Professor of Economics at Columbia University, Joseph Stiglitz is a Nobel Prize winner and former Chief Economist for the World Bank, as well as Chairman of the Council of Economic Advisors for Bill Clinton.
He is probably the preeminent authority on worldwide income distribution and international trade. His most recent best-selling book is the “Price of Inequality.”
This last fall he wrote an essay in the N.Y. Times called “Inequality is a Choice.” This blog is about an imagined conversation with him about his essay.
The comments in this imaginary conversation come from G&A. The G is for Gary Wechter, a friend and a re-inventing entrepreneur who collaborated with me (I’m the A).
So, let’s begin with Stiglitz’s basic thesis excerpted to concentrate on the parameters of this phenomenon in the United States:
Stiglitz: It is well known that income and wealth inequality in most rich countries, especially the U.S., have soared in recent decades and tragically increased since the Great Recession (2008).
Of the advanced economies, America has some of the worst disparities in incomes and opportunities, with devastating macroeconomic consequences. The gross domestic product of the United States has more than quadrupled in the last 40 years and nearly doubled in the last 25, but, as is now well known, the benefits have gone to the top—and increasingly to the very, very top.
In 2011, the top 1% of Americans took home 22% of the nation’s income; the top 1/10 of 1% took 11% of the income. Ninety-five percent of all income gains since 2009 have gone to the top one percent. Recently released census figures show that median income in America hasn’t budged in almost a quarter-century. The typical American man makes less than he did 45 years ago (after adjusting for inflation). Men who graduated from high school but don’t have four-year college degrees make almost 40% less than they did four decades ago.
G&A: Assuming it’s true, isn’t it possible that as costs have come down for most essential items like food, clothing and technology due to our free market system that the typical American man has improved his lot? I think we can come up with lots of examples of how the middle class and even the poor are doing better today than 45 years ago.
Stiglitz: American inequality began its upswing 30 years ago, along with tax decreases for the rich and the easing of regulations on the financial sector. That’s no coincidence. It has worsened as we have under-invested in our infrastructure, education, health care systems, and social safety nets. Rising inequality reinforces itself by corroding our political system and our democratic governance.
G&A: The statistics on equality are certainly startling. There is no argument there. The comments about the underinvestment on infrastructure are quite true; however, the same cannot be said for underinvestment in education, healthcare and the social safety nets.
You can question or judge the poor outcomes, but the money poured into all three areas have factually continued to escalate.
Stiglitz: Excessive financialization—which helps explain Britain’s dubious status as the second-most-unequal country, after the United States—also helps explain the soaring inequality. In many countries, weak corporate governance and eroding social cohesion have led to increasing gaps between the pay of chief executives and that of ordinary workers—not yet approaching the 500-to-1 level for America’s biggest companies (estimated by the International Labor Organization) but still greater than pre-recession levels.*
*That’s twice as much as Bloomberg estimates and 60% more than our unions estimate.
G&A: Excessive financialization—is the process by which financial institutions, markets, etc. increase in size and influence which unquestionably has reached mammoth proportions, i.e., too big to fail. All of which could be controlled by reverting back to not allowing these institutions to incorporate, thus putting the managing partners at risk and/or requiring the separation of commercial and investment banking. There is a serious question about whether the disparity in pay between CEO’s and workers really mean anything. In the real world, it’s tied to what Board of Directors have to pay to be competitive in attracting management.
Stiglitz: Pioneering firms like Apple, whose work relies on enormous advances in science and technology, many of them financed by government, have also shown great dexterity in avoiding taxes. They are willing to take, but not to give back.
G&A: A totally unfair characterization. Although we haven’t examined their tax returns, we are sure Apple and other large companies are paying their fair share under the existing tax code. Mitt Romney was demonized in last year’s presidential campaign for paying too little in taxes while it was agreed by all that he paid exactly what was legally required. Promote the badly needed reform of the tax code, but don’t demonize those who are currently complying with it.
Stiglitz: Inequality and poverty among children are a special moral disgrace. They flout right-wing suggestions that poverty is a result of laziness and poor choices; children can’t choose their parents. In America, nearly one in four children lives in poverty; in Spain and Greece, about one in six; in Australia, Britain and Canada, more than one in 10. None of this is inevitable.
G&A: Yes, if this is true it is a disgrace, but our definition of poverty is so skewed that to try and compare it to other countries is without merit. Their poverty dwarfs ours by miles. We have very few starving children and here they live in homes with refrigerators, televisions, microwaves, etc.
Stiglitz’s comment claiming “right-wing” suggestions of poverty as the result of laziness and poor choice is wrong and totally uncalled for in this essay. Who is his “they”? Many children escape the cycle of poverty and achieve substantial lives, out distancing their parents. The key is motivation and equal opportunity.
Those comments about children are especially questionable. If poverty affects 16% of Americans, why are 25% of the children affected? Where are these pockets of child poverty in the U.S. besides the Indian reservations?
Stiglitz: On the one hand, widening income and wealth inequality in America is part of a trend seen across the Western world. A 2011 study by the Organization for Economic Cooperation found that income inequality first started to rise in the late ’70s and early ‘80s in America and Britain (and also in Israel). The trend became more widespread starting in the late ‘80s. After the late ‘80s, the top 10% of earners in most advanced economies raced ahead, while the bottom 10% fell further behind.
G&A: This proposition infers that the 10% lost by the poor went to the rich. This is a zero sum concept which is blatantly untrue. The naïve non-business understanding folks can’t grasp that all boats rise in a rising tide or the idea that the pie gets bigger allowing more chance for everyone.
Stiglitz: For these reasons, I see us entering a world divided not just between the haves and the have-nots, but also between those countries that do nothing about it, and those that do. Some countries will be successful in creating shared prosperity—the only kind of prosperity that I believe is truly sustainable. Others will let inequality run amok. In these divided societies, the rich will hunker in gated communities, almost completely separated from the poor, whose lives will be almost unfathomable to them, and vice versa.
G&A: It should be noted that one of the primary goals of communism and socialism was the equality of income and wealth. First, it never really happened. The elite always had much more and both systems have failed. Which countries, exactly, have been “successful in creating shared prosperity”? There is evidence the poor and the middle class are doing better today than they were 40 years ago in spite of the income gap.
Stiglitz shows his decided left-wing bias, but, none-the-less, this is a fascinating and important issue which is at the heart of the debate between liberals and conservatives. Is it real with dire consequences or a lot of statistics which have little or no meaningful effects? Gary and I would like to do some more research and prepare some blog posts over the next few months which can simplify, as much as possible, as well as shed some light on this somewhat complex subject.