This group meets the 2nd Thursday of each month to consider books on current issues or with some historical relevance to what’s going on now…

This month’s selection is The Price of Inequality by Joseph Stiglitz.

Next month (October 10), the group will discuss a pair of unpublished manuscripts by Greg Harmon, “Commentaries from a Correspondence on Locke and Property” and “Locke on Property.”

All welcome!

______________________________________

Allegra Fortunati, a long-time participant in this book group, wrote the following review of the Stiglitz’s Price of Inequality:

According to Wikipedia, economics as “dismal science” was coined in the 19^th Century by historian Thomas Carlyle in response to Malthus’ predictions of starvation due to projected population growth exceeding the increase in the food supply.  Carlyle is quoted as saying “the controversies on Malthus … are indeed sufficiently mournful.  Dreary, stolid, dismal, without hope for this world or the next ….”  Reading Stiglitz’s The Price of Inequality could evoke the same feelings with page after page after page of how and why the economy and political institutions are devolving into dangerously unequal systems, awarding the 1% with unprecedented wealth and power at the expense of the 99%.  Stiglitz’s book is a tour de force in cataloguing the rising inequality in income and wealth.  The gap between CEO pay and the average worker is now 243 to 1.  In comparison, a quarter a century ago the ratio was 30 to 1; it is currently 16 to 1 in Japan.  Inequalities in wealth are now even greater than inequalities in income. The United States is no longer the land of opportunity, a fact that Americans are unwilling to face in spite of the large spike in economic insecurity among the middle class and the poor.  Pretty dismal, huh?

Written in an accessible style, Stiglitz spares us from most jargon, equations, and tedious statistical analyses.  Much of the book discusses the origins of this inequality, why it is a danger to the market system and democracy, and what we need to do to rectify the situation, at the end laying out economic and political reform agendas whose hope of passage is dependent on the 99% coming to their senses.  The basic idea in the book is that “…Market forces shape inequality [and] government policies shape market forces.”  We have control over the rules of the game with the caveat that corporations are good at circumventing the rules and blocking reform efforts ($3.2 billion was spent on lobbying in 2011).  Stiglitz goes through the familiar litany of how the 1% has gotten its hands on their fortunes (primarily through “rent seeking,” seizing a larger share of the pie) and how they will keep them, from the lack of progressive tax reforms (income, capital gains, and estate) and deregulation to government giveaways of public resources.  Another factor includes no rules for allowing shareholders to have a say about CEO compensation (unlike in Europe), campaign contributions, or even knowledge of stock options which can encourage dishonest accounting.  Inequality is compounded by the lack of healthy social programs to aid the poor and middle class, lack of public support for education (the US high school graduation rate in 2008 was 76% compared to the EU’s rate of 85%, and 13 other countries surpass our rate for completion of college), bankruptcy laws that favor the creditor (unlike Chapter 11 for corporations), unfettered and unregulated financial markets, lack of market transparency around financial markets such as derivatives, globalization (particularly the reduction of impediments to the flow of capital across borders and no downside for corporations sending jobs abroad) and other lacks that would make markets work for the common good rather than for the rich.  Due to the rich’s efforts to shape perceptions, most damning is the general acceptance of the current level of equality by the public and its underestimation and lack of understanding of its adverse effects.  The public also underestimates the ability of government to counter these effects, and it overestimates the costs of doing so.

Stiglitz also goes through the justification for America’s inequality through the “marginal productivity theory” (those who get the most money do so because they make a greater social contribution).  He disputes the theory, claiming it has no basis in fact.  There are existing factors that favor the already rich and well-positioned, including government-sponsored research and technology, institutional setting like the rule of law, a well-educated workforce, and a functioning transportation and communications infrastructure, rather than the rich’s own efforts.  In outlining the Right’s commitment to Friedmanite market theory, he claims they continually overestimate the benefits and underestimate the costs of incentive pay and less progressive taxation.

In asking how inequality affects the economy, Stiglitz looks at Latin America (where we find the highest level of inequality in the world).  “Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long term.”  Now he brings in demand theory or trickle-up economics.  Lower consumption of the middle-income and poor, groups that spend a higher proportion of their income, lead to a shortfall in demand which is stalling the economy.  Inequality also lowers morale among workers, lowering productivity, increasing unemployment, and leading to a society-wide erosion of trust.  The great divide also leads to a lack of empathy, among the rich, for ordinary people.

But, one of the main consequences of inequality is how it distorts our political system and diminishes democracy.  The rich’s objective is to shape laws and regulations to benefit themselves.  Without inequality, drug companies could never have gotten higher drug prices under Medicare during the Bush Administration, giving them over $50 billion a year more than they would have received under a free market.  Stiglitz calls for more government intervention to correct market failures, not to foster them.  The Dodd-Frank regulations do not go far enough.  The stimulus package was not big enough, and help for people losing their homes or being underwater has not been significant.  But, inequality has led to disempowerment, disillusionment, and disenfranchisement with a lower voter turnout.  The U.S. is no longer a country of one person, one vote, but one of one dollar, one vote.

The distortion in our political system has led to deficit fetishism where the ballooning deficit has become the focal point of politics, rather than unemployment.  Due to the tax cuts, military spending, the Medicare drug benefit, and the Great Recession with its decrease in tax revenues and increase in expenditures for social programs, the deficit did not cause the recession as proclaimed by the Right, and austerity will not work to correct it.  Making the economy more equal by reform measures (such as raising taxes for the rich, cutting out corporate welfare and hidden subsidies, increasing taxes on corporations that don’t invest and create jobs in the U.S., fining polluters, stopping giveaways of resources and overpayment for procurement, and cutting back military waste) could go a long way toward reducing the deficit.

What was most fascinating to me was Stiglitz’s discussion of the role of the Federal Reserve which I always thought was sacrosanct.  Keeping interest rates low is not going to do the trick, and its unwillingness to take on “too big to fail” and focus on inflation, rather than unemployment, has exposed it as a tool of the bankers.  It needs to have its independence limited.

I have only two main criticisms of the book.  Maybe it is Stiglitz’s desire to make his work understandable to the public and to drive home his points (at times the book is highly repetitive), but he relies on generally anecdotal and comparative evidence, rather than systematic research.  His paperback edition includes 237 pages of notes citing studies, many times in which he is the author or co-author.  He does not use the notes either to provide more concrete evidence for his point of view or to further explicate where the Right has gone wrong in their studies, making the book seem like a more sophisticated ideological debate rather than a disinterested argument.  Finally, his calls for reform seem born in a vacuum.  He neglects to describe the work of existing public interest lobbies already struggling at the state and federal levels to curb corporations and make a more equitable country and thus giving us more hope for the future.