Joseph Stiglitz: Inequality Undermines Prosperity

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."

Article Tabs

On the third anniversary of Occupy Wall Street, we'll be gathering in Zuccotti Park, New York City, for a full day of speakers, workshops and teach-ins – concluded, of course, with a march on Wall Street.

Using social media and alternative news networks, activists and citizen journalists have found new ways to tell Americans the real story – it's immediate, it's personal, its electronic and its everywhere.

When we chant “We are the 99%,” it is said with a sense of power, with our heads held a little higher and backs straighter, for people have a newfound dignity in being in the majority.

If you're planning to take to the streets in New York City or elsewhere this week, know that today's IMSI technology used by police or the FBI could greatly affect the privacy of your cell phone and protest communications.

The People's Climate March will begin in Columbus Circle – chosen in clear recognition that Indigenous people are on the frontline, leading struggles to protect all of our communities against polluting fossil fuel industries.

If you want to fully understand the game at play in the bankruptcies and privatization of public assets in Detroit, Argentina, and Europe, play Monopoly.

Posted 6 days 4 hours ago

Britain’s political system is broken to the point where many people in Northern England actually want to join Scotland to escape austerity measures.

Posted 5 days 3 hours ago

Organizers haven't been shy about their underlying intentions: using the September march in Manhattan as a platform on which to build an international environmental social movement unlike any previously seen.

Posted 2 days 5 hours ago

In addition to speaking with a common voice on climate justice and the policies needed to achieve it, today's "movement of movements" needs to reach beyond environmentalists.

Posted 5 days 3 hours ago

The latest misguided move by regulators could result in serious collateral damage to cities – maybe serious enough to finally propel them into bankruptcy.

Posted 5 days 3 hours ago

The left dare not answer conservatives by simply saying government is good. Instead, it must make special interests a rallying cry.

Former CEO Artie T. offered good benefits and fair pay – which is why employees are striking and customers are boycotting the market chain across the northeast, demanding to get him back.

The fracking industry has taken over the U.S., with more than 500,000 oil-producing wells located in rural and suburban land throughout the country in 2012.

Gone are the days when U.S. billionaires accounted for over 40 percent of the global list, with Western Europe and Japan making up most of the rest. Today, the Asia-Pacific region hosts 386 billionaires, 20 more than all of Europe and Russia combined.

Officials have discovered that they can use their eminent domain power to buy underwater mortgages at their current market value and resell them to homeowners at reduced price and mortgage payments.

Sign Up