or the discoverers of DNA. The innovation of those on Wall Street, while well compensated, brought the global economy to the brink of ruin; and these financial entrepreneurs walked off with mega-incomes.
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One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago; and the median income of a full-time male worker is lower than it was more than four decades ago. Meanwhile, those at the top have never had it so good.
Some argue that increased inequality is an inevitable byproduct of the market. False: several countries are reducing inequality while maintaining economic growth.
Markets are shaped by the rules of the game. Our political system has written rules that benefit the rich at the expense of others. Financial regulations allow predatory lending and abusive credit-card practices that transfer money from the bottom to the top. So do bankruptcy laws that provide priority for derivatives. The rules of globalisation – where capital is freely mobile but workers are not – enhance an already large asymmetry of bargaining: businesses threaten to leave the country unless workers make strong concessions.
Textbooks teach us that we can have a more egalitarian society only if we give up growth or efficiency. However, closer analysis shows that we are paying a high price for inequality: it contributes to social, economic and political instability, and to lower growth. Western countries with the healthiest economies (for example those in Scandinavia) are also the countries with the highest degree of equality.
The US grew far faster in the decades after the second world war, when inequality was lower, than it did after 1980, since when the gains have gone disproportionately to the top. There is growing evidence looking across countries over time that suggests a link between equality, growth and stability.
There is good news in this: by reducing rent-seeking – finding ways of getting a larger share of the pie, rather than making the pie larger – and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. Laws that tax speculators at less than half the rate of those who work for a living or make the innovations that are transforming our society, say something about our values; but they also distort our economy, encouraging young people to move into gambling rather than into more productive areas. Since so much of the income at the top is derived from rent seeking, higher taxes at the top would discourage rent-seeking.
America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. The US worked hard to create the American dream of opportunity. But today, that dream is a myth.
We can once again become a land of opportunity but it will not happen on its own, and it will not happen with a politics that focuses on cutting public education and other programmes to enhance opportunities for the bottom and middle, while cutting taxes for those at the very top. President Barack Obama’s support for these investments, as well as the “Buffett rule” that asks those at the top to pay at least as much in tax as a share of their income as those who are less fortunate, are moves in the right direction. Republican candidate Mitt Romney’s suggestion that we cut back on public employees is worrisome; as is his silence on whether capital gains on speculation should be taxed at a lower rate than income derived from hard work.
The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognise that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?
The writer is a recipient of the 2001 Nobel Prize in economics and the author of the forthcoming ‘The Price of Inequality’
Well this isn’t politically charged…
I have a hard time relating opportunity to egalitarianism. If opportunities were equal, there would certainly be a high degree on inequality.
Of course, lack of social mobility is a problem. However, I don’t know if it’s really due to lack of opportunity in the US.
Since I don’t have the numbers in front of me, I’ll assume the implied numbers he sites in the argument are correct.
First: his whole premise seems to be based on the notion the incomes of the middle class have fallen simply because politics/laws completely favor the rich. Yes many financial regulations do lead to predatory lending practices and other terrible abuses, but many were written this way with the idea to enable the poor access to capital… how convenient not to mention that.
Second: he doesn’t seem to consider that middle income wages in America came down due to external forces such as the rise of lower-paid middle classes in other countries. You could argue that our free-trade policies have caused jobs to go over seas, but I don’t see how any policy could have stopped this anyway in the long-run; pro-growth policies (low taxes, research grants, lax regulations) may have curbed it though.
Third: he doesn’t consider that technological innovations (not just hardware and software, but better management methods) may also be a cause of the decline in middle income wages. Simply put, we may not need as many hands greasing the machine as we did in the past.
Finally, “cutting back on public employees is worrisome?” Nice way to sneak in some partisan politics there. Growth in the public sector since the 1990s has soared nearly 27% (mostly in local and state), while the private sector has grown 17% (granted the comp is larger and thus more difficult). Average wages+benefits in the public sector: I’ve seen figures around $54k (public) vs $41k (private). Even if this gap is exaggerated by the sources, public employees still benefit immensely from employment stability and better work/life balance. To sum this up, I’ll use his own words: any way you slice it, public employment and benefits are probably too high and need to come down closer to the level of that in the private sector. If this doesn’t happen, we yet again have a poor allocation of resources, but at least politicians can juice employment figures to show they are doing something…
So in summary, he does cite a very real problem of growing income inequality that may lead to economic and political instability. However, I fail to see how simply taxing the rich to make things “fair” and stop laying off a bloated and unproductive public sector is going to save the middle class… in the long-run. I say the long-run again, because those policies he cites would likely inflate figures on income and employment for the middle class in the short and middle-term. My gut instinct is to always go with pro-growth policies (low and simple tax code, lax regulations, employee mobility, and strong rule of law), but I acknowledge that may be just a good place to start. Fixing these issues may require much more elegant and detailed approaches with well calculated government intervention and incentives.
I really need a tl;dr version.
Stiglitz argues that US policy favors the rich over the poor, creating a divided and inequal society. The effects of this inequality are “lower growth and higher social, political and economic instability”. Stiglitz advocates a more progressive tax structure and opposes cuts on public spending.
Basically, it’s the same argument that all Democrats make. Stiglitz even mentions his support for Obama over Romney in this article.
“Our political system has written rules that benefit the rich at the expense of others”
True. Unfortunately the author doesn’t understand how to undo this phenomenon (or more sinister: he understands this and is just using the issue to push an agenda that won’t fix the problem). Like soooo many others, his prescription is more government control over the economy. in fact it is government involvement in the economy that insulates those at the top and their companies from competition. Why is the pie not getting bigger? Because the corporate and political elite like it that way. So they write rules to keep it that way. Incumbant companies love new regulations because they can absorb the costs, which are too burdensome to start ups. tax them all you want, real growth above population growth is impossible without competition and the potential to profit from innovation.
It doesn’t matter who you vote for this time around. The problem is just going to get worse.
FTFY! America is a great country. Pay no attention to these talking head pessimists.
Actually Stiglitz feminism and gender EQUALITY are causing income INEQUALITY:
Inequality is a weak term because it implies that the rich getting poorer will be as effective as the poorer getting richer.
Stiglitz crybaby article aside, I think the US system works better than many realize - what’s viewed as poor in US is viewed as rich in many countries. Those Occupy Wall Street bums had not only plenty of food, but even Iphones and stuff - that’s upper middle class in Brazil - maybe mega-rich in Sierra Leone.
Edit: I do agree with all the bigger pie and avoiding unequal opportunities ideas - I just don’t like the term inequality since it so often used as “I’m jealous some other person has more money than me”.
From the below question 7, Dems want to increase taxes on rich people and maybe cut military spending. Reps want to change nothing.
For the 2012 budget, Pres. Obama requested $738 billion in defense spending, compared to the Republican proposal of $712 billion. $716 was enacted.
There are many factors already mentioned that contribute to the decline of the middle class lifestyle. Globalization of the middle class, etc.
But I’m firmly convinced one aspect is always missed. In the US, the middle class is much more risk averse than it used to be, causing entrepreneurialism to fall off drastically. People are by and large unwilling to take on the lack of security associated with starting your own small business and want security and large pay checks entitled by degrees. By and large, the hefty pay checks have become more scarce, but people are still clinging to security over the uncertainty and responsibility of running a business.
Lately I’ve been giving increasing thought to quiting at the end of this year and starting a business of my own. I’d easily trade a large chunk of my paycheck for personal freedom.
^from day one you’ll be lucky enough to have a silent partner in your venture. it won’t be a great deal for you though because they’ll only share in the upside, none of the downside. but it’ll be your fair share to pay so you’ll be fine with it right?
^ Who do you suppose should pay for police and fire department protection (among other things) for his business? The magic tax paying fairy?
Which is why Obama is not very popular even within his own party. I was speaking about the survey, in which 48% of respondents said they would use military cuts to help balance the budget.
@BS, I think some of this could be because the developed world is in a “decumulation” phase demographically, in contrast BRICs and other faster growing markets. People are risk averse because they are older. It’s funny, I think every young person I met last time I was in LA was basically freelance or owned their own company…could just be the circle my friends are in down there. One guy I met started his own fitness company after getting in early on the P90x craze. Maybe not the type of entrepreneurship you are think of, but it is what it is.
What are you talking about? My post had nothing to do with taxes?
Reference to the exact same question in the exact same survey was used by someone in my Obama vs. Romney thread as why he supports Obama, saying something to the effect that Obama is dealing with reality.