Nobel Laureate Joseph Stiglitz on the Price of Inequality
University Professor Joseph Stiglitz, Nobel laureate and co-chair of Columbia's Committee on Global Thought, has long been interested in income inequality. Indeed, his 1966 doctoral dissertation, complete with myriad equations and hand-drawn graphs, was titled “Studies in the Theory of Economic Growth and Income Distribution.”
Since that time the divide between the rich and almost everyone else has grown enormously and the impact of this trend is the subject of his just published book, "The Price of Inequality" (W.W. Norton & Co., Inc.), whose conclusion is sobering. The economic system is failing the majority of Americans. Most wage earners—the bottom 90 percent—have seen their wages rise by only 15 percent in the past 30 years, his research shows. The top 1 percent, by contrast, has seen an increase of 150 percent over the same time frame. Altogether, the top 1 percent controls some 40 percent of the nation’s wealth.
The 2007-2008 financial crisis and resulting Great Recession has only exacerbated the disparity, he writes, and is the result of “an increasingly dysfunctional capitalism” that has important social, political and economic ramifications, including slower economic growth and a lower GDP. Hence the book’s subtitle is "How Today’s Divided Society Endangers our Future."
“Inequality undermines the strength of our economy and contributes to economic instability,” says Stiglitz. America’s growth was strongest in periods where inequality was far lower, he points out, particularly in the decades after World War II when wages for middle class and blue collar workers steadily increased. To those who would say that there have always been poor, Stiglitz responds, “That doesn’t mean that there have to be so many poor.”
A prolific writer of articles and some two dozen books and former chairman of the Council of Economic Advisers under President Clinton, Stiglitz tackles a wide range of subjects such as global poverty, sovereign wealth funds and industrial policy. His interests are reflected in his position leading Columbia’s Committee on Global Thought, which was founded in 2005 by President Lee C. Bollinger as a place to study the many issues created by globalization. (His co-chair is Saskia Sassen, the Robert S. Lynd Professor of Sociology.)
Although he is downbeat about the current economic structure, in the last chapter of his book Stiglitz outlines a litany of reforms that could mitigate the damaging effects of growing inequality, everything from tax reform to public investment and improved corporate governance and trade balances. He holds out hope that the 1 percent will realize that inequality “is not only inconsistent with our values, but not even in the 1 percent’s own interest.”
Q. What happens when you have a society divided, with the top doing very well and the middle and bottom doing poorly?
It’s not a pretty picture. The consequences have been economic, political, social instability. As the separation gets larger, there are more political tensions and less sense of community. A couple of the countries have seen this growing inequality, looked over the precipice and said whoa, we have to stop. Brazil had one of the highest levels of inequality, and things were not very good. But at the critical moment the country came together, a broad national consensus developed to fight inequality. Under [President Fernando Enrique] Cardoso they spent a lot of money on education, realizing that it was the key to getting more equality of opportunity. Under his successor, [President Luiz Inácio] Lula da Silva, Brazil provided all kinds of programs to strengthen the safety net to make sure that the struggles of the people at the bottom were addressed. What’s so striking is that now, this country that had one of the highest levels of inequality has not just reduced the level of inequality—though they still have lots of work to do—but also improved in terms of economic growth. And that illustrates my argument that you can have both more equality and more economic growth; it’s not a trade-off, so that’s the element of hope.
Q. Why don’t the wealthy recognize that income inequality threatens their own wealth and long-term prospects?
The growing inequality in our society undermines the strength of the American economy. The wealthy may not fully realize it, but it is in their own self-interest to make sure that everybody in our society does well, and that the gap between the rich and the poor doesn’t continue to increase as it has. The rich may not be aware of the inequality because they already live in such different worlds from the rest of society. To a very large extent the rich go to their own schools, live in their own communities, talk to other rich people. That gives them a lack of a sense of what is happening to the rest of the country. Many of the people in that upper 1 percent made it on their own, but they don’t realize that to some extent the ladder has been pulled up behind them, and that what happened to them won’t be happening to other people who were born at the bottom and in the middle.
Q. Can democratic political systems reliant on compromise deal with our economic challenges in a time of such deep political polarization?
Democratic systems are able to respond to the challenge of a crisis, but politics is complicated. Unfortunately, there are those who are trying to grasp the opportunity of this crisis to downsize government so they are clamoring for budget cuts, even knowing that this is going to weaken our economy. In their mind, I suppose, it’s the price you have to pay to weaken government. Now, a basic principle in economics [that] we teach in our introductory economics course is something called the “balanced budget multiplier,” which says that one way to stimulate the economy is to simultaneously increase taxes and increase expenditures. In that scenario, you aren’t increasing the deficit because doing those things in tandem stimulates the economy a lot. If you spend the money the right way on investments and education and technology infrastructure, you provide the basis of long-term economic growth, and the money could be used to address some of our long-term problems. So all of this would suggest that anybody reasonably looking at our problems would support stronger spending, perhaps with more taxes on the top. If you’re worried about the magnitude of the deficit, you must realize the government can borrow at close to a zero interest rate right now.
Q. So what can be done to address inequality and improve the nation’s economy?
There’s a lot that you can do. You can say to American companies, if you invest in America, if you create jobs in America, we’re going to give you a lower tax rate. But if you don’t invest in America, you don’t create jobs in America, you’re going to face a higher tax rate. That provides incentives for firms to invest in America and to create jobs here. If you’re operating a bank in the United States, you have to create a subsidiary in the United States and regulate it so that the American economy has banks that focus on lending and do not undertake excessive risk-taking; we’re going to make sure that financial activities that occur within the United States are sound and are directed to strengthening the American economy. We can’t solve the whole world’s problems, but at least we can solve the problems here at home.
Q. How has the interdependent nature of the global financial system complicated the current economic crisis?
Some people worry that in a world of globalization no country, not even the United States, can solve the problems it confronts, that we can only do it with concerted global action, but global institutions are not up to the task. I agree with parts of that view. For instance, when the Federal Reserve tried to stimulate the economy, it didn’t go in the way that we had hoped. In the old world of a closed economy, you provide more liquidity, the money goes inside the country, stimulates the economy and helps recovery. But in the new world of a globalized economy without restrictions, the money is going to go where returns look highest, and the returns look highest wherever there’s a boom going on. So the irony is the money is going where it’s not needed, like the emerging markets.
Q. Is there a danger that the financial troubles in Greece, Spain or Portugal are considered only European problems rather than something that could affect the global financial system?
Greece is a relatively small economy, a country of 10 million amid a euro area of some 300-plus million. It turned out that the Greek restructuring was a non-event, and further restructuring on Greek debt probably won’t have a huge effect on the global economy. But a crisis in Spain is very different, and if other countries like Portugal, Ireland, maybe Italy, reach a crisis point, that would be very serious and Americans should understand that. Again, we can’t be sure because of the lack of transparency of our financial system. And I think it’s almost criminal that we haven’t done more to insist on more transparency of our financial system, to make sure that the regulators know more about what’s going on.
Q. Can the U.S. play a larger role than it does?
We are the largest economy in the world, and we’ve been among the foot draggers. Many of the countries in Europe have been calling for stronger regulation of the financial system, for curtailing the bank bonuses, for a financial transaction tax to encourage banks to take a longer horizon of rapid transactions. A lot of people in other countries have been calling for reforms that we should have been advocating, and we’ve been the stumbling block. So the sad thing is, you can say it’s important to have global cooperation, but we are among those that are not cooperating.
Q. Given the political challenges, are you hopeful that our government can take the kind of corrective actions that you talk about?
I wish I could be more optimistic on the direction in which our politics and our economy are going. There are policies that could be put into effect that would reduce the extent of inequality in our society, that would promote more equality of opportunity and strengthen our economy while promoting economic growth. One of the important points I raised in my book is that there isn’t the kind of trade-off that many economists historically argued—that we could only have a more equal society by lowering economic growth. Once you understand the sources of inequality, you understand that it tends to impede economic efficiency and economic growth. When you have a financial system that preys on the poor, that engages in abusive credit card practices, when you have lobbyists getting special corporate welfare for their firms, those are all things that weaken our economy. If you got rid of those, we could have a stronger economy and a more equal society. So we know what we can do to make a stronger economy and a more equal society. That’s the optimistic note. The pessimistic note is politics, that because so much of our politics is done by the 1 percent and for the 1 percent, it’s going to be difficult to change all this. The 1 percent must understand that it’s in their interest, their enlightened self-interest, for everybody to do well. One of the reasons I wrote the book is to help Americans understand where we are, where we’re going, and to lay out that there is an alternative, there is an alternative course. But it will take reforms in our political system and in our economic system.