A Synopsis of the book: The Price of Inequality (2012) by Joseph Stiglitz
INCREASES IN POLITICAL AND ECONOMIC INSTABILITY: THEIR LINKS TO INEQUALITY
In 1887 England’s Lord Acton wrote: “power tends to corrupt, and absolute power corrupts absolutely.” Leopold Kohr, in his 1957 book The Breakdown of Nations, demonstrated that history has repeatedly confirmed the psychological, the commercial, and the political truth of Lord Acton’s dictum. But from where, and what, does excessive power arise?
A partial answer to these questions is currently emerging in recent examinations of “inequality,” with particular reference to marked inequalities in income and wealth. Power and wealth are closely entwined, in part because they are mutually amplifying. This is one important lesson emphasized clearly throughout Joseph E. Stiglitz’s book The Price of Inequality, published in 2012 by W. W. Norton & Co.
Stiglitz begins this book talking about the psychological importance to humans, young and old, of what is or isn’t experienced as fair and just, and, what is and isn’t in accordance with socially accepted law and custom. Children from a very young age become very sensitive to unfairness, i.e. to the denial of what they perceive to be a person’s normal right. They are quick to note status differences between what they are permitted and what others are permitted, and, between what they receive and others receive. Morality and ethics matter to children. A moral society and a fair society are central to their developing senses of personal safety and comfort, as well as their social safety and comfort.
Similarly, adults remain sensitive to marked inequalities in their personal share of goods and services, of social status, and of social power or influence. For some, these sensitivities are conscious and troubling. For others marked social inequalities are either denied, or simply ignored as an unalterable fact of life. However, among the very few who command the very largest shares of wealth and power, marked inequality is generally held to be right and fitting, and to be expected. For these fortunate few, social inequality appears to be simply an expression of a natural market Darwinism working its comfortable and inevitable social magic. These people usually see themselves as the fit and deserving survivors in a completely normal, inevitable, and competitive monetized world.
In his book, Joseph Stiglitz emphasizes that personal reactions to marked inequality always depend in part upon our perceived opportunities to access some fair share of wealth and status. Equality of opportunity appears to be one important criterion defining social fairness. Moreover, the “opportunity” for fair treatment includes equal opportunity to access helpful others, particularly to access those authorities in the justice and political systems who have the power to redress unfair treatments and restore fairness.
All these themes are introduced in Stiglitz’s preface to The Price of Inequality, and they are developed further throughout his book. In it he reports considerable evidence to suggest that generally (but particularly in America) existing systems of government and justice often seem to undermine a sense of fair play, particularly so in recent years following the Wall Street banking crisis of 2007–2009. He writes of that crisis:
A basic sense of values should, for instance, have led to guilt feelings on the part of those who were engaged in predatory lending, who provided mortgages to poor people that were ticking time bombs, or who were designing the ‘programs’ that led to excessive charges for overdrafts in the billions of dollars. [pg. xvii]
Yet in the financial and corporate culture of America there has been almost no such guilt, nor any evidence of remorse. The U.S. justice department did not bring charges against most of those who both could and should have been convicted of fraud for their deliberate actions that triggered the crisis. Instead, a rigid economic ethos, celebrating the survival of the financially fittest, appears to have created an expanding amoral desert, one that has dried up all former considerations of fairness, justice, or recognizable dangers flowing from extremes of social inequality.
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Financial inequality has recently grown to near-record levels in almost every corner of the world, including many of the world’s most industrialized nations. In America this growth has been particularly clear, and particularly disruptive. Chapter 1 of Stiglitz’s book documents, in great detail, this growth of American inequality.
The American data available for determining inequality in personal wealth make it clear that this form of inequality is even more extreme than is the inequality in yearly incomes. In 2007, prior to the financial crisis of 2008-2009, the wealthiest one-tenth of 1 percent (one for every one-thousand Americans) together possessed more than one-third of all American wealth. These same wealthy Americans had an average income in 2007 that was 220 times the average income of the bottom ninety percent of all Americans.
The forces leading to increasing inequalities of wealth and income were augmented in America following the “Great Recession” that began in 2008. Stiglitz documents how this recession led to: (a) troubling increases in unemployment, (b) increasing limitations on unemployment insurance benefits, (c) increasing rates of personal bankruptcy, (d) increasing losses of health insurance coverage, and (e) decreased retirement benefits. He shows how each of these trends in turn increased further the amount of inequality throughout American society.
Over the 12 months during the year 2010, ninety-three percent of all the additional (new) income generated went to the top 1 percent of income earners. Average middle-class incomes continued to stagnate, measured in constant dollars (i.e. adjusted for inflation), as they had already been doing for many years. During the decade from 2000 to 2010, when adjusted for inflation, American households composed of college graduates saw their real income fall by 10%. Those with fewer skills did even worse. And yet the real income and wealth of the top 1 percent increased dramatically.
At the conclusion of chapter 1, Stiglitz compares American inequality to that in other countries around the world. He notes that America is among those countries with the highest inequality metrics in the world, countries that include South Africa and much of Latin America. Much less inequality is found in most of Europe, particularly in the Scandinavian countries and in the Netherlands, but also in Germany as well as Japan. Stiglitz notes that:
In other advanced industrial countries families don’t have to worry about how they will pay the doctor’s bill, or whether they can afford to pay for their parent’s health care. Access to decent health care is taken as a basic human right. In other countries, the loss of a job is serious, but at least there is a better safety net. [pg. 23]
Stiglitz ends chapter 1 commenting on a few of the objections that are made to the inconvenient facts he has already detailed, objections from members on the American political Right who deny that extremes of inequality are in any way unfair and risky. He counters that there can be no denying the recently diminished opportunity for poor Americans to improve their economic situation. Nor can it be denied that governments can afford successful policies to reduce poverty. The U.S. government has already done that for seniors, with policies like Social Security and Medicare. Yet Stiglitz points out that it is still sometimes argued that attempting other economic policies, policies that would help to reduce extremes of inequality,
…will simply ‘kill the golden goose,’ and so weaken America’s economy that even the poor will suffer. As Mitt Romney put it, inequality is the kind of thing that should be discussed quietly and privately. The poor in this land of opportunity have only themselves to blame. In later chapters…[I will] show that, for the most part, not only should we not blame the poor for their plight but also that the claim of those at the top, that they earned their money ‘on their own,’ doesn’t have much merit. [pg. 27]
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Stiglitz begins his second chapter as follows:
American inequality didn’t just happen. It was created. …The forces that have been at play in creating these outcomes are self-reinforcing. By understanding the origins of inequality, we can better grasp the costs and benefits of reducing it. The simple thesis of this chapter is that even though market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does, and what it does not do. [pg. 28]
Governments shape markets and profits and income distribution in many ways. Throughout his book, Stiglitz lays particular emphasis on the ways that Governments encourage, permit, and decline to limit or tax, “rent-seeking income.”
As economists use this term, “rent” is any payment received not for services and labour and creative accomplishment, but rather for simple ownership or control of resources that are “loaned” to, or temporarily shared with, the person or organization who pays rent for this privilege. This is most obvious in the case of a landlord, who temporarily rents his land or home while still retaining ownership and control of it. But “rents” can take very subtle and indirect forms too. The fish you raise in a pond in your back yard you may eventually “harvest” and sell to the public, but that is not rental income. However, if you sell to vacationers the right to fish in your pond, you are receiving “rent” from the pond. The “work” is being done by the renter, not by the owner of the pond.
Similarly, if a government gives you the sole license to import sugar at a price below the domestic price, and if you sell that sugar at the domestic price for a profit, that profit is called rental income. It is money earned by virtue of your ownership of the favourable license. If you own part of a sugar refinery, and receive interest payments or dividends on your investment, this too becomes “rental income” in the sense that economists use the term. In this case it is your “capital” that you have rented out. If an oil company or a book publisher pays you royalties, for drilling on your land or for selling the book for which you own the copyright, then you are receiving rental income on these properties. If you are a television company, one that owns of a band of the broadcast spectrum that is no longer available to others, then your company is receiving indirect rental income. By extension, every monopoly, every government subsidy, every trade restriction that reduces competition, every advantage you might enjoy by virtue of special ownership or special position, yields a form of “rent-seeking” income.
Income from “rent-seeking” currently tends to be taxed very differently than does income from wages and services. And corporate profits (which often come from rent-seeking sources) tend to be taxed very differently than do individual wages. Thus, it is generally true that rent-seeking income will provide a much higher percentage “return on investment” than will the income from wages or the production of goods and services. In his book, Stiglitz traces the many links between the rent-seeking activity that is supported by governmental actions and inactions, and the associated forces that amplify inequality in personal incomes and wealth.
However, Stiglitz also points out another aspect of rent-seeking. When private companies sell goods or services to governments at inflated prices (e.g. when only certain companies are capable of supplying what is wanted, or only a few are allowed to supply it) then governments end up paying “rent” to the owners of their necessary supply chains, “rent” that comes in the form of the inflated prices that those suppliers can and do command.
In the remainder of chapter 2, Stiglitz describes the close links between great fortunes and rent-seeking activities. He describes many of the powers and financial advantages that governments allow to rent-seekers. These ownership powers are then misused and they endure over long periods of time. They constitute, in Stiglitz’s phrase, “sustainable monopolies.”
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Chapter 3 of The Price of Inequality turns from governmental policy and behaviours to market rules and behaviours and their roles in creating major inequalities of wealth and power. Often, economists and others claim that market forces are simply natural, abstract, and impersonal, and that it is only through bad luck and perhaps poor judgment that market trends have turned out badly for those in the middle and bottom income groups. Implied in this view is that any interference with these “natural” economic processes, any attempt to “correct” the markets, will cause untold harm to all. Stiglitz responds directly to this argument, pointing out that in many countries of the world very different market rules and behaviour work well, yet inequality is much lower. These other countries are just as “advanced” and sometimes just as wealthy as America. Their economies do not implode. Stiglitz concludes:
Our hypothesis is that market forces are real, but that they are shaped by political processes. Markets are shaped by laws, regulations, and institutions. Every law, every regulation, every institutional arrangement has distributive consequences—and the way we have been shaping America’s market economy works to the advantage of those at the top and to the disadvantage of the rest.
There is another factor determining societal inequality…. Government, as we have seen, shapes market forces. But so do societal norms and social institutions. Indeed, politics, to a large extent, reflects and amplifies societal norms. …We shall see how changes in social norms—concerning, for instance, what is fair compensation—and in institutions, like unions, have helped shape America’s distribution of income and wealth. But these social norms and institutions, like markets, don’t exist in a vacuum: they too are shaped, in part, by the 1 percent. [pp.52-53]
Stiglitz traces the historical decline in employment opportunities and wage levels in the American manufacturing sector, beginning in the 1990s. This was one major cause of the decline of middle-class incomes and wealth. Union jobs were increasingly lost to cheap labour markets abroad. Unionized autoworkers in 2007 still commanded hourly wages around $28, but six years later union workers were forced to accept starting wages of around $15 per hour. Public sector workers such as teachers, hospital workers, or road maintenance personnel, saw their wages fall too, as governments restricted union wages to levels below those paid to private-sector workers in comparable jobs.
Government policies determining trade rules and costs have encouraged globalized transfers of capital, of jobs, and wages that have selectively favoured the rich over the middle-class. Stiglitz describes how financial capital is given relatively favourable global treatment while wage earners are given relatively unfavourable treatment in the globalized economy. The policies that create these effects increase inequality, but government policies have been shaped by large and powerful financial lobbies, and not by wage earners or their unions. Stiglitz writes:
…Imagine, for a moment, what the world would be like if there was free mobility of labour, but no mobility of capital. Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in, and that’s partly because the 1 percent doesn’t want it to be that way. [pp 61-62]
Corporations argue that the current rules governing globalization are good for everyone. They claim these will increase the economic output of the countries to which capital is moved, and that those benefits will trickle down to benefit everyone in the country. Stiglitz shows that in practice neither of these effects are seen, and he gives examples for why they are unlikely to be observed. There are usually unintended and predictable consequences that prevent “trickle down” benefits from reaching wage earners. High unemployment followed by lowered wages are part of the reason that trickle-down doesn’t occur. Economic theory says only that globalized free markets could make everyone better off, if the “winners” compensated the “losers” in the country. But nothing says that labourers will be compensated. In reality, the “winners” usually prefer not to share their gains by paying better wages or benefits. As currently managed then, globalization contributes significantly to increasing inequality.
Stiglitz turns next to factors other than government policies and market rules that contribute to increasing inequality, including some social and cultural factors. In the thirty years prior to the publication of his book, the percentage of U.S. wage earners belonging to a labour union dropped by 40%, from 20.1% overall to 11.9%. State and federal legislatures have passed laws eroding the negotiating power of unions and their ability to maintain members. Lobbyists have created a social climate encouraging the view that unions promote labour inefficiency and inflated social costs. Stiglitz argues the opposite point of view: that better wages and working conditions make for a more cohesive society and a more loyal, productive, workforce. History provides a number of examples supporting this view, which Stiglitz discusses further.
Next, Stiglitz turns to the factors that determine how corporate profits are distributed among workers, shareholders, and managers. There are tax laws and government regulations that affect how much profit corporations will earn, but there are very few laws that affect who will receive how much of those profits. Recently, internal corporate politics have tended to result in corporate executives “…taking a bigger slice of the corporate pie, awarding themselves [excessive] amounts even as they claimed they had to fire workers and reduce wages to keep the firm alive.” [pg. 67]
Another social force affecting inequality is discrimination in who becomes employed. Large portions of society are denied easy access to better-paying jobs, often including women, immigrants, those who are “under-educated” and members of racial minorities. Yet economic theorists have argued that, in a “free-market,” discrimination won’t happen once there are a few employers willing to hire the discriminated-against workers at a lower wage. History clearly shows otherwise however. Moreover, discrimination in employment can and does remain socially and economically enforced through various actions taken by employers that prefer to maintain the status quo.
Historic tax policy has also had a huge impact on inequality in America. Stiglitz notes that in the recent past:
The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton, and down finally to 35 percent under George W. Bush. This reduction was supposed to lead to more work and savings, but it didn’t. In fact, Reagan had promised that the incentive effects of his tax cuts would be so powerful that tax revenues would increase. And yet the only thing that increased was the deficit. George W. Bush’s tax cuts weren’t any more successful: savings did not increase; instead the household savings rate fell to a record low (essentially zero). [Pg. 71]
It was governmental relaxation of the capital gains taxes that most affected American inequality. The bulk of capital gains income goes to the very rich, who had their tax rate on capital gains dropped to 15 percent under Bush. Moreover, capital gains that are realized after death currently pay no tax at all. Thus wealthy families have been helped not only to stay that way, but to increase their wealth at a faster rate than families who live off wages and pensions. These policies and certain other tax loopholes have meant that today the American super-rich pay a lower average tax rate on their total income than do those less well off. In America the overall average tax rate dropped by 1.8 percent between 1979 and 2010. But the average tax rate among the top 1 percent of taxpayers dropped more than four times as much, by 7.5 percent, over the same time period.
So the riches of the wealthy increase at a faster rate than do those of persons of average means. This is equally true for the riches of corporations that have special tax loopholes and advantages working in their favour. Stiglitz describes international, federal and state tax laws, all of which work in parallel ways to favour the protection of great wealth from taxation. Thus, the annual rate of increase in such wealth, and its degree of concentration in fewer and fewer hands, become more and more pronounced.
Additional political and cultural factors that increase inequality are those that degrade or limit equality of opportunity. Education has become economically more segregated, with less diversity among students and their backgrounds, than was true prior to 1980. Stiglitz notes some of the many ways that this segregation perpetuates inequality and contributes to the sources that increase it.
In concluding chapter 3, Stiglitz reviews and criticizes arguments that justify inequality as being something that, if not inevitable, then at least is fair and proper. Stiglitz notes that individual contributions to the development of profitable new products and services all depend greatly on contributions previously made by many others, and on infrastructure that must be maintained by governments and by the society supporting those governments. While those who truly have contributed most to society include a vast majority who are wage earners (teachers, nurses, scientists, etc.), super-rich individuals generally contribute much less. Yet the super-rich retain control of much more of the overall resources that society needs to support a good life and government for all. This cannot be said to be “fair and proper.”
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Stiglitz begins his fourth chapter with the following observations:
Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term. …We know how these extremes of inequality play out because too many countries have gone down this path before. [Pp. 83-84]
Stiglitz reminds us that prior to the Great Depression of the 1930s, and again with the Great Recession that began in 2009, historically high and still increasing levels of inequality were seen in the United States. For multiple reasons there followed a collapse in demand for goods and services with subsequent mass unemployment. This further reduced demand, and further increased job losses. Stiglitz traces some of the reasons for the bursting of the market bubbles that triggered these events, and the roles that excessive inequality had played in creating those bubbles. Recent political responses to crises like these have attempted to restore demand by putting more money, at lower borrowing costs, into the economy. Tax reductions for the wealthy were part of this plan, but the wealthy do not spend nearly the proportion of their incomes on ordinary goods and services that average wage earners spend. So consumer demand and jobs remained abnormally low. Putting more money into circulation, by lowering interest rates, led to new financial and housing bubbles being created, the profits from which went mostly to the wealthy, increasing inequality further.
Deregulation of corporate and commercial activity was a further major contributor, both to increasing inequality and to market instability. Stiglitz concludes that “In a democracy where there are high levels of inequality, politics can be unbalanced, too, and the combination of an unbalanced politics managing an unbalanced economy can be lethal.” [Pg. 89]
Stiglitz further develops this idea, showing how inequality, and the lobbying carried out by wealthy elites, has led to lowered investments in both education and the market infrastructure that makes possible commerce and trade, innovation, and economic growth. Government support for research has been eroded as demands for leaner government and lower taxes have grown. Yet the boost that public investments give to economic growth is far greater than that given by private investments. Recently, corporate investments in basic research have fallen far short of what is needed to restore employment and market demand. Stiglitz suggests that
The more divided a society becomes in terms of wealth, the more reluctant the wealthy are to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security. They can buy all these things for themselves. [Pg. 93]
Stiglitz notes that government policies often divert talent from socially helpful projects, projects that help to promote a more secure work force and social support network. Instead governments now reward talent that is invested in legal and financial schemes, or lobbying activities that contribute mostly to market and social instability.
Inequality is further increased, and increasingly distorts the economy, by the many ways that governments reward rent-seeking income: through advantageous tax treatments, or by selling rights to common resources (oil, gas, minerals, even water) to companies at prices well below their actual market and social values. Military and defense spending by the American government is the source of more rent-seeking corporate income than any other single type. Stiglitz adds:
The wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money pays for it, and if budgets get tight, middle-class tax benefits and social programs are given the ax, not preferential tax treatment and manifold loopholes for the rich. . . . For U.S. contractors, the military has provided a bonanza beyond imagination. [Pg. 101]
But Stiglitz saves some of his sharpest criticisms for many American lawyers and the roles they play in tilting the economic playing field to favour both corporations and the top 1 percent. Too often it is only after damage has been done (as with the BP oil spill in the Gulf of Mexico) that those affected can try to get some legal redress, rather than getting legal help with regulations and interventions to prevent risky corporate behaviour before the damage occurs. And even then, deep corporate pockets are able to pay for lawyers who can delay and reduce payments for many of the forms that corporate damages may have taken. Other forms of corporate damage are never acknowledged, nor compensated, in such a lax regulatory and legal system.
Stiglitz turns next to consider how high inequality, and the perceived injustices created thereby, negatively affect the motivation and behaviour of employees and their families. The effects on worker motivation in exploitive working situations are neatly summarized by an old Russian adage: “They pretended to pay us, and we pretended to work.” Research has shown that workers paid a fair and livable wage are much more productive than those paid less. Their families too are subject to much less financial stress and anxiety, and everyone becomes more productive in their roles as students and citizens etc. In one study that Stiglitz describes, the wages of some workers were raised and at the same time the wages of some others were lowered. He writes:
One might have expected that [this] would increase productivity of the higher-wage worker, and lower that of the lower-wage workers in off-setting ways. But economic theory—confirmed by the experiments—holds that the decrease in productivity of the low-wage worker is greater than the increase in productivity of the high-wage worker, so total production diminishes. [Pg. 104]
Worker psychology is but one illustration of how human behaviour is affected by, and in turn affects, social inequality. Stiglitz next examines consumerism in America and how the drive for more personal goods and services exaggerates inequality. He notes that:
Trickle-down economics may be a chimera, but trickle-down [consumerism] is very real. People below the top 1 percent increasingly aspire to imitate those above them. …What matters (for an individual’s sense of well-being for instance) is not just an individual’s absolute income, but his income relative to that of others. [Pp. 104-5]
If this very human trait is given prominence in a culture, it leads to extremes of consumerism and inequality. The “Joneses” keep falling behind the Joneses with whom they compare themselves. Consumer debt becomes a destabilizing influence. In more equal societies there is a greater recognition of how much is enough, and how valuable it can be to have extra leisure, family, and social time.
Stiglitz concludes chapter 4 with an extensive critique of those on the political Right who argue that economic productivity and efficiency always require “incentives” that in turn require the conditions that lead to high levels of inequality. Summarizing this critique, Stiglitz writes:
The Right has in mind a perfectly competitive economy with private rewards equal to social returns; [but] we see an economy marked by rent-seeking and other distortions. The Right underestimates the need for public (collective) action to correct pervasive market failures. It overestimates the importance of financial incentives. And as a result of all these mistakes, the Right overestimates the costs, and underestimates the benefits of progressive taxation. [Pg. 107]
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Chapter 5 of The Price of Inequality is titled A Democracy in Peril. In it, Stiglitz addresses the question of how, in a democracy that intends to give each citizen one vote, the richest 1 percent of that country could so successfully shape the government and economy to serve primarily its own interests. He describes
…a process of disempowerment, disillusionment, and disenfranchisement that produces low voter turnout, a system in which electoral success requires heavy investments, and in which those with money have made political investments that have reaped large rewards—often greater than the returns they have reaped on their other investments. [Pg. 146]
The process that has led to extreme inequality, and to the considerable power and influence wielded by the 1 percent in America, has exploited an erosion of social trust. Corporations, banks, politicians, lawyers, have all experienced sharply decreasing levels of public trust over recent years. But trust is the social capital that makes the economy and politics and government able to function sustainably. Stiglitz illustrates the various ways that this loss of trust has given greater influence to the wealthy.
Closely linked to public trust, is the general sense of what is generally fair and what is not fair. Stiglitz next discusses the increasing doubts in America that businesses and politics and many government policies operate in a fair manner. Media too are losing public trust and appearing to become more biased. Control of the media is increasingly concentrated in the hands of the extremely wealthy who are in a position to monopolize access to advertising space, to news, information, and publicity. Stiglitz discusses how the control of ideas appearing in the media adds to the influence of the wealthy. And then he examines how the elite affect who is allowed to vote, and who is prevented from voting in elections.
Next, Stiglitz discusses how the U.S. Supreme Court gave the wealthiest Americans considerable extra political clout by allowing corporations, controlled by Boards of Directors drawn from the 1 percent, to spend as much as they wished on electioneering and political lobbying. All these factors add to the disenfranchisement of the poor and the middle class. Government gerrymandering of electoral districts further erodes the voting power of those who might oppose the wishes of the wealthy. In America, candidates for office are decided by primary elections in each district, but getting nominated, and success in the primaries, are each very sensitive to the financial resources of the candidates. Here particularly, the wealthy can prevent unwanted candidates from appearing on the ballot. Stiglitz then lists some of the reforms that could restore electoral fairness.
The fifth chapter concludes with an examination of globalization, its history and its potential dangers. Stiglitz writes:
…globalization, if managed for the 1 percent, provides a mechanism that simultaneously facilitates tax avoidance and imposes pressures that give the 1 percent the upper hand, not only in bargaining . . . but also in politics. Increasingly, not only have jobs been offshored but so, in a sense, has politics. [Pg. 138]
It is in debtor countries that globalization has most often given control of politics over to the 1 percent. Creditors dictate the terms, economic and political, for the future of the country. In the nineteenth century these terms were often militarily imposed. More recently they were dictated through the offices of the International Monetary Fund. Unfavourable trade agreements are often imposed on all citizens of a country by globalized corporate powers that threaten severe financial punishment if their new rules are not accepted. In the end, globalization has greatly restricted the tax and nationalization options in many countries, helping the world’s 1 percent to achieve unopposed financial supremacy and political power.
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At this point in The Price of Inequality Stiglitz is all but finished with his descriptions of the nature and “costs” of excessive inequality in America. With chapter 6 he begins to emphasize much more what he sees are the historical paths that have led to such high inequality, and to prepare the ground for a final discussion of what could potentially be done to reverse such trends and avoid the dangers they increasingly represent. Chapter 6 begins with an examination of how it has been possible for voters to be persuaded that marked inequality is safe, and, that the policies creating increased inequality will best serve the common man.
He begins with a consideration of some basic recent discoveries about human psychology and behavioural economics. Much depends on our perceptions of things, and those perceptions can be quite sensitive to subtle changes in how we are “helped” to think about them. Our perceptions in turn affect whether or how we vote in elections, and how we choose to spend our incomes, among many other factors that determine the society we live in and the degrees of inequality affecting that society. Stiglitz discusses these implications with particular reference to our perceptions of fairness (and justice) and how such perceptions determine the politics of social inequality.
In the course of chapter 6 Stiglitz goes on to trace the rise of neoliberal economic theory in America and in many other areas of the globalized world. He discusses the conflict between the roles of small government advocated by this theory and the values attached to ideas of democracy, human rights, and equality, values that require a large role to be played by government. Some false assumptions and flaws of neoliberal economic theory are presented here, and these are expanded in following chapters of this book.
Another topic, one that will also be elaborated again later in this book, is introduced next. It has to do with how slowly ideas tend to change in a population, even after weaknesses and problems have been revealed in them. Ideas and perceptions are each dependent on a social context. We look to others to confirm what appears reasonable, and, what doesn’t. We trust others when they agree with us, but we tend to mistrust their opinions when they do not. If most others in our immediate community of friends still hold one view, our own different view can have little impact for change. It is only after “enough” others also change their views that a tipping point is reached and society in general may then slowly come to adopt the new view. Stiglitz suggests that,
Today those who wish to preserve societies’ inequalities actively seek to shape perceptions and beliefs to make such inequalities more acceptable. They have the knowledge, the tools, the resources, and the incentives to do so. …The fact that those at the top can shape perceptions represents an important caveat to the idea that no one controls the evolution of ideas. Control can happen in several ways. [Pp. 159-60]
One of these ways is by using preferential access to educational curricula and the public media. A second way is by creating a social distance between those whose ideas are to be disparaged and the rest of society. This limits the influence of those whose ideas are not welcomed by the elite. A third way is by deliberately distorting public information so that it appears to confirm the views preferred by the elite. Stiglitz cites the examples of the tobacco companies that for a long time successfully argued that smoking bore no risks. He notes the similarity to today’s energy companies that argue global warming is not a threat and is only based upon flawed “science” and flawed data.
In the remainder of chapter 6 Stiglitz illustrates many of the techniques that the elite use to portray estate taxes as unfair, bank bailouts as necessary, mortgage relief (for the exploited) as dangerous, and “big” governments as evil. He concludes with a critique of the use of GDP (Gross Domestic Product) as the economic holy grail, apparent increases in which are being used in attempts to justify inexcusable social ills.
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In one sense, Stiglitz has at this point finished his main arguments detailing the causes and costs of both excessive inequality, and excessive political power in the hands of the extremely wealthy. But in the next three chapters he devotes some of his attention to additional and particular ways that democracy has come to suffer as a result of those excesses. In chapter 7 he focuses on how the rule of law is being eroded in America by the actions of the elite. Wealthy people, banks, and large corporations suffer far less in court for their illegal activities than do others. Court cases are expensive to defend, or to pursue, and the wealthy can and do prolong the time and costs of any final legal judgment against them. Justice becomes greatly delayed, and all but denied. Stiglitz concludes chapter 7 saying:
Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice. Some may still call it the “rule of law,” but in today’s America the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.” And the number of people who can afford it is rapidly diminishing. [Pg. 206]
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In chapter 8 of his book, Stiglitz sets the stage for what will become his recipes for reducing inequality. Many of the policies and practices that have led to excessive American inequality appear to be linked to, and justified as, American attempts to limit budget deficits. Most of this chapter then describes how budgetary policy has been based upon false economic assumptions and questionable rationalizations.
Stiglitz begins chapter 8 with a review of the causes of the ballooning budget deficits in the U.S.A. Those deficits have resulted from decreasing tax revenues while at the same time government expenditures have been increasing. Decreasing revenues were the product of the sharp recession and the new tax cuts (said to “stimulate” more taxable income), cuts that actually resulted in much reduced tax revenue. Increasing government expenditures were the product of (a) new wars being waged in the middle east, (b) new costs occasioned by the after-effects of those wars, (c) increased military spending for future war materiel, (d) increasing Medicare drug benefits (which cost the government high amounts of “rent” paid to pharmaceutical monopolies), and (e) other efforts to “stimulate” the economy by offering special “rents” to selective other segments of the economy. Stiglitz concludes, saying: “The critical point to bear in mind in thinking about deficit reduction is that the recession caused the deficits, not the other way around.” [Pg. 211]
For Stiglitz, the intelligent way to avoid deficits is to ensure that the economy is managed in such a way as to maintain nearly full employment, and, so that tax revenue is much more equitably and effectively assured. Full employment requires avoiding “austerity” policies, with their recessionary costs in reduced personal incomes and productivity. Increasing revenue requires a tax policy that is very different from the current American model. However, achieving those goals will require combating some powerful economic myths that Stiglitz discusses (and begins to combat) in the remainder of chapter 8.
The first such myth is that taxing the rich any more than at current levels will reduce employment opportunities and personal income and savings, and everyone will be hurt thereby. A second myth is that private companies (who always need to make a profit) are invariably more efficient than governments can be, and will deliver better goods and services, at lower cost, than will governments. Stiglitz argues that this myth is particularly harmful to the economy when it is used to prevent government control of the social safety net, including affordable health care and pharmaceutical costs, as well as unemployment supports that will help to maintain a stable demand for goods and services, and thereby, also maintain employment levels.
For Stiglitz however, the worst myths about budgetary deficits are “that austerity will bring recovery and that more government spending will not.” [Pg. 230] He spends the rest of chapter 8 carefully rebutting these beliefs with data drawn from recent economic history. He concludes chapter 8 saying:
The 1 percent has captured and distorted the budget debate—using an understandable concern about overspending to provide cover for a program aimed at downsizing government, an action that would weaken the economy today, lower growth in the future, and most importantly for the focus of this book, increase inequality. It has even used the occasion of the [American] budget battle to argue for reduced progressivity in our tax system and a cutback in the country’s already limited programs of social protection. [Pp. 236-37]
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And then, in chapter 9 of his book, Stiglitz’ gives us a brief lesson about governmental economic policy, and how it tries to “manage” the economy to keep inflation and unemployment confined within acceptable ranges. It is the Central Bank (the “Fed”) that administers the policy decisions designed to achieve these goals. But these decisions bring with them consequences, some of which have painful effects on large segments of society. Moreover, in America the Central Bank is controlled by wealthy bankers, and their priorities currently reflect those of the 1 percent. Stiglitz describes in some detail how historic monetary policies, justified by some powerful economic myths, have benefitted the 1 percent while dangerously destabilizing the overall economy. He summarizes much of chapter 9 as follows:
Just as the Great Depression drew attention to America’s growing inequality—destroying the myth that all were benefiting from the growth that had occurred in the preceding quarter century—it destroyed two other myths: that a focus on inflation was the cornerstone to economic prosperity, and the best way of ensuring economic stability was to have an independent central bank. …There is an alternative set of policies and institutional arrangements that holds out the promise of not only better and more stable growth, but also of a more equitable sharing of the benefits of that growth. [Pg. 240]
Stiglitz argues that central banks everywhere should not be independent, i.e. free from regulation and oversight. But with decreasing regulation of a nation’s financial sector, and the “capture” of most remaining regulatory bodies by lobbies that wish to weaken and limit controls on the powers of the central bank, the Federal Reserve Bank in America has become immune to government control. In the remainder of chapter 9 Stiglitz traces how the myths governing central bank behaviour came to have their power. He concludes:
As I have stressed in this book, policies have distributive effects, so there are trade-offs between the interests of bondholders and debtors, young and old, financial sectors and other sectors, and so on. I have also stressed, however, that there are alternative policies that would have led to better overall economic performance—especially so if we judge economic performance by what is happening to the well-being of most citizens. But if these alternatives are to be implemented, the institutional arrangements through which the decisions are made will have to change. [Pg. 264]
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In the final chapter of The Price of Inequality, Stiglitz shares his prescriptions for reversing the dangerous levels of inequality that otherwise are destined to continue increasing in America and beyond. These prescriptions also offer the promise of an economy less subject to recessions, to bursting bubbles, and to inflation. They offer as well an improved democracy that may be far more effective in making American society fair and sustainable. Many of these prescriptions will be difficult to fulfill, but over time they will each be important for accomplishing the economic and political and social goals that Stiglitz envisions.
I will save a discussion of this final chapter for a later essay, an essay in which I still plan to examine various solutions that have been proposed for dealing with the dangers associated with extremes of inequality. [This discussion-blog was finally published in November 2020 following the synopsis of corresponding solutions recently offered by Thomas Piketty (2019), and in addition to similar solutions offered by Anthony Atkinson (2015) in his book Inequality: What is to be done.]
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© J. Barnard Gilmore Kaslo, British Columbia March, 2015