On Siglitz: Part Six

The sixth chapter of Joseph Stiglitz's The Price of Inequality is called, "1984 is Upon Us." In this section, Stiglitz details how many of the wealthy in this country try to frame the discussion in a way that benefits their interests, realizing that, in democracy, they cannot simply impose their rules on others. He posits that, in one way or another, they have to "co-opt" the rest of society to advance their agenda. They do this using their own, more subtle version of "newspeak."

An example of this can be seen in how our society responds to the word "socialism."

In American parlance, "socialism" is akin to communism , and communism is the ideology we battled for sixty years, triumphing only in 1989 with the fall of the Berlin Wall. Hence labeling anything as socialism is the kiss of death. Medicare is a single payer system-the government pays the bill, but the individual gets to choose the provider. Most of the elderly love Medicare. But many are convinced that government can't provide services efficiently that they believe that Medicare must be private.

Hence the famous "Keep your government hands off my Medicare" line. The irony here, aside from the obvious, is just how much socialism there is in this country that hasn't delivered the promised tyranny we now daily from the Right and, in fact, has been enormously beneficial to our country. Even famed "unbridled capitalist" Adam Smith wrote, in The Wealth of Nations, that the sovereign has

The duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a greater society.

Here, Smith champions elements of socialism and states that they are essential to any successful society. They have certainly worked out very well for us as we are the greatest nation this world has ever seen.

So, the dichotomy here is very frustrating given how the framing of American parlance operates. When we start discussing economics and the high level of inequality we have in this country, we see it again. As Stiglitz notes

Mainstream economics assumes that individuals have well defined preferences and fully rational expectations and perceptions. Individuals know what they want. But in this respect, traditional economics is wrong. If it were true, there would be little need for advertising. Corporations use recent advances in psychology and economics that extend our understanding and preferences and beliefs can be shaped to induce people to buy their products. 

Exactly right. One of the major problems I have with the whole "people act in their own enlightened self interest" meme is that..well...people don't. They are often foolish, emotionally unintelligent, and behave poorly, even engaging in criminal activity. That's why "leaving it all up to the free market to sort out" doesn't work given that the powerful people who run many of these markets can be characterized as all the above.

More importantly, people who don't really know what they want and aren't rational can be easily manipulated. Because of this simple fact, Stiglitz notes that most Americans have no earthly idea how much inequality there is in this country. They believe there is less economic inequality than there is, they underestimate its adverse economic effects, and they overestimate the costs of taking action.

In a recent study respondents on average thought that the top fifth of the population had just short of 60 percent of the wealth, when in truth that group holds approximately 85 percent of the wealth. Interestingly, respondents described an ideal wealth distribution as one in which the top 20 percent hold just over 30 percent of the wealth. Americans recognize that some inequality is inevitable, and perhaps even desirable if one is to provide incentives; but the level of inequality in American society is well beyond that level.

I've brought up this study before but I think it should be revisited given the context of Stiglitz's argument. People don't have any idea just how much the wealthy have in this country. Of course, any discussion about it results in Orwellian screeches and howls from the Right about "Marxism" and "class warfare." Yet this sort of wealth concentration at the top is exactly where liberal economic theory was born. Men like Adam Smith and Samuel Stiles bemoaned the hoarding of wealth by the aristocracy through mercantilism and other protectionist practices. In many ways, Stiglitz has argued the same thing in previous chapters by pointing out the endless cycle of rent seeking, incompetent government action and government inaction. Regardless of the times or the mechanism, the wealthy are continuing to do what they always do: consolidate power.

Now, this is usually the point when people ask, "how much inequality is bad and how much is good?" Well, before we do that, we have to get back to the perception problem.

Not only do Americans misperceive the level of inequality; they underestimate the changes that have been going on. Only 42 percent of Americans believe that inequality has increased in the past ten years, when in fact the increase has been tectonic. Misperceptions are evident, too, in views about social mobility. Several studies (here, here, and here) confirmed that perceptions of social mobility are overly optimistic.

So, we need to solve the problem of awareness first before we can detail any sort of serious metric regarding acceptable or unacceptable levels of inequality. That means we have to combat the 1984ish messaging we see every day from the 1 percent.

After we've done that, the best place to start is the most commonly used measure of inequality: the Gini-coefficient. There is also the Theil index, which has more sub group and sub region development, the Decile dispersion ratio, and the Share of income/consumption of the poorest x%. All of these metrics should be used in tandem for a more accurate analysis.

In taking a look at where we are today, it's obvious that we really do have some very serious perception problems.

Bear in mind, these figures are only through 2010, the last time the Census Bureau did their estimate. Two years ago we were at 46.9 which means we are very close to that .5 tipping point where we quite literally have a country of haves and have-nots. The study from above shows that Americans want our country to be more like Sweden. That's not surprising, given that there Gini coefficient is .23, nearly half of what our's is today.

Stiglitz has much more to say in this chapter regarding perceptions in terms of market behavior, fairness, and a whole host of other issues like the public view on estate taxes and bank recapitalization. It's quite a bit of information to absorb so I chose to focus on the more general theme of the chapter-the perception of inequality. For the finer points, as always, I recommend reading the book and the sources contained at the end of each section, some of which I have listed here.

So, the facts show that it's a more subtle version of newspeak, isn't it? It's not quite war is peace (although the Right's view on guns is certainly close to that) but it's still just as contradictory. The people of this country need to know just how much inequality there is and, as Stiglitz noted in previous chapters, the detrimental effects it is inflicting on our country.