Last week, VF.com ran an exclusive excerpt from economist Joseph Stiglitz’s upcoming book, The Price of Inequality, out this month from W.W. Norton & Company. In the essay, Stiglitz discusses how the top 1 percent in America would better serve itself by trying to close the country’s wealth inequality gap. Below, the economist discusses his new work.
Related: The 1 Percent’s Problem
Cullen Murphy: In your new book, The Price of Inequality, you range very widely both historically and geographically. Looking at American history, what period strikes you as most similar to our own in terms of lack of concern for widening inequality?
Joseph Stiglitz:Two periods come to mind: the Gilded Age of the late 19th century and the boom times of the 1920s. Both were marked by high levels of inequality and corruption, including in the political process (such as the notorious Teapot Dome Scandal that marked the beginning of the 1920s). In fact, until the middle part of the last decade, income inequality had never reached the levels of the 20s. Of course, some of those who made their fortunes in both periods made great contributions to our society—the Robber Barons in building the railroads that transformed the country, or James B. Duke, who was instrumental in bringing electricity to parts of America. But both periods were also marked by speculation, instability, and excess.
There are some, like Edward Conard in his book Unintended Consequences, who argue that extreme inequality is not only not a sign of deep trouble but in fact is something to be celebrated. You’ll have many bones to pick with that argument. What are the central flaws?
Conard argues that greater inequality is good because as rich people accumulate more money, they will invest it and improve the economy. Further, their wealth is proof positive of their contributions to innovation. As you mention, there are so many problems with this view it is hard to know where to begin. Let me highlight three.
First, it is based on the notion of “trickle-down economics,” the idea that if those at the top do well, so will the rest of society. But the evidence is overwhelmingly to the contrary: the real income (adjusted for inflation) of most Americans today is lower than it was almost a decade and half ago, in 1997.
Secondly, it is based on the fallacy that inequality is good for economic growth, but again, the evidence is to the contrary. Time and again, inequality has been shown to retard economic growth and promote instability. These are findings based on mainstream studies. Even the International Monetary Fund, not known for its radical economic stances, has come to recognize the adverse effects of inequality on economic performance.
Thirdly, it is not true that the extremely wealthy use their money to take innovation-driving risks. What we have seen quite clearly is that a much more common use of wealth is to gain advantage in “rent-seeking.” When small groups of people have disproportionate wealth, they will use their power to seek special treatment from the government. Some of the wealthiest (historically, and even today) have gained their riches by the exercise of monopoly, preventing others from competing with them on a level playing field. Such rent-seeking behavior is a terribly inefficient use of resources: Rent-seekers don't create value. Rather, they use their privileged positions in markets to capture larger and larger portions of existing value. They distort the economy, lowering efficiency and economic growth.
The real drivers of growth and innovation are young businesses and small- and medium-sized businesses, especially in high-tech areas, typically based on government-supported research. Part of America’s problem today is that too many of those at the top don’t want to contribute their fair share to these “public goods,” with many paying taxes that are but a fraction of the rates paid by those who are much less well off. But it shouldn’t be a big surprise that some of the wealthiest Americans are promoting an economic fantasy in which their further enrichment is beneficial to everyone.
In the “recovery” of 2009–2010, the top 1 percent of American income earners captured 93 percent of the income growth. I don’t think Conard will persuade the nearly 23 million Americans who would like a full-time job but can’t get one to find comfort in that. If you had to locate a fork-in-the-road moment when we started down the path toward widening inequality, when would that moment be? And what were the precipitating events?
It’s hard to pinpoint a single critical moment, but clearly the election of President Ronald Reagan represented a turning point. In the decades immediately after World War II, we had economic growth in which most people shared, with those at the bottom doing proportionately better than those at the top. (It was also the period that saw the country’s most rapid economic growth.) Among the precipitating events leading to greater inequality were the beginning of the deregulation of the financial sector and the reduction in the progressivity of the tax system. Deregulation led to the excessive financialization of the economy—to the point that, before the crisis, 40 percent of all corporate profits went to the financial sector. And the financial sector has been marked by extremes in compensation at the top, and has made its profits partly by exploiting those at the bottom and middle, with, for instance, predatory lending and abusive credit-card practices. Reagan’s successors, unfortunately, continued down the path of deregulation. They also extended the policy of lowering taxes at the top, to the point where today, the richest 1 percent of Americans pay only around 15 percent of their income in taxes, far lower than those with more moderate incomes.
Reagan’s breaking of the air-traffic controllers’ strike is often cited as a critical juncture in the weakening of unions, one of the factors explaining why workers have done so badly in recent decades. But there are other factors as well. Reagan promoted trade liberalization, and some of the growth in inequality is due to globalization and the replacement of semi-skilled jobs with new technologies and outsourced labor. Some of the increase in inequality common to both Europe and America can be ascribed to that. But what’s different about America is the remarkable growth in incomes of the very top—especially the top 0.1 percent. This is orders of magnitude greater than in most of Europe and comes partly out of Reagan’s deregulatory fervor, particularly in finance, partly out of inadequate enforcement of competition laws, partly out of America’s greater willingness to take advantage of inadequate corporate governance laws.
Throughout its history, America has struggled with inequality. But with the tax policies and regulations that existed in the postwar period, we were on the right track toward ameliorating some of that. The tax cuts and deregulation that began in the Reagan years reversed the trend. Income disparities before tax and transfers (help that is given to the poor through, for instance, food stamps) is now larger, and because government is doing less for the poor and favoring the rich, inequalities in income, after taxes and transfers, are even larger.
One of the activities you criticize at length is “rent-seeking.” Do you see rent-seeking at play in the J.P. Morgan fiasco?
The huge losses that J.P. Morgan recently reported show that we have not curbed the excesses of the banks; we have not cured the problems that led to the crisis. There is still a lack of transparency, predatory lending, and reckless behavior—with taxpayers still at risk. The failure to reform the financial sector is a clear manifestation of rent-seeking. We have continued with a system where we privatize profits and socialize losses; in effect, the banks have been the recipients of massive (often hidden) subsidies.
The financial industry has used its revolving door with the government first to weaken the regulations that constrain them; and even after it was manifestly clear that they were inadequate, to prevent the imposition of adequate new regulations. We have a deficient regulatory structure because of rent-seeking. Banks use their muscle to get special treatment, including bailouts. They have seen that if a loss would put them into bankruptcy, the American taxpayer is there for them with cheap financing (direct injections, zero-percent interest rates, propping up the mortgage market, paying A.I.G.’s obligations, and so on). In that way, they extract rents from the rest of us. These rents are then paid out in dividends to shareholders and “bonuses” to the management. What upset so many Americans was that those who brought their companies to the brink of ruin still received bonuses. And even as the Fed lent the banks money at close to zero percent interest, and they could make easy money by simply buying a long-term government bond, bankers received bonuses as if the profits were a result of their hard work or genius.
In your book you offer a number of policy options that together, over time, would redress the inequality problem. If you could press a button and achieve only one of them, which one would it be and why? If you could press the button once again, what would the second one be?
There is simply no silver bullet, partly because there are so many different parts to America’s inequality: the extremes of income and wealth at the top, the hollowing out of the middle, the increase of poverty at the bottom. Each has its own causes, and each needs its own remedies.
What disturbs me most is the fact that America has ceased to be a land of opportunity, with the chances of those at the bottom making it to the middle or top being much lower even than in old Europe; in fact, it is worse here than in any of the other advanced industrial countries for which there is data. This lack of equality of opportunity translates, over the years, into increasing inequality, and can lead to the creation of an inherited plutocracy. So for me, the single most important action is to ensure a quality education for all. At the same time, improved education would help Americans compete in the increasingly competitive global market.
The policies that I propose in The Price of Inequality follow directly from my diagnosis of the sources of inequality: at the top, excessive financialization, abuses of corporate governance that lead CEOs to take a disproportionate share of corporate profits, and rent-seeking; in the middle, the weakening of unions; at the bottom, discrimination and exploitation. Creating good financial regulations, better systems of corporate governance, and laws that curb further discrimination and predatory lending practices would all help. So too would campaign-finance and other political reforms that would curb opportunities for rent-seeking by those at the top.
These steps would all reduce the extent of inequality in before-tax incomes. But equally important is a reduction in after-tax income inequality. An easy place to start is with taxation itself—the current system taxes capital gains, which can be profits from speculation, at a much lower rate than salaries and wages. Not only is there no good reason for that, such tax policies distort the economy and increase instability. The wealthy should not be paying a smaller proportion of their incomes in taxes than the middle class. This worsens inequality, further distorts our politics, and makes it harder to restore the country’s fiscal health. The increased revenues could, furthermore, help finance the needed public investments in infrastructure, education, and research that will get our economy back on track—and, if well designed, would also increase both equality and equality of opportunity.
There must be voices among the 1 percent who make the same arguments you do about why inequality matters and why the wealthy have a stake in the welfare of everyone. Who are they?
There are many, including George Soros and Warren Buffett. Hundreds have signed on to a petition coordinated by a group called the Patriotic Millionaires to increase taxes on the rich, which can be found at patrioticmillionaires.org. They understand that a house divided cannot stand; they understand that their own long-term well-being, and that of their children, depends on there being a cohesive American society, one that invests adequately in education, infrastructure, and technology. Many of these are individuals who lived the American dream, who did not inherit their fortunes, and who want others to have the same opportunities that they enjoyed. Above all, I suspect that they believe strongly in certain values—exemplified by Buffett’s lifestyle—and they worry that in an increasingly divided America those values will become an increasing rarity. As the Patriotic Millionaires wrote in their petition in support of the Buffett rule, “Our country has been good to us. It provided a foundation through which we could succeed. Now, we want to do our part to keep that foundation strong so that others can succeed as we have.”