The Price of Inequality

The Price of Inequality by Nobel Economist Joseph Stiglitz is a book filled with insight into the workings (or non-workings) of the markets and on the roles of government and of central banks in the economy. A major theme of the book is that “inequality is as much the result of political forces as of economic ones.” He explodes prevailing myths about the “free” market place, globalization, the effectiveness of austerity programs, GDP as an indicator of economic performance, and government vs. private efficiency. He also exposes the policies enacted since the 1980’s that brought about the Great Recession and the current state of inequality in this country. This historic inequality has potentially serious consequences as the book’s subtitle states: “How Today’s Divided Society Endangers Our Future”.

Let’s face it. It is not a level playing field. The rules of the game have been shaped by the powerful. One concept that Stiglitz introduces and that is at the heart of inequality is what economists call rent seeking. Broadly defined, rent seeking occurs when those at the top get 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.” Some examples of rent-seeking include sale of natural resource leases on public lands at below market value, statutes that allow corporations to pass costs on to the rest of society, government subsidies and noncompetitive procurement practices (e.g., private contracting for wars in Afghanistan and Iraq). Basically, it’s the corporate welfare that is so engrained in our tax codes and government policies.

In the section on “history of the deficit“, Stiglitz reviews how the country went from the large surpluses of the Clinton years to the seemingly out-of-control deficits of today. He lays the blame squarely where it belongs: the Bush tax cuts (about 1/5 of the 2012 deficit; $3.3 trillion dollars if extended for 2011-2020), the expenses incurred in the wars in Iraq and Afghanistan (long-term this will exceed $2-3 trillion), the provision that the Federal government, the largest buyer of drugs in the world, couldn’t negotiate price with drug companies as part of the Medicare Drug Benefit (worth “by some estimates, a half trillion dollars over ten years”) and, of course, the biggest contributor by far - The Great Recession brought about by the collapse of the housing bubble and the deregulated financial environment so dear to those on the Right. As Stiglitz states, “16 percent of the deficit was for measures to stimulate the economy…but almost half (48 percent) of the entire deficit was a result of underperformance of the economy.” The latter, he explains, “led to lower tax revenues and higher expenditures on unemployment insurance, food stamps, and other social protection programs.”

Stiglitz is well aware that the major problem now is not the deficit but the joblessness and lack of demand in the economy. Companies are not investing in capital or labor - not because they are unprofitable or lack confidence in the government but because there is a lack of demand brought about by the Great Recession. This lack of demand could be alleviated by government spending (for example, on infrastructure and education) and by benefits to those that would spend the money and put it back into the economy (e.g., unemployment insurance, food stamps, etc.) There is a multiplicative return to the economy on these expenditures - exactly the expenditures demonized by those on the Right.

In addition to discussions on the history of austerity program failures from the time of Hoover to the current European economic crisis, the deleterious effects of central bank policies on real wages, the evisceration of our democracy and the causes for the loss of American leadership abroad, the author throws out an occasional gem such as the Lockheed Martin F-35 Joint Striker Fighter project. This weapon that we don’t need for a type of conflict we will not be fighting, at $382 billion, “costs half of the entire Obama stimulus program.”

The book is not about the politics of envy but, as Stiglitz states in his concluding chapter, it is “instead about the politics of efficiency and fairness.” After reading more than 250 pages on how the system was rigged for inequality, I was beginning to lose hope. Is there any way out of this mess? Is there any way to restore upward mobility to the 99%?

In the last chapter, the author presents a well thought out program of economic reform. Among the reforms that would make a big difference are curbing the financial sector (“Dodd Frank is a start but only a start”), stronger and more effectively enforced competition laws, improved corporate governance, comprehensive bankruptcy law reform, ending government giveaways in the disposition of public assets and in procurement, ending corporate welfare including hidden subsidies, and comprehensive legal reform to democratize access to justice. In addition, he proposes two significant tax reforms - a more progressive income and corporate tax system with fewer loopholes and a more effective estate tax system. Several additional actions “would make a big difference in the plight of the 99 percent”: improving access to education, helping ordinary Americans save (“say, a matching grant or expansion of first-time home owner programs”), universal health care, and strengthening other social protection programs.

There are additional proposals on tempering globalization (“ending the race to the bottom” as Stiglitz phrases it), fiscal and monetary policies to restore and maintain full employment, and a growth agenda based on public investment. He also addresses “immediate issues” - fixing the mortgage problem by restructuring mortgages, more aggressive stimulation of the economy to increase employment and more active labor market policies to train workers for new jobs.

Citizens United has ensured the dominance of the 1% agenda in national politics for the foreseeable future. Without major political reforms, it is doubtful that the political process would allow even the “barest elements of this agenda.” So we are probably looking at a long-term thing. It has taken the Right 30 years of relentless propagandizing of a failed economic theory and policies to bring us to the inequality and economic crisis that we see today. Perhaps it will take as long for the country to regain its senses.

In light of this, “Is There Hope?” - as the concluding section of the book asks. Stiglitz sees two routes by which reform might happen. “Those in the 99 percent could come to realize that they have been duped by the 1 percent: that what is in the interests of the 1 percent is not in their interests…and…the second way that reform could happen [is that] the 1 percent could realize that what’s been happening in the United States is not only inconsistent with our values but not even in the 1 percent’s own interest.”

He then presents two visions for America a half century from now. One is of a society even more divided between the haves in gated communities and have-nots with ever decreasing opportunity for advancement. We would devolve to a plutocracy.

The other is a vision of a society of “shared destiny and a common commitment to opportunity and fairness, where the words ‘liberty and justice for all’ actually mean what they seem to mean…This second vision is the only one consistent with our heritage and our values.”

So is there hope? Stiglitz concludes that yes, there is hope but time is running out. “Four years ago there was a moment where most Americans had the audacity to hope. Trends more than a quarter century in the making might have been reversed…Today, that hope is flickering.”

If Obama does win a second term, this book should be required reading both for him and for his entire economic policy team. They really need to be better informed. Better yet, he should bring in Joseph Stiglitz to head up and reorganize his team. (See #4 on the October 24, 2011 post: Obama Short(falls) List.)  Of course, if the 1% wins in November and Republicans control Congress, the Supreme Court, and the Presidency, we will lose any chance to even begin implementing the slightest of the necessary reforms for at least four years.