Wednesday, June 27, 2012

The Price of Inequality

Interview with Joe Stiglitz
by Jared Bernstein

Joe Stiglitz, Nobel Laureate economist, is uniquely qualified to explain how the economy really works, or more precisely, how and why it’s working far better for the top 1 percent than the bottom 99 percent.  That’s the topic of his new book The Price of Inequality. 

The book is a model of clarity, but that's just one of its virtues. Another is how Stiglitz frames the problem; he doesn’t start from a place of "vast inequality is a fact of life in our free-market system, and that's as it should be." He starts from a much more interesting, and frankly, humane place: "This is happening. Why? Is it a good thing? Is it the market functioning smoothly or is someone taking advantage of their power? Above all: Is society better or worse off?

I recently asked Joe a few questions about his new book.  

In this book you develop an elaborate set of arguments about how the high levels of economic inequality we’re seeing hurt our economy, our institutions, and our politics. Let’s start with the economy. A lot of people argue that there’s a tradeoff between growth and inequality -- that you can have faster growth but you might have to take more inequality along with it.
It’s well documented that countries that are more unequal don’t do as well, don’t grow as well and they are less stable. It’s not an accident that in the period right before the Great Depression, our inequality reached another peak just like it did in the years before the Great Recession. Inequality destroys growth.

Not to mention opportunity.

That’s right. America has become the country with the least equality of opportunity of any of the advanced industrial countries. That means children that are born of poor parents or poorly educated parents are not living up to their opportunities. We’re wasting our most valuable asset – our human resources.

And that goes beyond economics to our sense of who we are as a country.

That’s right. In the book I try to show how economic inequality puts our democracy in peril by undermining our basic principles of one person, one vote; and how our notion of America as a land of opportunity has been undermined and our principle of justice for all has been perverted into justice for those who can afford it. If you go through almost every social and important political economic debate, it’s being shaped by the massive inequality we’re facing today.

Talk more about the political impact. How do you see inequality undermining our democracy?

High levels of economic inequality lead to imbalances in political power as those at the top use their economic weight to shape our politics in ways that give them more economic power. If you look at so many of the outcomes in our political process, no one can say that they reflect the interests of most Americans. Most Americans don’t think speculators should be taxed at a fraction of people that work for a living; or that banks should be allowed to engage in predatory lending or abusive credit card practices; or that drug companies be allowed to get special benefits out of the government in the form of overpayments; or that mining companies should be able to get natural resources at below competitive prices.

At the top [of the income scale], a lot of the inequality arises out of efforts that people take to get a larger share of the pie rather than to increase the size of the pie. As you know, economists call it “rent seeking.” What they’re doing is moving money from the bottom to the top. But they’re not creating wealth; they’re just shifting wealth around. And the people who have been exploited are not better off; in fact, they’re worse off.

All of which breeds disillusionment.

Right. I was really struck that in the 2010 election only about 20 percent of young people bothered to vote. And that was an indication that in their mind politics doesn’t matter. No matter who won, the outcome was going to be determined by the people at the top, and so why bother to vote? Even worse, disillusionment only reinforces the power of money.

Why don’t more people recognize these inequities?

One of the reasons, I suggest in the book, is that our views on these issues have really been shaped. Corporations learned how to sell almost anything. An example that makes that clear is how the cigarette companies sold so many Americans on the idea that there was no credible evidence that cigarette smoking was bad for your health.

I’m surprised they didn’t try to convince us that cancer wasn’t bad for your health!

If you can sell a toxic product like cigarettes, you can sell pretty much any idea, good or bad. Today, those at the top have the tools, the resources, and the incentives to try to shape the public debate in ways that serve their interests. There are so many instances of this kind where they tried to deny the diagnosis of the problem and divert us from the right solutions.

Can you give an example?

Some people say we have this inequality because some people have been contributing much more to our society, and so it’s fair that they get more. But then you look at the people who are at the top and you realize they’re not the people who have transformed our economy, our society. They’re not the inventers of the lasers the transistors, the computer, the discoverers of DNA. They’re the bankers that exploited the poor, the CEOs who took advantage of the deficiencies of our corporate governing structure to a larger and larger share of the corporate revenues without increasing the productivity and performance of the companies or our economy as a whole.

I was struck by the fact that all of the Republican candidates for President had as one of their primary platform positions to repeal Dodd-Frank.

It’s going back to 2007 to the kind of environment that created the crisis to me is amazing. I understand the criticism of Dodd-Frank that it didn’t go far enough.
That’s not where they’re coming from. They want to recreate the circumstances that allow for bubbles, exploited predatory lending, abusive credit card practices. How anybody can say after those experiences that that’s what make an economy good, strong, and that’s an economy that will benefit most citizens, I find incredible!

How do you explain it?

Ideology. This is economics being used to pursue a political agenda. I feel very intensely about that, because my own work over 30 years ago showed that whenever there’s “asymmetric information,” which just means some people know something others don’t, whenever there were incomplete risk markets which there always are, markets are not in general efficient, and there is an important role for government regulation, government providing goods like basic research or support of the internet, and that kind of thing. But the ideology totally ignores this.

Let’s talk for a second about current events. So much economic policy today both here and especially in Europe, seems like medieval medicine: bleed the patient, and when she gets worse, add more leeches. In other words, “austerity.”

Let me put it very forcefully: No large economy has ever recovered from an economic downturn through austerity. It’s not going to happen in the United States and it’s not going to happen in Europe.

The book ends on a hopeful note. You say the way out of this unsustainable inequality is “self-interest, properly understood.” What do you mean by that?
It’s basically the realization that unless the country does well together, even the 1% won’t do well. We’ve put a lot of money at the top, and the people in the middle, let alone the bottom, have done very badly. So let’s focus on what makes our society as a whole work well.

What would you include in that category?

Education, investments in technology, infrastructure; and you have to start looking at our legal framework: anti-trust, corporate governance, financial regulations, tax laws that are riddled with loopholes that distort our economy -- all these have to be changed to try to make our society and our economy work for all Americans, not just the top.

But what are the chances of getting any of it done?

When you have a highly divided society, it’s hard to come together to make investments in the common good. One of two things -- or both -- can happen: One, the 1 percent will realize that the direction we’re going is not even in their own self interest, and, two, the 99 percent realize that they’ve been sold a bill of goods. And I hope my book will make it clear that we have reached a level of inequality that is really intolerable and that we are all paying that price. And there really are simple remedies that we could implement if we only had the political will.

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