Read

Search form

Joseph Stiglitz: Inequality Undermines Prosperity

Joseph Stiglitz: Inequality Undermines Prosperity
Fri, 8/10/2012
This article originally appeared on Reader Supported News

Photo: Joseph Stiglitz, courtesy of the Roosevelt Institute.

Despite what the debt and deficit hawks would have you believe, we can't cut our way back to prosperity. No large economy has ever recovered from serious recession through austerity. But there is another factor holding our economy back: inequality.

Any solution to today's problems requires addressing the economy's underlying weakness: a deficiency in aggregate demand. Firms won't invest if there is no demand for their products. And one of the key reasons for lack of demand is America's level of inequality - the highest in the advanced countries.

Because those at the top spend a much smaller portion of their income than those in the bottom and middle, when money moves from the bottom and middle to the top (as has been happening in America in the last dozen years), demand drops. The best way to promote employment today and sustained economic growth for the future, therefore, is to focus on the underlying problem of inequality. And this better economic performance in turn will generate more tax revenue, improving the country's fiscal position.

Even supply-side economists, who emphasize the importance of increasing productivity, should understand the benefits of attacking inequality. America's inequality does not come solely from market forces; those are at play in all advanced countries. Rather, much of the growth of income and wealth at the top in recent decades has come from what economists call rent-seeking - activities directed more at increasing the share of the pie they get rather than increasing the size of the pie itself.

Some examples: Corporate executives in the U.S. take advantage of deficiencies in our corporate governance laws to seize an increasing share of corporate revenue, enriching themselves at the expense of other stakeholders. Pharmaceutical companies successfully lobbied to prohibit the federal government - the largest buyer of drugs - from bargaining over drug prices, resulting in taxpayers overpaying by an estimated half a trillion dollars in about a decade. Mineral companies get resources at below competitive prices. Oil companies and other corporations get "gifts" in the hundreds of billions of dollars a year in corporate welfare, through special benefits hidden in the tax code. Some of this rent-seeking is very subtle - our bankruptcy laws give derivatives (such as those risky products that led to the $150-billion AIG bailout) priority but say that student debt can't be discharged, even in bankruptcy.

Rent-seeking distorts the economy and makes it less efficient. When, for instance, speculation gains get taxed at a lower rate than true innovation, resources that could support productivity-enhancing activities get diverted to gambling in the stock market and other financial markets. So too, much of the income in the financial sector, including that derived from predatory lending and abusive credit card practices, derives not from making our economy more efficient but from rent-seeking.

If we curbed these abuses by the financial sector, more resources (especially the scarce talent of some of our brightest young people) might be devoted to making a stronger economy rather than to exploiting the financially unsophisticated. And the banks might actually go back to the boring business of lending rather than high-risk and often opaque speculation.

Curbing rent-seeking is not that complicated (aside from the politics). It would take better financial regulations, fairer and better-designed bankruptcy laws, stronger and better-enforced antitrust laws, corporate governance laws that limit the power of CEOs to effectively set their own pay, and, in all of these areas, more transparency. Because so much of the income at the top is from rent-seeking, more progressive taxation (and in particular, taxation of capital gains) is necessary to discourage it. And if the additional revenue is used by the government for high-return public investments, there are double benefits.

Countries with high inequality tend to underinvest in their collective well-being, spending too little on such things as education, technology and infrastructure. The wealthy don't need public schools and parks. That's another reason economies with high inequality grow more slowly. Indeed, the United States has grown much more slowly since the 1980s, while inequality has been growing more rapidly than it did in the decades after World War II, when the country grew together.

Public investments are of particular importance today; they increase demand in the short run and productivity in the medium to long term. Increasing public investment would help make up for continued weakness in the private sector. Investments in training for new jobs could facilitate the economy's structural transformation, helping it move from sectors with declining employment (like manufacturing) to more dynamic sectors. Strengthening education would help restore the American dream and help make the country once again a land of opportunity where the talents of our young people are fully utilized.

The right says that we can achieve greater equality only by belt-tightening. But that vision would result in a slowdown of the economy from which all would suffer. Because so much of America's inequality arises from rent-seeking and other activities that distort the economy, curtailing inequality would actually strengthen the economy. Investing public money in the collective good rather than allowing it to be captured by rent-seekers would enhance growth at the same time it reduced inequality.

By giving priority to the austerity/deficit cutting agenda, we'll fail to achieve any of our goals. But by putting the equality agenda first, we can achieve all of them: We can have both more equality and more growth. And if we get better growth, our deficit will be reduced - it was weak growth that caused the deficit, not the other way around. We can achieve the kind of shared prosperity that was the hallmark of the country in the decades after World War II.

Joseph E. Stiglitz, recipient of the Nobel Prize in economics, chaired President Clinton's Council of Economic Advisers and was chief economist of the World Bank. His latest book is "The Price of Inequality: How Today's Divided Society Endangers Our Future."

Add new comment

Sign Up

Article Tabs

map

More than 20 places around DC are opening up their doors to people attending the Women’s March

Inauguration Day

Some of the Inauguration Day Protests photos sent to us by our friends on the streets of DC.

The 142-mile-long Trans-Pecos Pipeline would bring fracked gas to the small border city of Presidio, where it would continue on into northern Mexico – in the process crossing under the Rio Grande, threatening fragile water supplies.

money in politics, corporate political class, Michael Gecan, community organizing, parallel political structures, Death of the Liberal Class, Industrial Areas Foundation, Donald Trump, Saul Alinsky, Ralph Nader, mass movements, popular movements

"People who understand power tend to have the patience to build a base, do the training, raise the money, so when they go into action they surprise people,” says community organizer Michael Gecan of the Industrial Areas Foundation.

Obamacare, Affordable Care Act, Obamacare repeal, repeal and replace, Congressional Budget Office, Paul Ryan, Donald Trump

The Congressional Budget Office also estimated that premiums for policies purchased through the marketplaces or directly from insurers would increase by 20 to 25 percent next year if Obamacare is repealed without a replacement.

creative activism, Act Out, Donald Trump, Trump Inauguration, Inauguration 2017, #DisruptJ20, Women’s March, J20, anti-Trump protests, non-violent direct action, Samantha Castro, WACA, dissent, protest, political left, hierarchy, NGO, community organizing

As stages are set for the upcoming inauguration, activists across the country prepare to strike, block, march and disrupt. We’ll outline what's happening in D.C. and where you are.

Posted 3 days 2 hours ago
Trump resistance, Indivisible Guide

The incoming administration has fueled a new level of political activism.

Posted 4 days 13 hours ago
London tube strikes, anti-labor laws, anti-strike laws, London Underground, National Union of Rail, Maritime and Transport Workers, RMT

Strikers are protesting job losses that have led to a shortage of station staff, which they say is endangering passenger safety and reducing the level of customer service.

Posted 4 days 13 hours ago

The 142-mile-long Trans-Pecos Pipeline would bring fracked gas to the small border city of Presidio, where it would continue on into northern Mexico – in the process crossing under the Rio Grande, threatening fragile water supplies.

Posted 2 days 13 hours ago
Betsy DeVos, public eduction, Chicago Public Schools, privatized education, charter schools, Donald Trump, voucher programs, Charter School Program, dismantling public schools, national voucher program, Wisconsin Education Association Council, Wisconsin t

The president-elect has already pledged $20 billion to expand voucher programs nationwide, and his appointee for Education Secretary, Betsy DeVos, views dismantling public education as a mission from God.

Posted 3 days 2 hours ago
Trump resistance, Indivisible Guide

The incoming administration has fueled a new level of political activism.

The 142-mile-long Trans-Pecos Pipeline would bring fracked gas to the small border city of Presidio, where it would continue on into northern Mexico – in the process crossing under the Rio Grande, threatening fragile water supplies.

Betsy DeVos, public eduction, Chicago Public Schools, privatized education, charter schools, Donald Trump, voucher programs, Charter School Program, dismantling public schools, national voucher program, Wisconsin Education Association Council, Wisconsin t

The president-elect has already pledged $20 billion to expand voucher programs nationwide, and his appointee for Education Secretary, Betsy DeVos, views dismantling public education as a mission from God.

money in politics, corporate political class, Michael Gecan, community organizing, parallel political structures, Death of the Liberal Class, Industrial Areas Foundation, Donald Trump, Saul Alinsky, Ralph Nader, mass movements, popular movements

"People who understand power tend to have the patience to build a base, do the training, raise the money, so when they go into action they surprise people,” says community organizer Michael Gecan of the Industrial Areas Foundation.

1 percent, Ralph Nader,

In his latest book, the critic and activist proposes the creation and activation of a new 1 percent — one that will expose “conditions of deprivation and abuse” and champion “basic fair play.”