Abstract
Only one adjective accurately describes this effort by a somewhat left-leaning, Nobel Prize-winning economist to critique the current politico-economic situation for non-economist readers: peculiar. Having been chief economist of the World Bank and the head of President Clinton’s Council of Economic Advisors, one would not expect Stiglitz to have been surprised by events world-wide surrounding the 2008 crisis, but he explains here that he was. The Occupy Wall Street mobilizations emphasis on “the 1 percent” versus “the 99 percent” startled him into taking a new view.
This book’s concern with inequality is the result. Since the 1970s, Stiglitz argues, inequalities of wealth and income in the United States have significantly widened, causing unprecedented harm to the middle class and those below it. Middle class incomes have stagnated, the proportion of the population below the poverty level has increased, one-quarter of all children are in poor families, while the income and wealth of the top percentiles has greatly increased, especially the top 1 percent. As a result, Stiglitz believes, America has ceased to be the “land of opportunity.” The crisis of 2008 and since has similar characteristics to prior major recessions, but worsening inequality, Stiglitz asserts, has made the resulting unemployment, home foreclosures, loss of savings, and increased poverty much worse.
Inequality has been increasing in recent decades predominantly because of shifts in the relative shares from production and sales going to capital and labor, and in the proportion of gains in productivity being shared with labor. For many decades of the last century the relative shares to capital and labor remained steady. There was no satisfactory explanation why this was true but it was comforting that it was. Now capital’s share is steadily increasing. Of productivity gains, the proportion labor received as wage increases post-World War II is now drastically shrinking. The weakening of unions, and the decline in the proportion of the labor force that is unionized, have something to do with this but are far from sufficient explanations.
Stiglitz agrees that these relationships are crucial, but as his text unfolds it becomes clear that he does not have new insights into why they are worsening. Nor does he assert that his most prominent topics (“rent-seeking,” especially by banks; hi-jacking of the political system by the wealthy and powerful; and distortions in the functioning of markets) improve our understanding of these fundamental shifts.
Hence my accusation of peculiarity: not having important contributions to offer for understanding the dominant sources of increasing inequality, Stiglitz has resorted to singling out other behaviors he believes are relevant to worsening inequality and making a case for their importance.
Of his three big topics, rent-seeking is the least helpful as explanation. The rent-seeking Stiglitz discusses involves public goods and public choice theory. Through lobbying and political contributions, powerful interests obtain regulations and protections that are potentially of great value to them, and detrimental to the public. Credit card-issuing banks are Stiglitz’s most prominent villains; they have obtained and successfully defended a regulatory regime that allows them to engage in tremendously harmful predatory lending. Much of the rest of the financial sector is benefitting itself in similar ways.
Bad behavior of this kind hinders public choice from generating good policies, and weakens enforcement of desirable regulations that do manage to get enacted. However, introducing a technical term such as rent-seeking to describe all this to a popular readership seems ill-advised. Much of the behavior Stiglitz discusses differs not at all from the unadulterated greed of powerful interests. Gordon Gekko fictionally but famously proclaimed “greed is good,” and undergraduate textbooks teach that there are forces turning greed to good purposes.
Stiglitz’s description of the takeover of politics is less technical but even more peculiar. Inspired by his enchantment with Occupy’s 99 percent versus the 1 percent, he claims that the “perceptions” of voters have been distorted “so that the 99 percent [have] adopt[ed] the interests of the 1 percent as their own.” “The wealthy,” he writes, “have the instruments, resources, and incentives to shape beliefs in ways that serve their interests.” A minimum of this sort of hyperbole is not entirely objectionable, but when Stiglitz moves on to cases, the 1 percent are suddenly supplanted by “the Right,” whom he accuses of persuading much of the public that estate taxes are not in their interest, that it was proper to recapitalize large banks following the 2008 crisis, and that the downside of major restructuring of distressed home mortgages would be far worse than the benefits. What is peculiar here is that it is not “the Right” that has recently been the party of at least the Wall Street faction of the 1 percent but the Democrats, thanks to President Clinton’s forging of a permanent alliance with them, aided by his charismatic Treasury Secretary Robert Rubin but presumably not by Council of Economic Advisors head Stiglitz. Barack Obama, aided by his Treasury Secretary Tim Geithner, formerly undersecretary to Rubin at Treasury, as well as head of the New York Federal Reserve Bank, has only strengthened this alliance, although he incurred some displeasure in the 2012 campaign by calling his Wall Street allies “fat cats.”
Stiglitz’s case for distorted markets emphasizes the way globalization has been managed: maximizing the mobility of capital world-wide, to the detriment of labor confined within national borders. Much of the rest of the discussion wanders from issue to issue without clearly explaining how inequality is impacted. To his credit, Stiglitz cautions that the pros and cons of specific global phenomena require careful analysis.
As to recommendations, Stiglitz hopes to inspire people to unite around demands for greater fairness and better regulation. “Another world is possible” he writes, if we can: reduce rent-seeking, “curb the bonuses [to top managers] that encourage excessive risk-taking and short-sighted behavior,” “end government giveaways,” make student loans dischargeable in bankruptcy, provide “health care for all,” “temper” the effects of globalization, provide “full employment,” “make money less important in the political process,” and make markets operate fairly. Most of these items are desirable but very unlikely to be achieved. Others are not appropriate. Allowing student loans to be liberally discharged in bankruptcy would destroy the entire student loan apparatus presently in place; there are far better ways to reform student loans. As for health care, although this book appeared in 2012, there is no direct mention, or discussion, of the Affordable Health Care Act, the greatest reform accomplishment of the almost fifty years since Medicare and Medicaid were established. Nor will “health care for all” necessarily reduce income inequality. A lone endnote cautions that it has yet to be determined whether Obamacare will lower health care costs. The opportunity to add something on Obamacare to the 2013 paperback edition has been declined.
Stiglitz explains that current macroeconomic policy has little concern for inequality and the harms it inflicts. This is a valid claim, although macroeconomic policy generally has little concern for distributional issues, whether or not income and wealth inequalities are worsening. Stiglitz blames the Federal Reserve for failing to keep the economy more stable, and for not giving full employment higher priority among its objectives. He also accuses them, without persuasive justification, of constantly having their “focus” on the 1 percent, of having been “captured by the financial sector,” and generally of being “an embarrassment.” One chapter title announces that we have “a macroeconomic policy and a central bank by and for the 1 percent.”
More substantively, Stiglitz claims that in the way it responded to the bursting of the “tech bubble” of the late 1990s, the Fed “engineered, unintentionally,” the post-2000 housing bubble; that it then failed to recognize a bubble had developed; and therefore that it failed to do what was necessary to deflate the housing bubble. To counteract its capture by the financial sector and the 1 percent, Stiglitz proposes that if the political independence of the Fed, something virtually universally considered indispensable to its effective functioning, were moderated, it might become more “democratically accountable.” It would be interesting to hear Fed chairman Bernanke’s, and incoming chairwoman Yellin’s, views on this.
Like Ralph Nader, whose style of analysis and reform advocacy much of this book resembles, Stiglitz wants his readers to believe their demands, along with different Fed practices, and better legislative regulations and reforms, can make markets more “fair,” distribute income and wealth more evenly, or reduce the role of money in election campaigns. Whatever activism he seeks to inspire, it will not be “radical.” The wonders of Kindle technology reveal that the “r” word appears nowhere in the text or the notes. Neither do “R.R.P.E.” or “RRPE”; if Stiglitz has been reading what we have published in the past forty-plus years he considers none of it worth citing. The notes do reference and discuss a lot of mainstream research and conjecture about inequality, which economists of that stripe will appreciate.
My biggest disappointment is how drastically this book runs counter to what Stiglitz surely understands, as an expert in the functioning of the global economy: that tremendously powerful and increasingly global forces produce whatever level of inequality Americans experience, forces our electorate, the Fed, Congress, or the president have only a minimal ability to counteract. Since the massive layoffs triggered by the crisis of 2008, employers and investors have been sitting on billions and billions in cash, waiting for consumers and workers to evolve new patterns of consumption and to enthusiastically present themselves for new kinds of employment. The Fed has been working to stimulate investment and hiring by lowering interest rates and by massive repurchasing of government bonds–”quantitative easing”–which Stiglitz also fails to discuss. What exactly he would have a Fed rescued from the clutches of the “1 percent” and the “financial sector” do significantly differently he does not explain.
Stiglitz could have written a useful popular book on inequality that discusses its predominantly global sources and the hardships they are inflicting on the United States, and other nations. This is not that book. By setting aside the global picture and focusing instead on the lesser sources of inequality that can be attributed to domestic culprits (Wall Street, the Fed, greedy corporations, too-big-to-fail banks) he is not serving his popular readership well, regardless of how pleased, according to the paperback edition’s preface, he has been hearing they are with the present version.