“The Price of Inequality” by Joseph E. Stiglitz

Stiglitz_Price_of_InequalityISBN 978-0-393-34506-3. “The Price of Inequality – How Today’s Divided Society Endangers Our Future” by Joseph E. Stiglitz was published by W.W. Norton & Company Inc in 2013 (this the paperback with new Preface, original hardback from 2012). This looks like a pretty daunting piece of work for the layman as the paperback weighs-in at a meaty 600 pages plus. Don’t be alarmed though, this was not a hard read. In fact, for a work of economics, it was a surprisingly un-put-down-able & packed with quotable-quotes. No wonder it made the New York Times bestseller list. But you might be in for a surprise. If you think the topic of inequality began and ended with “The Spirit Level” or “Affluenza” think again. This is a different beast entirely.

Stiglitz is not shy of parading his credentials. Yes he won the Nobel Prize in Economics which he shared with a colleague. (Technically there is no such thing as the Nobel Prize for Economics but we won’t argue.) Yes he headed up the World Bank and, yes, he advised the Clinton Presidency (largely unsuccessfully it seems – no doubt much to his personal disappointment). Yes he is a Professor at MIT, as is Noam Chomsky, yet they have more than this in common. There is probably nothing [in principle] in this book that has not already been said by Chomsky. Needless to say, when Stiglitz does it, it makes the bestseller list. This is why this is so important. This is the kind of book Chomsky should be writing if he were an Economics Professor, not a Linguistics academic. Stiglitz is in a different league entirely. He talks; people listen. Important people. People who just might matter.

Well, some people. Stiglitz is often a lone voice, a Keynesian economist cut loose in a sea full of Chicago School wannabes. Hence it is remarkable that he has penetrated the mainstream as far as he has. We last discussed his work whilst reviewing “Mis-measuring Our Lives” in 2011 yet we met him quite recently in the pages of Greg Palast’s “Vultures’ Picnic“. [Indeed Stiglitz tips his hat to Palast in the lengthy notes in the back of the book.]

We live in a world where it seems that any economist that doesn’t accept the consensus is automatically “of the left”. This is a reflection of just how far the “norm” has shifted to the “right”, in any other universe we could consider Stiglitz quite the conservative. We feel an affinity. We consider ourselves to be a ‘recovering conservative’ having fallen in love with 1980s Thatcherism only to fall out with it by the late 1990s. It became clear that it wasn’t delivering. Over ten years later and it still isn’t delivering anything other than abject failure. By 2008 it collapsed completely. Yet what choices are we given? It seems that the indoctrination is so complete that we have to accept that we need MORE of the same to fix the problems caused by the last dose. The very definition of insanity is to re-attempt the same failed policies over and over in the expectation that one day that might yield to the ideology that suggested they might work in the first place.

For this reason Stiglitz’s “Price of Inequality” is like a breath of fresh air. It is such a relief to see such sanity from someone so respected and so close to the establishment. It gives us all hope. He has put the words of Chomsky into the language of economics and spoke truth unto power. They might not listen to Chomsky but this? This is not an economics textbook. The author may be a heavy-weight in these things but he has made this as accessible as possible. It is a delight to read. It kicks off right in the heart of the Occupy movement. Stiglitz uses the language of Occupy – the 1 percent versus the 99 percent – without embarrassment through the entire book. It remains a fixed point of reference which was something I pointed out whilst reviewing Noam Chomsky’s “Occupy” a few weeks ago. The movement moved the agenda to the point where books like this can appear by prominent authors and get on bestseller lists.

Whilst “The Spirit Level” only gets one brief mention in the Notes it is clear that, instead, Stiglitz has borrowed heavily from Emmanuel Saez & Thomas Piketty’s “Income Inequality in the United States 1913-1998”. Yes, THAT Piketty, the same one who brought us “Capital in the Twenty-first Century” that so shook the world of economics in 2014. Where Piketty wrote the definitive academic work [that effectively disproves that unbridled capitalism can do anything other than lead to inequality], Stiglitz has written the user’s guide that reaches the same conclusion. If you had a choice between the two than chose Stiglitz. It’s ‘Piketty for the common-man’ you might say.

Only two drawbacks: firstly this is written largely from the perspective of the USA, secondly, Stiglitz meanders off his central theme around the middle of the book. It thus tends to become a treatise on Stiglitz’s pet Keynesian economics projects. The reader might quickly forget that the author was meant to be addressing the economic causes and impacts of inequality. The problem with inequality, as Stiglitz is quick to embrace, is that it is not a simple matter of economics. It embraces both politics and psychology. What we enjoyed from the get-go was how he used the language of economics to show how inequality happens and why it erodes economic strength. Inequality may work in the favour of a minority but, in the end, nobody wins. It is a negative-sum game. [The same conclusion as that in “The Spirit Level”.]

The main thrust of Stiglitz’s argument is that the Occupy protestors were correct; there is something fundamentally wrong with the political and economic status quo. It isn’t working for most people. The protests might have started earlier but the public expected their democratic system to correct the problem. It didn’t. It couldn’t. It was beholden to special interests. After a while it became clear that the elite had no intention of allowing anything to change. Rage followed as people realised that:

“…universal values of fairness became sacrificed to the greed of a few, in spite of rhetoric to the contrary, the feeling of unfairness became a feeling of betrayal.”

“Much of what has gone on can only be described by the words ‘moral deprivation’. Something wrong happened to the moral compass of so many of the people working in the financial sector and elsewhere. When the norms of a society change in a way that so many have lost their moral compass, it says something significant about the society.”

“If markets had actually delivered on the promises of improving the standards of living of most citizens, then all the sins of corporations, all the seeming social injustices, the insults to our environment, the exploitation of the poor, might have been forgiven. But to the [..] protesters [..] capitalism is failing to produce what was promised, but is delivering on what was not promised – inequality, pollution, unemployment, and most important of all, the degradation of values to the point where everything is acceptable and no one is accountable.”

What’s this book about? Stiglitz writes thus:

“This book is not about the politics of envy: the bottom 99 percent by and large are not jealous of the social contributions that some of those among the 1 percent have made, of their well-deserved incomes. This book is instead about the politics of efficiency and fairness. The central argument is that the model that best describes income determination at the top is not one based on individuals’ contributions to society (the “marginal productivity theory” [..]), [..]. Much of the income at the top is instead what we have called rents. These rents have moved dollars from the bottom and middle to the top, and distorted the market to the advantage of some and to the disadvantage of others.”

Stiglitz succinctly explains the point Chomsky makes:

“The failures in politics and economics are related, and they reinforce each other. A political system that amplifies the voice of the wealthy provides ample opportunity for laws and regulations – and the administration of them – to be designed in ways that not only fail to protect ordinary citizens against the wealthy but also further enrich the wealthy at the expense of the rest of society.”

Like Chomsky Stiglitz bemoans what passes as “free trade agreements” – he refers to them as “managed-trade agreements” in that they have nothing to do with free trade at all. And isn’t that the problem? The solution? The solution for Stiglitz is community, because our top-down politics has become so corrupt and beyond reform that it may never redeem itself:

“…I think [..] that the real solution to the inequality crisis lies in focusing on community rather than simply on self-interest – both community as a means to prosperity and as a goal in its own right. [..] Indeed, we are a community, and all communities help those who are less fortunate among them.”

This quote is lifted from the new preface to the paperback edition and strike a slightly different chord from the author’s conclusions to the original book. His original words struck at the utter despair of the system ever righting itself when corrupt power gets to write the rules for itself. He describes the current system as smacking of “social Darwinism” – it’s fundamentally flawed.

Like Chomsky, Stiglitz argues that the establishment has not colluded to create the current system; rather that it evolved… “moneyed interests use their wealth and influence as they can to shape it“. Those at the top have extracted large gifts from the public purse. The technical term is “rent seeking”: the elite are not earning their money, they are taking it in an unfair fashion; and everyone suffers.

“Markets by themselves often fail to produce efficient and desirable outcomes, and there is a role for government in correcting these market failures, that is, designing policies (taxes and regulations) that bring private incentives and social returns into alignment.”

The author goes on to list many well know ways in which classical markets are imperfect in such a way that they behave inefficiently. Rent seeking is one such inefficiency. This turns the paradigm on its head. Free markets are good but only if they are perfect. The ones we have are neither “free” nor perfect enough to deliver economic efficiency: hence government is needed to make markets work… Efficient market theory only works if you square the circle.

How long have we waited for words such as these from someone who writes with such authority? Why do we have take it at face value that everything that is wrong with society is the natural outcome of free market forces working correctly and are thus desirable? No more. Markets are not perfect. They make bad things happen and those negative outcomes produce a downside for everyone. The only good market is one working efficiently. The idea that we remove governance from markets to improve them will now be seen, in retrospect, one of the greatest and most lethal fallacies of the 20th and 21st centuries.

Hence deregulation leads to crisis. These could have been corrected but the

“…financial sector used its political muscle to make sure that the market failures were not corrected, and that the sector’s private rewards remained well in excess of their social contributions…”

In fact the author goes as far as saying the ‘heads the financial sector wins, tails the public loses’ in a culture of “too big to fail”. Big business has no interest in making free markets more “free”, work more efficiently or more competitively. No, their only self-interest is in making markets work for them and them alone. They want less competition, less efficiency, more rents, more monopoly power. Who, in their shoes, wouldn’t want a free ride at the public’s expense? By very definition this kind of power corruption leads to inefficient markets which centralise wealth and power – round and round in circles; with inequality growing worse as each turn.

So, Stiglitz asks, why, if it so demonstrably doesn’t work and only works to the disadvantage of the majority, do people vote for it? He uses a word familiar to Chomsky. He uses it only once: ‘propaganda’. He spends quite a lengthy section dealing with how the elite has convinced the 99 percent to vote for them. This is probably not his finest work and, indeed, Chomsky could probably have put it better, but it does the trick. Much money was invested in the propaganda. The more they spent, the more it worked, the more it worked, the more money they got. It was the Nazis who so perfected this form of indoctrination. ‘Mein Kampf’ excluded most Germans from the Reich’s dreams of power. So why did Hitler receive such massive public support? Because their propaganda system convinced the voters that they were part of the elite or, if they worked hard, they would become part of that elite. By definition the likelihood that they could ever be was virtually nil. The illusion of opportunity is very powerful and none more powerful than in the American Dream of today. The USA is now, not only one of the most unequal societies on earth but, is also one of the most socially immobile. Most people with money keep it and pass it on within their own family. Few of the poor will ever break into that circle. Period.

Research in the USA showed that a surprisingly large proportion of people receiving healthcare benefits didn’t realise they were a Government social security mechanism paid for through taxation. Indeed states that received most federal assistance tended to be those most against Government hand-outs. The indoctrination is so persuasive.

Although, at times, parochial, this books also has some international outlook as Stiglitz covers the European experience. However Stiglitz restricts his analysis to the actions of the European Central Bank and this remains secondary to his interest in US policy. Of all the nations on earth, who most wish to be exactly like America, the English speaking countries are the most keen: Australia, Canada and the UK. What happens in the USA today happens here tomorrow. We must avoid their mistakes. Money has to be kept out of politics. The state must not be “captured” by corporations. The term “capture” is used both by George Monbiot in “The Captive State” and by Stiglitz here. Monbiot was writing about a Labour Government in Britain 15 years ago. We still have a large way to go to catch up, but we are giving it our best. Our UK elite are never slow to take advantage of a recession to enforce austerity on everyone else. It’s “disaster economics” – the “Shock Doctrine” and Naomi Klein has it nailed.

The great game of inequality continues unabated because hypocrisy is written all across it. Stiglitz tells tale of the Obama administration official who told the public that it was necessary to honour banker’s bonuses, due to contractual sanctity, yet it was also OK for auto-workers to have their contracts shredded as their pay was slashed. The elite had such a grip upon establishment power that they need no longer hide their contempt and double standards from the rest of society.

Another example… The day before I sat down to write this there was an extract of a new book by Anne Mann (called “The Life of I: the new culture of narcissism“, published by Melbourne University Press) in the Guardian newspaper that told of research by US psychologist Paul Piff into the effects of wealth and inequality on people’s attitudes:

“He found that as people grow wealthier, they are more likely to feel entitled, to become meaner and be more likely to exploit others, even to cheat.”

This was not an aspect picked up by Stiglitz but it is just further evidence of how far down the rabbit hole our society has now gone with no sight of a way out. We are engineered to go deeper and deeper to our destruction. When will it ever end? Stiglitz can only hint at what has happened in other societies that have gone this way. Sometimes it ends in revolution. He has hope that, as in South America, democratic socialist politicians may arise and gain a popular mandate. He fails to ponder the effects of US foreign policy in that region. Indeed it seems ironic that he warns his US readership that if their country continues on its current path it will have the same levels of inequality as is seen in some tin pot military dictatorships in south and central America. He lets the irony just hang there.

Most of these countries (if not all) are US client states who have tried hard to forge an independent development path only to be struck down by the US. The US has a track record of forcing its clients to serve only the greed of U.S. corporations & elite interests – in spite of the real needs of the population. What goes around, come around. Is it any surprise that the US elite itself would finally succumb to the allure of one massive gated community – something reminiscent of the sci fi movie “Elysium”? If it’s good enough for Honduras then it is good enough for Florida. As U.S. elite influence goes on the wane from South America it has been in ascendant in the homeland. How disturbing. A dose of our own medicine.

Reforms were attempted from within the Clinton administration when Stiglitz was adviser, but all were shot down in flames. Ever heard of their attempt to implement a “Green GDP”? No? Now you know why. It is amazing how little power a US President seems to have when it comes to facing up to his sponsors. Stiglitz even tells tale of one objection to a Clinton policy (ending corporate welfare) that was labelled “class warfare”. Indeed, as Warren Buffet pointed out, yes, there is a class war and the rich elite are winning it easily. And don’t get the author started on war:

“With the top 1 percent in charge and paying no price for wars, the notion of balance and restraint goes out of the window. There is no limit to the adventures we can undertake; corporations and contractors only stand to gain. [..] For U.S. contractors, the military has provided a bonanza beyond imagination.”

…and these are not the words of Michael Moore. No, the wisdom of Nobel Prize winning, President advising, former head of the World Bank, Stiglitz. The rich don’t send their sons to war. A blind man could see it to be true. When will America wake up? Not soon it seems:

“What’s worrying is that those in the 1 percent, in attempting to claim for themselves an unjust proporation of the benefits of the system, may be willing to destroy the system itself to hold on to what they have.”

Does the evidence lead to any other conclusion? It’s snake oil – the very thing Stiglitz himself was accused of when he suggested exchange controls. Yet, for the Right there has always been someone else to blame. If the market went wrong then somehow the government just had to be to blame. That is the orthodoxy. Evidence to the contrary is simply ignored.

“Like the doctors of the Middle Ages who believed in bloodletting, but when the patient didn’t get better argued that what they really needed was another round…”

And as with Monbiot’s work on Private finance Initiatives in the public health sector in the UK, Stiglitz has demonstrated that the government could have used the armed services to perform basic services at a fraction of the cost that the US paid private contractors. This seems so obviously true. Private corporations are there to make as much money as possible and accept only very high profit margins. In no way can they ever compete with public services. To believe otherwise is to believe in unicorns. I have seen the evidence with my own eyes in the forum of community energy where corporations walk away from good projects because the profit margin isn’t high enough yet the returns would still be better than an average pension scheme. This leaves a vast area of the economy open to smaller community investors & entrepreneurs who are NOT rent seeking.

The author then goes off to shine a light onto the very shady practices in the US Financial Services industry. These practices are specific to the USA but you will recognise the culture whenever you hear of a bank being fined for mis-selling in the UK market. Why does this happen? Because executives are incentivised to cheat. They represent organisations that are too big and powerful to be held to account. Do we really need to copy “corruption, American-style”? For that is what it is – the very words use by the author. The US legal system is stacked in favour of the rich and powerful. They cannot lose.

So what to do? Stiglitz is firm: tax the rents.

“A basic principle of economics holds that it is highly efficient to tax rent because such taxes don’t cause any distortion.”

We can’t see that sort of ‘class warfare’ going down well at the Country Club. The author goes onto offer research suggesting that rents can be taxed anything up to 70% or more without any major disincentive effect. Beyond that he suggest other simple measures such as cutting out corporate welfare, taxing polluters, stop giving away natural resources, cutting military waste and shrinking the tax havens. A simple agenda. On corporate welfare this:

“The big banks can thus prosper not because they are more efficient or provide better service but because they are in effect subsidised by the taxpayers.”

Quite. This is the sort of plain speaking we need in Government. Call a spade a spade.

Moving on to the Chicago School economics and Milton Friedman, Stiglitz offers some professional politeness which barely can conceal his frustration:

“…his free market beliefs were based more on ideological conviction than on economic analysis. I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn’t work well. Friedman simply couldn’t or wouldn’t grasp these results. He couldn’t refute them. He simply knew that they had to be wrong. He, and other free-market economists, had two other replies: even if the theoretical results were true, they were “curiosities“, exceptions that proved the rule; and even if problems were pervasive, one couldn’t rely on government to fix them.”

Swiftly follows a take-down of the free banking policies implemented by the Chicago boys down in Chile under Pinochet. It nearly destroyed the economy:

“It would take Chile more than a quarter of a century to pay back the debts that the government incurred in fixing the problem.”

The Friedman banking deregulation genie had already been let out in his South American experiments and had failed in exactly the way it failed in the rest of the world in 2008. We learnt nothing because ideology got in the way. It will take us 25 years to recover.

So what remedies does Stiglitz come up with?

  1. Curb the finance sector, curb excessive risk taking, no more “too big to fail”, create greater transparency, create greater competition, curb bonuses, close down the off-shore market.
  2. Better enforcement of competition laws
  3. Improve corporate governance
  4. Reform US bankruptcy laws
  5. End corporate welfare
  6. Legal reform
  7. Tax reform, make it more progressive
  8. Improve access to education
  9. Help ordinary people save
  10. Health care for all (remember this is the USA)
  11. Strengthen social security
  12. Temper globilisation with a real level playing field
  13. Restore full employment
  14. Correct trade imbalances
  15. A new social contract
  16. Affirmative action
  17. Restore sustainable and equitable growth, use public investment, preserve the environment
  18. Political reform

That is a right long list and I have summarised it a lot. Of course this is aimed at the largely defective US system but, remember, where they are today is where we are heading tomorrow.

In his closing remarks Stiglitz looks at his long wish list and asks the pertinent question: “is there hope?” It is a long shot isn’t it? We can’t expect most of this stuff even in quite liberal European countries. He warns the power brokers to look out of the window and consider the fate of corrupt rulers who fell in the Arab Spring.

“As we gaze out at the popular fervour in the streets, we might ask ourselves some questions. When will it come to America? When will it come to other countries in the West? In one important way, our own country [the USA] has become like one of these disturbed places, serving the interests of a tiny elite.”

This is neither a threat nor a promise. It is a sad reflection of where we are. The fact is that our elite will behave the same way as the Arab elites. They will send in the tanks and repel the fervour with all the same draconian measures we so deplored when other people’s elites were the perpetrators. Stiglitz does warn that time is running out. He writes that he is not directly suggest the inequality will lead to crisis (strange choice of book title if he believes that!) but he points to the work of others that do suggest a strong link between the two. He believed there might have been hope when Obama came to power but it was not to be. His final words are melancholy-defined:

“Today that hope is flickering.”

The notes at the back of the book are very comprehensive and span well over a hundred pages. I recommend that you spend some time to study them. It is a shame that so much useful information was left out of the main text. Given the long length of the book it may as well have been shoe-horned in leaving the citations only at the rear.

To conclude: this is a great book if overly long. The central idea is massively radical for the current establishment. The problem is that Stiglitz is 100% correct: not only about the problem but also about the utter hopelessness. His new Preface offers a new direction: maybe the community is a better focus? Maybe he should spend less time at the World Bank and in the company of Presidents and more time working at the grass-roots to create civil structures that build equality from below. Equality can only be decreased if alternative economic mechanisms are in operation. Those mechanisms have to fly under the radar and undercut the top-down enforcement of inequality by elites. Hence even community action must, finally, threaten the elite. What a battle we will have then?

As I suggested earlier there is now an area of the market where social enterprises can provide services for lower returns than the “rents” sought after by corporations. Social returns are reasonable and distributed amongst the community. Still, this is, at best, a sticking plaster over a gaping deficiency in our governance. Should we ever have to accept a future of a 0.1% sheltered in their gated communities whilst one massive favela exists beyond? What kind of world is that? Is it the sort of world we hoped for when we have children? These are not universal human values. We have to make democracy work again. We need practical alternatives not a wish list to Santa. We must cut the elite off from their rents.

“The Price of Inequality” may not have shaken the world of Economics like Piketty’s later book, but they are coming from the same place. Economic academia can no longer justify the dogma of neo-liberalism. It doesn’t work. Where it fails we see inefficiency and suffering. So, maybe, if politics and the elite won’t yield then we have to focus not only upon the grassroots but also upon our Schools and Universities. From these halls of learning we need raise an army equipped with reality-economics. Their swords will be pragmatism, their armour the statistics of the last thirty years. When a new generation of this dismal science sweep away all those old ideologies then another world is possible.

Please make it so Mr Stiglitz.

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