Tuesday, May 12, 2015

Stiglitz - The Price of Inequality

Joseph Stiglizt paints a picture that many do not want to see, particularly those in the U.S.A. In The Price of Inequality (2013) he admits that it was hard to acknowledge “that the United States was no longer the land of opportunity portrayed by Horatio Alger stories of ‘rags to riches.’” One of the most important points of his book was that the blaming and framing for individual advantage that has become so much a part of the American debate has to stop. In its place we need a substantive conversations informed by “self-interest properly understood” (Alexis de Tocqueville) that has the potential to return U.S. economic policy to one that serves many, rather than the few. Before offering some reflections, no personal indictment is intended to anyone – I’m a humanist trying to understand economics and, more importantly, attempting to find ways to devise an economy that can serve all people more equitably.

The parallels between the Gilded Age of the late 19th and early 20th century and what is now occurring at the beginning of the 21st century is striking. The statement, “America’s concentration of wealth at the top was a result of rent seeking – including monopoly profits and the excessive compensation of some CEOs and, especially, that of the financial sector” is applicable across both times. Think of the names of the Gilded Age – Carnegie, Vanderbilt, Frick, Morgan, Rockefeller – and now those of the 21st century – Buffet, Walton, Gates, Trump… Using one example, the Waltons who are heirs to the Walmart empire control 69.7 billion dollars of wealth, equivalent to the total wealth of the bottom 30% of the entire U.S. economy. And what does Walmart do? It purchases and moves products made by others and makes them widely available at below market prices (sometimes) because of economy of scale. Walmart adds nothing to the general welfare of society and creates no innovation or advancement – it’s only a broker of the sweat and effort of others.

Rent seeking is extracting a natural resource or controlling access to a service or product that shifts wealth simply by taking it away from others. No contribution is made through innovation or the provision of any product or service. Countries that have abundant natural resources have classic rent seeking economies that gain access to their resources at prices and with terms that are lower than fair market value. The question about the rent-seeking economies is who owns these resources, especially when their extraction creates other impacts that create costs that are then laid at the feet of the public.
What happens among some of those with extreme wealth is that they credit their success to themselves, not recognizing the free gift of generations ahead of them, the opportunities of education and work they were accorded, and the infrastructure of a government and society that makes innovation and commerce possible. When this generational and public gift remains unrecognized, it becomes a sort of corporate welfare that no one acknowledges. “When the oil industry pushes for more offshore drilling and simultaneously pushes for laws that free companies from the full consequences of an oil spill, it is, in effect, asking for a public subsidy.” Beyond the financial costs associated with rent seeking, the greatest cost may be the “erosion of our sense of identity in which fair play, equality of opportunity, and a sense of community are so important.”

Ronald Reagan started the repositioning of the U.S. economy when he reduced taxation at the highest levels from 70% to 28% under the premise that the benefit to the rich would trickle down to the lower economic strata of citizens. The extreme inequality that is derived from the Reagan era, contradicting the trickle-down idea, has created a parallel and dysfunctional divide in the politics of the current generation. Those who have obtained great wealth are now able to more easily buy politician’s votes through campaign support, a dynamic that creates misinformation campaigns to manipulate the middle and lower class into thinking that maintaining an unrestricted economy that benefits the wealthy is in the interest of common citizens.

The solution that Stiglitz recommends is dramatic – focus “on community rather than simply on self-interest – both community as a means to prosperity and as a goal in its own right.” Return to an achievement model of income determination, one based on rewarding in income those who make the greatest contribution to society. Then reverse the government’s fiscal position by raising taxes at the top to reasonable levels, cut out corporate welfare and subsidies, increase taxes for corporations that don’t invest and create jobs in the U.S., impose taxes/charges on polluters, stop natural resource give aways, cut military waste, don’t overpay through government procurement (whether it’s a drug company or a defense contractor). Then invest in infrastructure, education and technology that will establish the base for growth in the future.

While these measures may seem draconian to some, they are likely in everyone’s best interest – even those with extreme wealth. The growing economic divisions among us all are dangerous because they result in hopelessness for some (resignation to poverty), unrest among others (public protest and violence), and complacency for those who do not recognize that economic disparity is one of the greatest dangers we face in terms of political and military conflicts around the world.

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