In the second chapter of The Price of Inequality, Joseph Stiglitz discusses how an unequal society is created. From the outset, he discusses how this is allowed to happen.
Much of the inequality that exists today is a result of government policy, both of what the government does and does not do. Government has the power to move money from the top to the bottom and the middle, or vice versa.
Wow. What a commie.
He then goes on to discuss the concept of rent seeking and how people in power use it to manipulate the government into doing their bidding, hence the increased inequality. But aren't these people in power faced with a choice?
To put it baldly, there are two ways to become wealthy: to create wealth or to take wealth away from others. The former adds to society. The latter typically subtracts from it, for in the process of taking it away, wealth gets destroyed. A monopolist who overcharges for his product takes money from those whom he is overcharging and at the time destroys value.
Right. That's the erosion of consumer surplus of which I often speak. So how does the latter (taking away wealth) actually happen? Well, it starts with many wealth creators not being satisfied with their wealth. So they seek to monopolize or rent seek even further. We saw this with the railroad barons of the nineteenth century and I think we are seeing it again today. So does Stiglitz.
Why does this happen? Stiglitz submits that Smith's invisible hand doesn't apply to our financial sector because their interest are not aligned with societal returns. They are, instead, aligned with their own interests and that of other people in the one percent. It's not a zero sum game but a negative sum game, where the gains to the winners are less than losses to the losers. As Smith himself said
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
We saw this go on with the stock pools in the 1920s and the credit default swaps and CDOs in 2008. In fact, Stiglitz argues that private financial firms act to ensure that markets don't work well. Why? Because they can make more money. If markets are competitive, after all, profits above the normal return to capital cannot be sustained.
That is so because if a firm makes greater profits than that on a sale, rivals will attempt to steal the customers by lowering prices. As firms compete vigorously, prices fall to the point that profits (above the normal return to capital) are driven down to zero, a disaster to for those seeking big profits.
He goes on to discuss how they teach students in business school to create barriers to competition and entry to a market as well as circumvent government regulation. Essentially, how to erode consumers surplus, make markets less efficient, and continue to widen the gap between the interests of the financial sector and the interest of society. In short, increase inequality.
Indeed, the financial sector has become quite adept at doing this. On pages 36-38, there is a section called "Moving money from the bottom of the pyramid to the top" in which Stiglitz offers examples of how exactly this is accomplished.
-Taking advantage of asymmetries of information (selling securities that they had designed to fail, but knowing that buyers didn't know that)
-Taking excessive risk-with the government holding a lifeline, bailing them out, and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could
-Getting money from the Federal Reserve at low interest rates, now almost zero
And the worst, according to Stiglitz?
-Taking advantage of the poor and uninformed., as they made enormous amounts of money by preying upon these groups with predatory lending and abusive credit card practices. This took many forms...changing high interest rates, sometimes obfuscated by fees...the abolition of usury laws...circumventing regulations. Rent-a-Center, for example, claimed to be renting furniture but was really selling it and lending money at high interest rates.
One poor person by themselves couldn't have done this. As there were so many, the amount of debt was astronomical. If the government had intervened in the best interests of social justice or concern of market efficiency, none of this would have happened.
Now there are many who think that it was the government, not the private sector, that drove this rush to lend to poor people through the
Community Reinvestment Act of 1977. To put it bluntly, this is a giant load of shit.
Here is one example of why that is. And here is another. And another.
And another. As we saw in
House of Cards and
Inside Job, this debacle originated in the private sector (specifically California) and happened simply because people in the financial sector (and then everyone else) wanted to make more money.
So, the financial sector was (and still is) more focused on circumventing regulations and exploitative activities than economic growth. As I have shown repeatedly, they don't contribute to our society in any meaningful way from an economic standpoint. Indeed, from Adam Smith's standpoint.
What other ways shift money from the bottom to the top?
-Those at the top have managed to design a tax system in which they pay less than their fair share-they pay a lower fraction of their income than do those who are much poorer. We call such tax systems regressive.
-The hollowing out of the middle class and the increase in poverty due to laws that govern how corporations interact with the norms of behavior that guide the leaders of these corporations and determine how returns are shared among top management and other stakeholders. If monetary authorities act to keep unemployment high (even because of fear of inflation), then wages will be restrained.
And who is it that heavily influences those authorities?
Moreover, the very sharp attacks on unions have weakened have weakened the individual's power over the corporation. We currently have about 7 percent of our population that are in private sector unions.
Stiglitz concludes this section by stating that market forces combined with politics (both of which should work in a balance to lessen inequality) have actually joined forces to increase income and wealth disparity.
All in all, it's not a pretty picture and it continues to get worse. There are no words that I can use to express my frustration at the right who view this information as being "commie talk." I urge all of you to read the rest of Chapter 2 of Stiglitz's book as it details more ways (too lengthy to mention here) that the wealthy are rent seekers.
