June 11 (Bloomberg) -- As a populist war cry, “We are the 99 percent” is hard to beat. What the movement has lacked, though, is a coherent message and agenda. Until now.
Joseph E. Stiglitz, a Nobel Prize-winning economist who grew up amid the steel-mill grit and grind of Gary, Indiana, has spent decades studying the subject of his provocative new book, “The Price of Inequality.”
His conclusion: Economic growth, democracy and even the upper class itself suffer when the top 1 percent of Americans earns a fifth of the country’s income and controls more than a third of its wealth, as they do today.
“The rich do not exist in a vacuum,” he says in a blunt message to the inhabitants of what journalist Robert Frank calls Richistan. “They need a functioning society around them to sustain their position and produce income from their assets.”
Yet the U.S. government, far from reducing inequality, has spent 30 years doing the opposite, he argues: warping the market to shift money from the bottom and middle of society to the top. Government, in this view, is the billionaire’s secret weapon.
Stiglitz, who teaches at Columbia University in New York, has been exploring how inequality shapes economic behavior ever since his doctoral dissertation at the Massachusetts Institute of Technology in the 1960s. His findings, presented here with precision and passion, are grounded in behavioral economics, game theory, information asymmetries and more.
A former World Bank chief economist and Clinton White House adviser, Stiglitz has zero patience with what he calls the “religious belief” that markets are always efficient and the corollary, that governments are ever inefficient. Urging a greater balance between the two, he seeks to broaden the debate with a philosophical question:
Has American society become so unfair that “the land of opportunity” is now a myth?
Inequality has been growing for three decades, concentrating the nation’s winnings in the hands of the 1 percent even as the poor get poorer and the middle class hollows out, Stiglitz says. The last time wealth grew so condensed was just before the Great Depression.
This curbs consumption and perpetuates recessions, he says. The 1 percent club, after all, saves 15 percent to 25 percent of its income, which reduces demand and increases unemployment, he says.
Since the days of John Maynard Keynes, governments have sought to counter shortfalls in demand with increases in either public or private spending. With the 1 percent bent on restraining government expenditure, the burden for stimulating the economy fell on tax cuts and low Federal Reserve interest rates, Stiglitz says.
The devastating result was the housing bubble, which Alan Greenspan couldn’t (or wouldn’t) see because he believed markets were fully efficient. Half a decade after the bubble burst, the slump grinds on.
Stiglitz opens with a grim panorama of the economic landscape: One out of six Americans couldn’t find full-time jobs. Millions of families lost their homes. Middle-aged people faced premature retirement. And too many college graduates couldn’t find work yet were saddled with tens of thousands of dollars in student loans.
Among advanced industrial nations, the U.S. now has the highest level of inequality, he says, and the immiseration didn’t happen by chance. Though market forces played a role, government policies shaped those forces. This should be obvious to anyone who reflects on why Wall Street banks were allowed to gamble with federally insured deposits -- and got bailouts when their wagers blew up.
Or why shareholders have no binding say on executive pay. Or why Warren Buffett pays a lower income-tax rate than his secretary.
“There’s been class warfare going on for the last 20 years,” Buffett explains, “and my class has won.”
As you might expect, Stiglitz doesn’t discuss the governmental excesses that sparked the Reaganite and Thatcherite rebellions of the late 1970s -- unions holding countries hostage, wage-price spirals and the Great Inflation. What of today’s abuses, though?
For all the talk about “starving the beast” of government, “we haven’t achieved the minimalist state that libertarians advocate,” he writes. What we’ve created instead, he says, is a state too weak to improve public goods such as infrastructure and education yet strong enough to shower a bounty on the wealthy. It’s government “of the 1 percent, for the 1 percent, by the 1 percent,” he says.
Stiglitz isn’t fomenting the politics of envy. He is, rather, seeking to show how fairness and efficiency can work hand-in-hand, making markets more competitive. He closes, tellingly, with an observation Alexis de Tocqueville made about 19th-century America.
The genius of America, the French thinker said, was “self-interest properly understood.” Society’s well-being, in other words, hinges on minding the self-interest of others as well as ourselves.
“Those canny Americans understood a basic fact,” Stiglitz says, paraphrasing Tocqueville. “Looking out for the other guy isn’t just good for the soul; it’s good for business.”
Sometimes the French understand America better than Americans do.
“The Price of Inequality: How Today’s Divided Society Endangers Our Future” is published by Norton in the U.S. and will be available from Allen Lane in the U.K. later this month (414 pages, $27.95, 25 pounds). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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