On Stiglitz, Part Four

Spend just a few minutes on the internet and you can see Joseph Stiglitz everywhere.

A recent article on how public sector belt tightening has made inequality worse.

These reductions, economists say, act as a drag on the economy. Former park employees, clerks, and firefighters such as Lykins are buying only the necessities. Cities are deferring road work, which means contractors aren't hiring people to pour concrete. By far, the largest impact is on school systems, which are laying off teachers, counselors, and janitors.

The latest BLS data on the working poor.

In 2010, there were 10.5 million individuals classified as "working poor" (persons who spent at least 27 weeks in the labor force—that is, working or looking for work—but whose incomes still fell below the official poverty level); the number of working poor was little changed from 2009.

Yet another report on the widening income disparity.

The divergent fortunes of Reyes and Hemsley show that the U.S. has gone through two recoveries. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583.

So, Chapter 4 of The Price of Inequality by Joseph Stiglitz, aptly titled "Why It Matters" could never be more relevant.

Stiglitz begins by illustrating a very simple fact.

When the wealthiest use their political power to benefit excessively the corporations they control, much needed revenues are diverted into the pockets of a few instead of benefiting society at large. But the rich do not exist in a vacuum. They need a functioning society around them to sustain their position and to produce income from their assets. The rich resist taxes, but taxes allow society to make investments that sustain the country's growth.

This echoes Nick Hanuer and his pointing out of the obvious: he (and other wealthy people) don't buy 5,000 pairs of pants. They buy 5 pairs. If people are buying less pairs of pants, the economy doesn't grow and that's why it matters. But it gets worse.

As Stiglitz notes, moving money from the bottom to the top lower consumption because the wealthy save more of their money rather than spend it. In fact, they save 15 to 25 percent of their income whereas those at the bottom spend all of theirs. Why does this matter?

The result: until and unless something else happens, such as increase in investment or exports, total demand in the economy will be less than what the economy is capable of supplying-and that means there will be unemployment. 

So, what can be done? Well, the wealthy are going to have to give up some of the money they are saving if they want to continue to have a society in which to enjoy their wealth. Stiglitz thinks that this should be done through taxes and government spending. Certainly, that's going to happen in some form or another but I question to what degree and, I have to admit, I question the mechanism. Relying completely on government is not the answer. As Stiglitz himself admits, they are running the government with their money and it's going to be enormously difficult to break out of that cycle, if not impossible. I think the president is trying to do this and having a tough time of it. Mitt Romney will make it worse.

That doesn't change the fact that the wealthy of this country are going to have to ALL do what Bill Gates does in Africa but do it here. It can't just be a few of them and the sooner they realize the necessity of this to their own livelihoods, the better. Stiglitz has a simple way to solve it.

The top 1 percent of this country earns 20 percent of the income. If they shifted just 5 percent of that income to the poor or middle class who do not save (through a combination of taxes, private charities, grants, and higher wages a la Henry Ford), this would increase aggregate demand by 1 percentage point and still leave them obviously quite wealthy with 15 percent of the nation's income. This is what we saw from post WWII to about 1980 and it wasn't socialism, folks, there was still inequality...just not enough to inhibit growth in our economy like there is right now.

This increase of one point would have a cascading effect. As the money recirculates, output would actually increase by 1.5 to 2 percentage points. Unemployment would go down considerably, likely around 6 percent. Stiglitz notes that a broader redistribution (from the top 20 percent, as opposed to the top 1 percent) would lower this unemployment even further.

Right around now is when the mouth foamers blow a bowel and starting screaming about socialism and/or communism. Paying higher taxes, as Stiglitz is suggesting, isn't socialism. Morever, I'd be more than happy if the wealthy of this country saw the need to do this voluntarily and simply did it for their own sake's. If we continue down this path of increased inequality and stagnation (likely worse, eventually), they will not have a choice. I think things are moving in the right direction, though, and we are already seeing some signs of this possibly happening and I am certainly optimistic.

Stiglitz goes on to discuss how the government's response to weak demand from inequality led to a bubble and even more inequality. He cites inadequate regulation and dishonest/incompetent banking as large contributors to this problem but this has been gone over many times.

He then lays out exactly how inequality makes for a less efficient and productive economy by looking at lowering public investment (as we see in the CSM link above), underinvestiment in the common good like education that directly leads to economic mobility, rent seeking and the financialization of our economy (the oil market is a great example of this...filled with people that don't actually buy oil but speculate on it), and the issue of consumerism.I'm going to turn this final point of consumerism into a stand alone post at some point as it is worthy of special attention. 

The rest of Chapter 4 is devoted to the alleged inequality efficiency trade off which, again, deserves its own post and honestly is separate from the issue of why inequality matters.  Suffice to say, Stiglitz has shown thus far that not only are we failing in equality of outcome but we are failing in equality of opportunity. People simply don't have the income mobility that leads to greater opportunity and our society is sorely lacking in closing this gap and increasing these types of opportunities.

Worse, as Stiglitz previews for the next chapter, this inequality is imperiling our democracy.