By Amherst Trustee Joseph E. Stiglitz ’64 (Norton)
Reviewed by Geoffrey Woglom
[Nonfiction] What’s wrong with the U.S. economy? In his new book, The Price of Inequality, Joseph Stiglitz answers that there is a great deal wrong, and he believes that things are getting worse at an alarming pace. This is an important book for at least three reasons: 1) It describes in devastating detail how unequal our society has become. 2) It traces the link between rising inequality and changes in our economic, regulatory and political institutions. 3) It argues persuasively that our increasing inequality is a major impediment to economic growth.
Most of us are aware of media reports of rising inequality. Even so, I was appalled at the detailed and devastating statistics Stiglitz cites. My favorite quirky example is that the six heirs to the Walmart fortune have more wealth than the bottom 30 percent in the United States. But many of the statistics are even more troubling and hit closer to home. For example, only 9 percent of students in highly selective colleges come from the bottom half, while 74 percent come from the top quarter. And we can no longer take solace in social mobility as the long-run solution. Stiglitz cites studies that show there is less social mobility now in the United States than in most industrialized countries. All citizens need to be aware of these facts.
Some argue that inequality is an unfortunate byproduct of our economic success. Stiglitz, however, makes a strong case that the exact opposite is true. He describes how the political and regulatory processes have been captured by elites in order to secure their status. As an example, he cites the 2003 law that extended Medicare drug benefits but that also prohibited the government from negotiating over drug prices. The latter provision benefits the pharmaceutical companies to the tune of $50 billion per year. While this is a scandalous waste of government money, it reflects a much more pernicious problem. Major corporations currently have more at stake in lobbying to affect legislation (a phenomenon economists call “rent seeking”) than they do in innovating to develop new products and markets.
These perverse incentives are the basis for Stiglitz’s assertion that a fairer society would lead to a more
efficient and dynamic economy. First, the elites’ control over the government leads to monopolies, which cause inefficiency: monopolies produce less in order to justify charging higher prices. Second—and, I believe, more importantly—monopolies and the elite in general have a vested interest in the status quo. Therefore, they use their economic and political power to retard any innovation and change that could dislodge their monopoly position and disrupt their elite status. Who cares if the pie is bigger if my slice is smaller and I have less influence?
This aspect of Stiglitz’s indictment of the U.S. economy dovetails nicely with another new book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by the economists Daron Acemoglu and James Robinson. They provide a detailed historical analysis of the role of political and economic institutions in fostering sustained growth in countries around the world. They find that the common thread in countries with sustained growth is inclusive political and economic institutions that foster innovation, change and dynamism. Stiglitz’s argument can be thought of as documenting the loss of these inclusive institutions in the United States.
I would take issue with some parts of The Price of Inequality. I am uncomfortable with Stiglitz’s characterization of economists’ views on some issues. Stiglitz writes, for example, “The analysis shows unambiguously that the stimulative effect [of government spending] is considerably greater than the contractionary effect [of higher taxes]” (emphasis in the original). While I am sympathetic to this view, my reading of the economics literature is that the size (and sign) of fiscal multipliers is more contested. In addition, I do not share Stiglitz’s blanket criticism of Federal Reserve policies as motivated in the interest of the 1 percent. Specifically, my view is that the Bernanke Fed’s monetary policy at the end of 2008 was revolutionary but by and large successful in preventing a worldwide depression and that those policies at least served the interest of the 100 percent.
Overall, however, I am persuaded by the main argument that Stiglitz presents: Our economic and political institutions have become far less inclusive and supportive of dynamic growth and social mobility. But how do we change? Stiglitz sees two possible avenues: 1) The Arab Spring comes to the United States and the 99 percent force change, or 2) the 1 percent realize that the status quo is unsustainable and that it is in their interest to promote a fairer, more dynamic economy.
I find the first avenue scary and the second unlikely. As a young adult in the ’60s, I experienced the power but also the excesses of a populist uprising. I hope we don’t have to go that route to effect change. With regard to the second avenue, my pessimism is due to the fact that, while America might be a far better place with Stiglitz’s proposed policies, the 1 percent would be worse off. The only alternative I can see is incremental change in all areas of public policy to make things fairer, more efficient and more transparent, in the hopes of starting a virtuous circle of policy reform. Sadly, I could argue for my alternative more persuasively had the Supreme Court reached a different decision in Citizens United.
Woglom is the Richard S. Volpert Professor of Economics at Amherst.