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Stiglitz on Inequality: "The Great Divide"

By       Message Seymour Patterson     Permalink
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Joseph Stiglitz
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The Great Divide at 417 pages is a lengthy tome. However, it does not suffer from obtuse economic terminologies in the economics discipline: The language is easy for the typical lay reader to understand. The book is thematically organized such that the topics connect smoothly: showing both a backward linkage to the previous topics and a forward linkage to the upcoming material, making the flow of ideas rational and accessible. This is remarkable considering that the book is a compilation of articles written by Prof. Stiglitz over considerable time. The Great Divide is a timely book that addresses contemporaneous issues of inequality that started to plague the U.S. since the early 1980s, when policies dealing with the enforcement of anti-trust legislations were ignored, prejudicial tax cuts were enacted, and the attack on unions reached a benchmark with the destruction of the air traffic controllers' union.

Prof. Stiglitz uses relevant examples of countries like Mauritius, Singapore, Scotland, Spain, Greece, the U.K., China, and Japan to buttress his arguments. He puzzles over the causes of America's rising inequality such as the 1 percent co-opting policy makers by buying politicians: The Supreme Court of the United State's (SCOTUS) ruling in the Citizen United case made this easier for the 1 percent. For lobbyists buying politicians is usually money well spent to get laws enacted that favor the interests of the 1 percent: less regulation (they can pump more arsenic and mercury in the atmosphere), lower taxes, and the ability of companies to socialize costs and privatize gains. Prof. Stiglitz was also able to demonstrate that large inequality hurts even the 1 percent. (p. 73) The transfer of money to the 1 percent increases their income by the amount of the transfer, but since it harms GDP, then even the 1 percent are worse off in the long term.

Bankers also borrow from the Fed at favorably low interest rates, then they lend the money to the government at 3 to 4 percent interest and they get to keep the profit. (p.148) These institutions are too big to fail--maybe no longer under Dodd-Frank (Act). Perhaps bank bailouts as Prof. Stiglitz points out should be about bailing out banks, not bankers and stockholders. When a bank goes under the stockholders should lose everything and bondholders should become shareholders. Too big to fail creates a perverse incentive for banks to gamble with other people's money. SCOTUS, in McCutcheon (money is speech) and Citizen United (corporations are people), became enablers of bankers' bad behavior. (p. 145) Weakening regulations by Congress also played a role. These things have contributed to the widening equality we are experiencing in the U.S.

By arguing against inequality, even as effectively as Prof. Stiglitz has done in The Great Divide, goes against the grain. The pro-inequality faction has been in the ascendancy since the 1980s. Pres. Bush signed on this trend by favoring the 1 percent if not in legislation, in rhetoric: He wanted to privatize social security, tax cuts for the 1 percent; and he favored deregulation. The undue focus on cutting government spending (including privatizing government services), while ignoring the resulting hardship for real people, has been incorporated into the ideology of some state governors around the country and world leaders: Sam Brownback in Kansas, for example, and in Europe the "troika's" (IMF, ECB, and EC) hard-line policies toward Greece with ruinous consequences.

The book is also a treatise on the gap between the 1 percent at the top of the income ladder and the rest of us. It does an excellent job of explaining how this came about, and the consequences it poses for the U.S. economy if it is not rectified. Prof. Stiglitz doesn't subscribe to the notion that inequality is a good thing that is necessary for economic growth. On the contrary, he argues that inequality hurts us all by reducing aggregate demand and thus GDP. And, government intervention is needed to correct it. One way to address this problem is to encourage more investment and more consumption. Absent both, there is always government spending, regulation, redistributive taxation, etc.

Prof. Stiglitz does not just highlight the causes and problems associated with inequality, but also offers a way forward for the US economy, which is to raise the saving rate to about 4 percent: that is, investment and spending should increase. This is an important aspect of the content of the book; it identifies the problem of inequality, and recommends solutions to them. But fixing it is obviously not easy--dare bring it up and there is some pushback: class envy, and the rich are rewarded by the market for hard work. But the poor are lazy and immoral: They have children out of wedlock, etc. Redistribution smacks of communism, even when it asks the rich to contribute more to public goods.

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The Great Divide explains what led to the rise in inequality, both income and other types of inequalities. It posits also that inequality is a product of politics rather than economics. And that it has everything to do with education, race, and accidents of birth, sex, and historical flukes. If inequality is not resolved, our economic growth will decline and inequality will prove to be the precursor to the end of America's global hegemony.

Prof. Stiglitz' views on the cause of the Great Recession of 2008 include: It is the lack of demand that explains the weakness in our economy, and this lack of demand is caused by inequality. And because banks engaged in reckless lending and went bankrupt, the big ones could not have been allowed to go under. Lehman Bros. and many other institutions were allowed to fail such small banks that made loans to small and medium businesses. (p. 377). Such loans could have stimulated faster economic growth.

The perverse effect of money on politics and economics includes reductions in regulation (perhaps starting with Reagan, who allowed for a proliferation of mergers, concentrations, and acquisitions during the 1980s). Major tax cuts from about 70 percent to 28 percent that disproportionately favored the rich. And, of course, the attack on unions, starting with the Air Traffic Controllers, fueled the U.S. on a glide path to greater inequality. The expectation of "a rising tide lifts all boats" didn't quite pan out. Third, the tax cuts didn't produce the stimulus bang President Bush expected, nor did the billions in subsidies to agriculture and oil companies. In addition, Medicare part B was a sop to the pharmaceutical companies. Congress made it impossible for the Federal government to negotiate lower prices for drugs, making Americans pay more for drugs than "people elsewhere in the developed world." (p. 31)

The book illustrates the sources of inequality in a way that we learn how businesses take "welfare" from the government; even while they excoriate the poor on welfare. The unawareness of the contradiction, and hypocrisy, contained in this position suggests a prejudice toward the poor: a similar program aimed at the 1 percent and the poor (namely welfare), is denounced by the 1 percent with words like "lazy" and "dependency" but seen as an incentive for the 1 percent for job creation. A CEO receives a mammoth payoff even as the company files for bankruptcy protection. And in the aftermath of the great recession of 2008, bankers responsible for it were bailed out by the tune of $700 billion.

Many viable developed countries are more equitable than the US in providing "free education" and "health care" for their citizens because these policies mitigate inequality in these countries.

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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