Income inequality and wealth inequality have skyrocketed in the last 30 years. There is no dispute about this, but there are disputes over both the causes of this phenomenon and its effects.
In one sentence summary for those of you who like a very short review, this book has a threefold agenda. First to document the widely accessible and now well-known phenomenon of inequality, second to explain its cause and third understand its effects.
Also note that Stiglitz's book is very much an elaboration of his 2011 Vanity Fair article "Of the 1%, for the 1%, by the 1%." This article provides an excellent summary of the basic argument.
For those of you who like a longer review I will now provide a rather lengthy summary for those interested in the crucial issues of inequality, which are the root cause of the Occupy movement (see Richard Wolff excellent book _Occupy the Economy_,
Occupy the Economy: Challenging Capitalism (City Lights Open Media)) and global tensions (see James K. Galbraith's indispensable _Inequality and Instability_,
Inequality and Instability: A Study of the World Economy Just Before the Great Crisis).
Stiglitz's book is really two books, the first book is 290 pages of very well argued and accessible text aimed at the above threefold agenda. The second book is 100 pages of notes, documentation, and very excellent citations and references. My review will concentrate on the text.
In chapter one Stiglitz emphasizes that the phenomena of income inequality has been occurring well before the financial crisis of 2008. Indeed inequality is suggested to be a root cause of the crisis itself. From pre-crisis, 1979 - 2007, the richest 1 percent of Americans received 60 percent of all gains income growth, the richest 5 percent of Americans received 80 percent of all income gains, while the 90 percent of American households receive 8.6 percent. These staggering statistics are completely unprecedented in U.S. history.
Indeed if we look closer most Americans were actually becoming worse off with respect to inflation-adjusted income from 1979 - 2007. Stiglitz writes: "While the top 1 percent was doing fantastically, most Americans were actually growing worse-off" (p. 3), even though real per capita GDP has increased by nearly 80 percent, "most American male full-time workers have seen their income go down" (p. 26).
The wealth inequality (assets such as stocks, bonds, real estate, etc.) is even greater than income inequality (see Edward Wolff's _Top Heavy_
Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It, Second Edition. But worse still, the quality of life, health benefits and job security has drastically deteriorated for most Americans since 1979. The Great Financial Recession has not caused these trends, but has made many of them worse (p. 27).
Both income and wealth inequality is explained by the symbiotic relationship between markets and government. While "market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does and what it does not do" (p. 28).
This latter point is absolutely essential to the argument of the book. Businesses which want to make profits will attempt to circumvent competition and achieve monopoly-like power. This can be difficult, but because of "asymmetric information" (e.g. sellers having more information than the buyer) many industries can accomplish monopoly-like power within the market process.
More importantly to Stiglitz, if monopoly-like power cannot be achieved by means of market processes and marketing, then there is always "rent-seeking" activity.
Rent-seeking is the attempt to obtain windfall profits or "rents" by means of political privilege and advantage. In other words, rather than creating new wealth via new technology, marketing, new efficiencies, a business or industry will attempt to manipulate the political environment of the economic activity through political lobbying (Jamie Galbraith has provided the best and most sustained argument of this behavior in his brilliant book _The Predator State_,
The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, also see Charles H. Ferguson's _Predator Nation_,
Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America).
The financial industry is able to exploit both asymmetric information situations and achieve rents-seeking privilege. Stiglitz writes, "the form of rent seeking that is most egregious - and that has been most perfected in recent years - has been the ability of those in the financial sector to take advantage of the poor and uninformed (p. 32). This is because financial companies almost always know more about their product (mortgage, derivative, stock, etc.) then do their customers, and the industry has been able to minimize any regulation or action by the government to even the playing field.
According to Stiglitz it is rent-seeking activity and the rise of what Jamie Galbraith calls the "The Predator State" that is the main cause of the both wealth and income inequality. According to Stiglitz, the main cause of inequality is not globalization, education, or technological change, although they do play part (p. 30), rather the main cause is political manipulation of rules and regulations by American businesses which have entered American politics through lobbying and financing campaigns (p 40ff).
Also playing a supporting role in the rise of inequality is macroeconomic policy (chapter 9), the decline in unionization, the incentives of corporations, and tax policies of the government.
Thus the causes of inequality are first and foremost (1) rent-seeking activity and the rise of The Predator State, then (2) tax policy, (3) macroeconomic policy (4) corporate governance and regulation, or lack thereof, (5) decline in unionization, (6) globalization, (7) technological change, and (8) education.
Now, importantly only causes (6) and (7) are market determined forces, all other causes and the primary cause are socio-political phenomenon. The good news here, according to Stiglitz is because of these socio-political phenomenon are policy determined, rather than market determined, then a change in policy can reduce most, although not all, of the inequality.
But why should we wish to change inequality at all? Or, what are the costs and benefits of inequality? This is addressed primarily in chapter four "Why It Matters." As society, "We are paying a high price for our large and growing inequality [...]. Those in the middle, and especially those at the bottom, will pay the highest price, but our country as a whole - our society, our democracy - also will pay a very high price" (p. 83). Inequality creates tension between citizens, increases criminality, and lowers life spans (see Richard Wilkenson's impressive work on these issues,
The Impact of Inequality: How to Make Sick Societies Healthier,
Unhealthy Societies: The Afflictions of Inequality, and
The Spirit Level: Why Greater Equality Makes Societies Stronger).
Economically inequality creates instability, lowers output, increases unemployment and decreases GDP, "unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term" (p. 84).
Worse still, inequality is correlated with reductions in public investment to infrastructure and education, "massive distortions in the economy (especially associated with rent seeking), in law, and in regulations", and has negative effects on workers' and citizens morale (p. 94).
Stiglitz dedicates a chapter to the negative effects inequality has on democracy (see Larry Bartels, for an excellent argument from which Stiglitz draws,
Unequal Democracy: The Political Economy of the New Gilded Age. In other words, inequality is the _real_ road to serfdom and diminished freedom and weakened liberty. Economic inequality is at the same time political disempowerment, which places our "democracy in peril." Drawing heavily from behavior economics, chapter six explains how Americans misperceive the degree of inequality, fail to recognize its causes and misunderstand its consequences.
Chapter seven explains how inequality is now eroding the rule of law and created a nation of injustice and unfairness, diminishing socio-economic opportunities and political participation of citizens. In short, "inequality, combined with a flawed system of campaign finance, risks turning America's legal system into a travesty of justice" (p. 206)
The battle over the budget than is really a battle over inequality, while macroeconomic policy in the United States as made fetish of inflation at the neglect of other fiscal priorities, such as employment, infrastructure, and quality of life and personal security of citizens.
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