Our Dysfunctional Economics and Politics: Reflections on Joseph Stiglitz’s The Price of Inequality

joseph stiglitz inequality reviewNobel-Prize-winning economist Joseph Stiglitz’s The Price of Inequality: How Today’s Divided Society Endangers Our Future (2012) demonstrates how and why our present economy and government are a mess and how they have increased inequality, including widening the opportunity gap. Besides telling us how this inequality “endangers our future,” he offers suggestions on how to fix our dysfunctional state.

In a 2011 essay in Vanity Fair, he emphasized the great divide between society’s wealthy 1 percent and the other 99 percent, a distinction he continues in his present book, which has incorporated his earlier essay. Later on in 2011, the Occupy Wall Street (OWS) movement burst forth and proclaimed, “We are the 99 percent,” and Stiglitz sympathized with it and spoke to the protestors in New York’s Zuccotti Park (see here for more on the sympathy of Stiglitz and other academics for OWS). In his Preface, he cautions readers that he often uses the term “1 percent” loosely and that he makes “more sweeping generalizations than would be appropriate in more academic writing” (liii-liv, all page references are to the paperback ed.).

His readable prose avoids specialized terms except for “rent seeking”—“getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their [the 1 percent’s] effort.” (39-40) His reader-friendly style does not, however, lead to any lack of documentation, for he includes 137 pages of endnotes.

Since my own reflections here are influenced by my previous thinking on capitalism and progressivism, let me summarize them by borrowing from Chapter 3 (“Capitalism, Socialism, and Communism”) of my An Age of Progress? Clashing Twentieth-Century Global Forces (2008),

Many nineteenth-century capitalists, especially in Great Britain and the United States, championed laissez faire, which was hostile to almost any government regulation of business or private property that would curtail employers’ rights. Slaveowners and factory owners sometimes trotted out this principle to defend their “right” to own human property (slaves) or to pay low wages, hire young children, or maintain unsafe working conditions.

The core of capitalism was and is the seeking of profits in a market economy. As the conservative economist Milton Friedman once wrote, “The social responsibility of business is to increase its profits.” In 1976, Daniel Bell’s The Cultural Contradictions of Capitalism  mentioned that late twentieth-century capitalism had “no moral or transcendental ethic.”

In Atlantic Crossings: Social Politics in a Progressive Age, we read that to address the type of problems that capitalism made worse, or at least failed to address, the Progressive movement arose in the final decades of the nineteenth century. It was a diverse movement “to limit the socially destructive effects of morally unhindered capitalism, to extract from those [capitalist] markets the tasks they had demonstrably bungled, to counterbalance the markets’ atomizing social effects with a countercalculus of the public weal [well-being].” It did not attempt to overthrow or replace capitalism, but to constrain and supplement it in order to insure that it served the public good. The movement’s early leaders first appeared in western Europe, then in the United States, becoming especially evident during the so-called Progressive Era from 1890 to 1914. Progressivism was also present during the Franklin Roosevelt administration (1933-1945).

The Progressives were right: a movement (Progressivism) was needed to constrain and supplement capitalism to insure that it served the public good. For as Bell recognized, it possessed no transcendental ethic. It was neither moral nor immoral, but amoral.

For the proper aim of politics, as I have argued elsewhere, is the public good. And we cannot depend on the “free market” or unfettered capitalism, or any economic system alone to insure such a goal. Nor, as economist E. F. Schumacher realized long ago, is overemphasizing GNP or GDP growth the best way to further the common good—“GDP is not a good measure of economic performance.” (335)

Truth about economics and politics is complex, and Stiglitz makes some assertions that are open to debate. But none of the major points in The Price of Inequality contradict my previous convictions, and much of the book reinforces them. It also, of course, does much more.

Stiglitz’s starting point is the 2007-08 Financial Crisis. He begins his Chapter 1 telling us that it “and the Great Recession that followed cast vast numbers of Americans adrift amid the flotsam and jetsam of an increasingly dysfunctional form of capitalism. A half decade later, one out of six Americans who would like a full-time job still couldn’t find one; some eight million families had been told to leave their homes, and millions more anticipate seeing foreclosure notices in the not-too-distant future.” (1)

The half-decade since 2007-2008 has increased inequality, but the trend had been developing for many years, aided in no small part by the tax policies and other actions of Presidents Reagan and George W. Bush.

To backup his statements, Stiglitz provides a plethora of statistics and other data. Some examples: “The average tax rate in 2007 on the top 400 households was only 16.6 percent, considerably lower than the 20.4 percent for taxpayers in general.” (91) “The six heirs to the Wal-Mart empire command wealth of $69.7 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society.” (10) Although Stiglitz fails to tell us that this was in 2007, he adds in an endnote that by 2010, “the Walton wealth was larger than the wealth of the bottom 40 percent of all American families combined,” and he provides the source for these figures that clarifies the widening inequality. (383)  “Loopholes and special provisions have eviscerated the tax [on corporations] to such a degree that it has gone from providing 30 percent of federal revenues in mid-1950s to less than 9 percent today.” (92) “In the great bailout of the Great Recession, one corporation alone, AIG, got more than $180 billion—more than was spent on welfare to the poor from 1990 to 2006.” (225)

We also learn that our inequality is much worse than that that of most other advanced industrialized countries. For example, the ratio between the pay of U.S. CEOs and typical workers in 2010 was 243 to 1, as compared to Japan, where the ratio was 16 to 1. (Although Stiglitz’s main concern is with U.S. inequality, he expertly places it within a global context, not surprising for a former chief economist at the World Bank and author of Globalization and its Discontents.)

And he is concerned not just with economic inequality, but also with many others inequalities often related to income. As he states, some countries “produce a standard of living higher than that of the United States for most of their citizens, measured not just in terms of income but in terms of health, education, security, and many other aspects that are key to determining the quality of life.” (333) (See here for another source on how “we’re creating yet again two Americas and deepening inequality through . . . communications inequality.”) Overall, he believes that “the high level of inequality in the United States today increases instability, reduces productivity, and undermines democracy.” (193)

He is especially good at smashing the Right-wing myth that our capitalistic system would work best if government “interference” were kept to a minimum. Many younger people fail to recognize that “big government” was not always viewed as negatively as it has been since Ronald Reagan declared, “You can’t be for big government, big taxes, and big bureaucracy and still be for the little guy.” Not coincidently “the election of President Ronald Reagan represented a turning point” in regard to equality (xxxi), but also in how we viewed the size of government. As evidenced by Franklin Roosevelt’s four elections to the presidency, a majority of people during his years in power wanted a strong government and one that would restore and regulate our economy.

As a former chairman of President Clinton’s Council of Economic Advisers, Stiglitz has had ample experience in dealing with the nexus between the state and the economy. He realizes that government must play an important role. The reality is “government sets and enforces the rules of the [economic-social] game.” (38) It makes laws regarding such matters as unionization, corporations, competition, globalization, taxes, and bankruptcy. “More generally, it provides the soft and hard infrastructure that enables a society, and an economy, to function. If the government doesn’t provide roads, ports, education, or basic research—or see to it that someone else does, or at least provides the conditions under which someone else could—then ordinary business cannot flourish.” (116)

He also notes that conservatives don’t really want a hands-off government that lets the “free market” operate unfettered. They wish a government that will operate for them, for their interests. “The Right wants the ‘right’ rules of the game—those that advantage the wealthy at the expense of the rest.” (217)  And, in fact, our “political system . . . gives inordinate power to those at the top. . . . Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation.” (39-40) Using high-paid lobbyists is one way. “There are more than 3,100 lobbyists working for the health industry (nearly 6 for every congressperson), and 2,100 lobbyists working for the energy and natural resources industries. All told, more than $3.2 billion was spent on lobbying in 2011 alone. The main distortion is to our political system; the main loser, our democracy.” (119)

Partly as a result of such lobbying, drug companies were able to include a provision of the 2003 Medicare drug benefit law “that prohibited government from bargaining prices for drugs.” It “was, in effect, a gift of some $50 billion or more per year to the pharmaceutical companies.” (61)

price of inequalityStiglitz also asserts that “government spending can be very effective,” especially in regard to stimulating the economy. (293) In some cases, it is more efficient than that in the private sector. He provides several examples. After declaring that “returns from government investments in technology on average have been very, very high,” he cites the Human Genome Project, jet airplanes, and the Internet. (218) He also avers that “private health insurance companies are much less efficient than the government-run Medicare program. Private life insurance companies are much less efficient than the government’s Social Security program.” (220)

He tackles another myth of the Right regarding their contention that they are against equality of outcomes, but for equality of opportunity. This claim is an old one among conservatives. In his Conservatism in America, historian Clinton Rossiter noted that “the preference for liberty over equality lies at the root of the Conservative tradition, and men who subscribe to this tradition never tire of warning against the ‘rage for equality.’” At the end of the twentieth century, conservative historian Richard Pipes in his Property and Freedom echoed that sentiment when he wrote “the main threat to freedom today comes not from tyranny but equality—equality defined as identity of reward.”

Stiglitz deals with an updated version of this conservative fear of the “rage for equality” after quoting the 2012 Republican VP candidate Paul Ryan. The latter stated that a major difference between the Republicans and Democrats is “whether we are a nation that still believes in equality of opportunity, or whether we are moving away from that, and towards an insistence on equality of outcome. . . . Let’s not focus on redistribution, let’s focus on upward mobility.” (145) But Stiglitz convincingly demonstrates that because of Republicans’ opposition to increasing taxes on the rich and more funding for public education and other programs, combined with their support for more deregulation of the financial industry and other pro-rich measures, they have widened not just equality outcomes but the opportunity gap.

He mentions that “Horatio Alger stories, of individuals who made it from the bottom to the top, are part of American folklore.” But lately those stories seem more like “a dream, a myth reinforced by anecdotes and stories, but not supported by the data.” (xliv-xlv) They seem more, one might say, of Nathanael West’s novel Cool Million (1934), which satirizes the Alger myth-making. than any of Alger’s rags-to-riches novels.

Thus, the United States, often thought of in the past as the “land of opportunity,” now offers less chance to ascend the economic ladder than do other advanced industrialized countries. These include all those European countries like Great Britain that we’re used to thinking of as more class-bound and stratified than us.

In Chapters Four and Five, Stiglitz turns to “Why It Matters”—if we don’t reverse our increasing inequality, “our society, our democracy . . . will pay a very high price” (104)—and “A Democracy in Peril.” He criticizes the 1 percent and their Right-wing protectors not only for using all their wealth and power to maintain their privileges, but also for weakening the democratic process. They have done so by such means as transmuting our system from a “one person one vote” arrangement to a “one dollar one vote system” and making it harder for poor people to vote. (163-64, 179) He is especially critical of “the 2010 decision in the case of Citizens United v. Federal Election Commission, in which the Supreme Court essentially approved unbridled corporate campaign spending . . . a milestone in the disempowerment of ordinary Americans.” (165)

Stiglitz realizes that societies need social cohesion to work well. “There needs to be compromise, and compromise has to be based on trust: one group gives in today, in the understanding that another does in another year. . . . Cooperation and trust are important in every sphere of society.” (152). But “in America there has been an enormous erosion of trust in recent years. Within the economy the banking sector has been at the forefront of this trend. . . . The banks are not to be trusted.” (155)

He also has much to say about “how important fairness is to most individuals” (158), for example, fair pay for workers relative to what CEOs or Wall Street financers make. If workers perceive that they are being treated unfairly, they will not work as hard or be as productive in the work place. “If the belief takes hold that the political system is stacked, that it’s unfair, individuals will feel released from the obligations of civic virtue. When the social contract is abrogated, when trust between government and its citizens fails, disillusionment, disengagement, or worse follows. In the United States today and in many other democracies around the world mistrust is ascendant.” (151) “Where social cohesion has been destroyed . . . societies have become dysfunctional. (153)

Stiglitz’s viewpoint is at times similar to that of President Obama (see here, e.g., for Obama’s remarks on fairness that almost seem to echo those of Stiglitz). The economist is, however, sometimes critical of the president. For example, “The administration’s response to the massive violations of the rule of law by the banks reflects our new style of corruption: the Obama administration actually fought against attempts by states to hold the banks accountable.” (251)

In Chapter Five Stiglitz states that “the top has persuaded those in the middle to see the world in a distorted way, leading them to perceive policies that advance the interest of those at the top are consonant with their own interests.” (172) In his long Chapter Six, “1984 Is Upon Us,” he explores further “how, in a democracy supposedly based on one person one vote, the 1 percent could have been so victorious in shaping policies in its interests.” (183)

He declares that “the fact that the 1 percent has so successfully shaped public perception testifies to the malleability of beliefs. When others engage in it, we call it ‘brainwashing’ and ‘propaganda.’” (183) And he adds, “It is clear that many, if not most, Americans possess a limited understanding of the nature of the inequality in our society.” They underestimate not only how much inequality exits, but also its harmful economic effects and “the ability of government to do anything about it. . . . They even fail to understand what the government is doing—many who value highly government programs like Medicare don’t realize that they are in the public sector.” (184)

Amidst this unawareness, “the powerful try to frame the discussion in a way that benefits their interests, realizing that, in a democracy, they cannot simply impose their rule on others. In one way or another, they have to ‘co-opt’ the rest of society to advance their agenda.” (233) As part of their “framing” efforts, they propagate “big ideas” regarding “the role of the market, the state, and civil society.” (193) “Modern marketing has taught the art and science of shaping perceptions—and for those with enough resources (disproportionately the wealthy) there are tools [such as the media] to do so.” (201)

In What’s the Matter with Kansas, mentioned in a Stiglitz endnote, Thomas Franks also asked why voters (in Kansas) seemed to vote against their own economic interests, but emphasized the Republican appeal on cultural and religious issues more than does Stiglitz, who here ignores issues like abortion.

Stiglitz’s seventh chapter deals with “how inequality is eroding the rule of law.” (234) He believes that “the laws and regulations, and how they are implemented and enforced, reflect the interests of the top layer of society more than those of the people in the middle and at the bottom.” (258) And he provides examples of how the powerful (like big banks and other corporations) have used the legal system to their advantage, sometimes breaking laws without being punished.

Chapter Eight is titled “The Battle of the Budget.” Stiglitz starts off the chapter by dealing with the history of our current deficits. He thinks they are due to four main causes: the unwise George W. Bush tax cuts; the wars in Iraq and Afghanistan; the provision in the 2003 Medicare drug benefit that prohibited the government from bargaining drug prices, “a gift, worth by some estimates, a half trillion dollars over ten years”; (263) and the Great Recession begun under George W. Bush.

Although he realizes that the government deficits are a real problem, he believes that the Right’s recent emphasis on it is primarily motivated by its “true agenda—downsizing government” (except perhaps military spending) and “preserving and extending inequalities.” (271, 277) Conveniently, the Right’s present “deficit fetishism” (272) and emphasis on austerity would hurt government programs for the poor and middle class and widen inequalities even further.

Stiglitz, however believes that “more austerity will only worsen the downturn.” (264) His solution for dealing with the deficit emphasizes a different approach. “The causes of the reversal in the U.S. fiscal position provide a clear prescription for how to put it on a firm foundation: reverse the Bush era tax cuts for millionaires, end the wars and scale back defense spending, allow the government to negotiate drug prices, and, most importantly, put the country back to work.” (264) In addition, other measures could raise more revenues. Making the tax code fairer and more progressive would help. So too would taxing polluters and providing corporations less subsidies (corporate welfare) and below-market-value privileges, such as to public lands, drilling rights, and airways. “Levying additional taxes involves a simple principle: go where the money is.” (269)

Stiglitz also deals with various myths that the Right has propagated, such as that more government regulations (e.g. in regard to the environment) will hurt jobs and that the “poor have only themselves to blame.” (287) But “the worst myths are that austerity will bring recovery and that more government spending will not.” (288)

In Chapter 9, “A Macroeconomic Policy and a Central Bank by and for the 1 Percent,” Stiglitz is very critical of our central bank, the Federal Reserve. Earlier he had written, When it “lends unlimited amounts of money to banks at near-zero interest rates, and allows them to lend the money back to the government (or foreign governments) at much higher interest rates, it is simply giving them a hidden gift worth billions and billions of dollars.” (61) Here he refers to “its focus ever on the 1 percent.” (305).

Following up on his earlier comments about the battle of “big ideas,” Stiglitz states that “it is not a coincidence that currently fashionable monetary/macroeconomics finds its origins in the work of the influential Chicago school economist Milton Friedman [1912-2006], the strong advocate of so-called free-market economics.” He believes, however, that Friedman’s “free-market beliefs were based more on ideological conviction than on economic analysis.” (321) He also notes Friedman’s opposition to big government. (When asked at the end of the twentieth century whether he would keep or eliminate fourteen U. S. cabinet departments, he responded he would eliminate most of them, including those overseeing commerce, education, energy, and labor.)

In the chapter’s “Concluding Comments,” Stiglitz writes: “Over the past quarter century macroeconomic and monetary policies and institutions have failed to produce stability; they failed to produce sustainable growth; and, most importantly, they failed to produce growth that benefited most citizens in our society.” (p. 330)

Stiglitz’s final chapter, “The Way Forward: Another World Is Possible,” sums up his suggestions on how we can pull ourselves out of our current dysfunctional mess, create more equality, and prevent things from getting even messier in the future. He offers mainly an “economic reform agenda [that] would simultaneously increase economic efficiency, fairness, and opportunity. Most Americans would gain; the only losers might be some of the 1 percent.”  (336) Many of his proposed economic reforms have already been mentioned or suggested (e.g., cutting military spending; taxing the wealthy more; closing tax loopholes; lessening “corporate welfare”; and investing more in technology, education, the environment, and infrastructure). Here he makes more specific suggestions regarding economic and social policies. Examples include curbing financial abuses; helping consumers, workers, unions, and victims of discrimination; attacking inequities resulting from globalization; increasing access to education and health care; and revising laws that presently favor the wealthy.

Although he believes that political reforms must precede major economic reforms, he offers only a small number of them: for example, campaign finance reform—he would like to see the Citizens United case (see above) reversed— and ensuring access to “less biased information, as several of the Scandinavian countries do.” He also suggests that we could follow the example of many European countries and “provide public support for a variety of independent think tanks, to ensure a more balanced debate about the wisdom of alternative policies.” (358) A few of his other suggestions include making voting easier and reducing gerrymandering and filibustering.

He realizes, however, that for any real political reform to occur a deeper change must transform the political battlefield, and there are “two routes by which reform might happen.” (359)

By the first route, “those in the 99 percent could come to realize that they have been duped by the 1 percent: that what is in the interest of the 1 percent is not in their interests.” (359) In this section he indicates as a hopeful example how many less-than-1-percent-type authoritarian regimes in the Middle East were recently toppled. Earlier in the book, especially in his two prefaces (including a separate one for the Paperback Edition), he also offers the Occupy Wall Street movement as a hopeful American sign.

By the second path, “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.” (360) Stiglitz quotes the nineteenth-century Frenchman Alexis de Tocqueville, who “saw as a chief element of the peculiar genius of American society, something he called ‘self-interest properly understood’. . . . Tocqueville was not suggesting that there was anything noble or idealistic about this outlook.  Rather, he was suggesting the opposite: it was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul; it’s good for business.” (360-61)

Stiglitz is not a politician or political scientist, which helps explain why his suggestions for reform do not propose any concrete political tactics. His book provides only a few hints of how he thinks politics should work. His comment that Milton Friedman’s “free-market beliefs were based more on ideological conviction than on economic analysis,” indicates that Stiglitz believes rationality and objective analysis, not ideology, should fuel economic thinking. His favorable mention of “American pragmatism” in connection with de Tocqueville suggests a similar approach. As we have seen, he also “recognizes our political system can’t work if there isn’t a deeper sense of community,” and “there needs to be compromise.”

But he is a media-savvy individual who has written numerous books and essays, as well as lectured, appeared on TV and radio, and provided easy access to his thinking via his web site. Since his Inequality book appeared, journalists like Bill Moyers have increasingly emphasized our nation’s widening gap. On April 17, 2013 a Google search of the two words Stiglitz inequality provided 654,000 results. A few days earlier he wrote an opinion piece entitled A Tax System Stacked Against the 99 Percent, for The New York Times.

His actions as a public intellectual and encouragement of the Occupy Wall Street movement indicate his way of helping to bring about the dream he desires: “where the gap between the haves and the have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness, where the words “liberty and justice for all” actually mean what they seem to mean . . . . In this vision, we have an increasingly vibrant political system far different from the one in which 80 percent of the young are so alienated that they don’t even bother to vote.” (362)

walter moss

Walter Moss

He realizes that “our society and our politics is a competitive marketplace of ideas,” and that gives us “a reason for hope.”  (160, 224) His contribution is to fight in the “battle of ideas.” In our democracy—if fought as he fights it, non-violently with the weapons of rationality, persuasion, and tolerance—it is a noble battle. He hopes to awaken more of the 99 percent to how they have been duped and persuade more of the 1 percent what is in their own self-interest. If his efforts help move us closer to the more just America he desires, we will indeed owe him a huge debt.

Walter G. Moss

Wednesday, 17 April 2013

Published by the LA Progressive on April 18, 2013
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About Walter G. Moss

Walter G. Moss is a professor emeritus of history at Eastern Michigan University. His most recent book is An Age of Progress?: Clashing Twentieth-Century Global Forces (2008). For a list of all his recent books and online publications, including many on Russian history and culture, go here: http://people.emich.edu/wmoss/pub.htm