Post by arthur woukhttp://www.nybooks.com/articles/archives/2015/sep/24/stiglitz-why-rich-are-so-much-richer/
Why the Rich Are So Much Richer
James Surowiecki, Sept 24, 2015 Issue
The Great Divide: Unequal Societies and What We Can Do About Them
by Joseph E. Stiglitz, Norton, 428 pp.
Rewriting the Rules of the American Economy: An Agenda for Growth and
Shared Prosperity, by Joseph E. Stiglitz, Roosevelt Institute, 114 pp.
Creating a Learning Society: A New Approach to Growth, Development,
and Social Progress, by Joseph E. Stiglitz and Bruce C. Greenwald
Columbia University Press, 660 pp.
The fundamental truth about American economic growth today is that
while the work is done by many, the real rewards largely go to the
few. The numbers are, at this point, woefully familiar: the top one
percent of earners take home more than 20 percent of the income, and
their share has more than doubled in the last thirty-five years. The
gains for people in the top 0.1 percent, meanwhile, have been even
greater. Yet over that same period, average wages and household
incomes in the US have risen only slightly, and a number of
demographic groups (like men with only a high school education) have
actually seen their average wages decline.
Income inequality has become such an undeniable problem, in fact, that
even Republican politicians have taken to decrying its effects. Its
not surprising that a Democrat like Barack Obama would call dealing
with inequality the defining challenge of our time. But when Jeb
Bushs first big policy speech of 2015 spoke of the frustration that
Americans feel at seeing only a small portion of the population
riding the economys up escalator, it was a sign that inequality had
simply become too obvious, and too harmful, to be ignored.
Something similar has happened in economics. Historically, inequality
was not something that academic economists, at least in the dominant
neoclassical tradition, worried much about. Economics was about
production and allocation, and the efficient use of scarce resources.
It was about increasing the size of the pie, not figuring out how it
should be divided. Indeed, for many economists, discussions of equity
were seen as perilous, because there was assumed to be a necessary
tradeoff between efficiency and equity: tinkering with the way the
market divided the pie would end up making the pie smaller. As the
University of Chicago economist Robert Lucas put it, in an oft-cited
quote: Of the tendencies that are harmful to sound economics, the
most seductive, and
the most poisonous, is to focus on questions of
distribution.
Today, the landscape of economic debate has changed. Inequality was at
the heart of the most popular economics book in recent memory, the
economist Thomas Pikettys Capital. The work of Piketty and his
colleague Emmanuel Saez has been instrumental in documenting the rise
of income inequality, not just in the US but around the world. Major
economic institutions, like the IMF and the OECD, have published
studies arguing that inequality, far from enhancing economic growth,
actually damages it. And its now easy to find discussions of the
subject in academic journals.
All of which makes this an ideal moment for the Columbia economist
Joseph Stiglitz. In the years since the financial crisis, Stiglitz has
been among the loudest and most influential public intellectuals
decrying the costs of inequality, and making the case for how we can
use government policy to deal with it. In his 2012 book, The Price of
Inequality, and in a series of articles and Op-Eds for Project
Syndicate, Vanity Fair, and The New York Times, which have now been
collected in The Great Divide, Stiglitz has made the case that the
rise in inequality in the US, far from being the natural outcome of
market forces, has been profoundly shaped by our policies and our
politics, with disastrous effects on society and the economy as a
whole. In a recent report for the Roosevelt Institute called Rewriting
the Rules, Stiglitz has laid out a detailed list of reforms that he
argues will make it possible to create an economy that works for
everyone.
Stiglitzs emergence as a prominent critic of the current economic
order was no surprise. His original Ph.D. thesis was on inequality.
And his entire career in academia has been devoted to showing how
markets cannot always be counted on to produce ideal results. In a
series of enormously important papers, for which he would eventually
win the Nobel Prize, Stiglitz showed how imperfections and asymmetries
of information regularly lead markets to results that do not maximize
welfare. He also argued that this meant, at least in theory, that
well-placed government interventions could help correct these market
failures. Stiglitzs work in this field has continued: he has just
written (with Bruce Greenwald) Creating a Learning Society, a dense
academic work on how government policy can help drive innovation in
the age of the knowledge economy.
Stiglitz served as chairman of the Council of Economic Advisers in the
Clinton administration, and then was the chief economist at the World
Bank during the Asian financial crisis of the late 1990s. His
experience there convinced him of the folly of much of the advice that
Western economists had given developing countries, and in books like
Globalization and Its Discontents (2002) he offered up a stinging
critique of the way the US has tried to manage globalization, a
critique that made him a cult hero in much of the developing world. In
a similar vein, Stiglitz has been one of the fiercest critics of the
way the Eurozone has handled the Greek debt crisis, arguing that the
so-called troikas ideological commitment to austerity and its
opposition to serious debt relief have deepened Greeces economic woes
and raised the prospect that that country could face depression
without end. For Stiglitz, the fight over Greeces future isnt just
about the right policy. Its also about ideology and power. That
perspective has also been crucial to his work on inequality.
The Great Divide presents that work in Stiglitzs most popularand
most populistvoice. While Pikettys Capital is written in a cool,
dispassionate tone, The Great Divide is clearly intended as a
political intervention, and its tone is often impassioned and angry.
As a collection of columns, The Great Divide is somewhat fragmented
and repetitive, but it has a clear thesis, namely that inequality in
the US is not an unfortunate by-product of a well-functioning economy.
Instead, the enormous riches at the top of the income ladder are
largely the result of the ability of the one percent to manipulate
markets and the political process to their own benefit. (Thus, the
title of his best-known Vanity Fair piece: Of the 1 percent, by the 1
percent, for the 1 percent.) Soaring inequality is a sign that
American capitalism itself has gone woefully wrong. Indeed, Stiglitz
argues, what were stuck with isnt really capitalism at all, but
rather an ersatz version of the system.
Inequality obviously has no single definition. As Stiglitz writes:
There are so many different parts to Americas inequality: the
extremes of income and wealth at the top, the hollowing out of the
middle, the increase of poverty at the bottom. Each has its own
causes, and needs its own remedies.
But in The Great Divide, Stiglitz is mostly interested in one
dimension of inequality: the gap between the people at the very top
and everyone else. And his analysis of that gap concentrates on the
question of why incomes at the top have risen so sharply, rather than
why the incomes of everyone else have stagnated. While Stiglitz
obviously recognizes the importance of the decline in union power, the
impact of globalization on American workers, and the shrinking value
of the minimum wage, his preoccupation here is primarily with why the
rich today are so much richer than they used to be.
To answer that question, you have to start by recognizing that the
rise of high-end incomes in the US is still largely about labor income
rather than capital income. Pikettys book is, as the title suggests,
largely about capital: about the way the concentration of wealth tends
to reproduce itself, leading to greater and greater inequality. And
this is an increasing problem in the US, particularly at the highest
reaches of the income spectrum. But the main reason people at the top
are so much richer these days than they once were (and so much richer
than everyone else) is not that they own so much more capital: its
that they get paid much more for their work than they once did, while
everyone else gets paid about the same, or less. Corporate CEOs, for
instance, are paid far more today than they were in the 1970s, while
assembly line workers arent. And while incomes at the top have risen
in countries around the world, nowhere have they risen faster than in
the US.
One oft-heard justification of this phenomenon is that the rich get
paid so much more because they are creating so much more value than
they once did. Globalization and technology have increased the size of
the markets that successful companies and individuals (like pop
singers or athletes) can reach, so that being a superstar is more
valuable than ever. And as companies have gotten bigger, the potential
value that CEOs can add has increased as well, driving their pay
higher.
Stiglitz will have none of this. He sees the boom in the incomes of
the one percent as largely the result of what economists call
rent-seeking. Most of us think of rent as the payment a landlord
gets in exchange for the use of his property. But economists use the
word in a broader sense: its any excess payment a company or an
individual receives because something is keeping competitive forces
from driving returns down. So the extra profit a monopolist earns
because he faces no competition is a rent. The extra profits that big
banks earn because they have the implicit backing of the government,
which will bail them out if things go wrong, are a rent. And the extra
profits that pharmaceutical companies make because their products are
protected by patents are rents as well.
Not all rents are terrible for the economyin some cases theyre
necessary evils. We have patents, for instance, because we think that
the costs of granting a temporary monopoly are outweighed by the
benefits of the increased innovation that patent protection is
supposed to encourage. But rents make the economy less efficient,
because they move it away from the ideal of perfect competition, and
they make consumers worse off. So from the perspective of the economy
as a whole, rent-seeking is a waste of time and energy. As Stiglitz
puts it, the economy suffers when more efforts go into rent
seekinggetting a larger slice of the countrys economic piethan
into enlarging the size of the pie.
Rents are nothing newif you go back to the 1950s, many big American
corporations faced little competition and enjoyed what amounted to
oligopolies. But theres a good case to be made that the sheer amount
of rent-seeking in the US economy has expanded over the years. The
number of patents is vastly greater than it once was. Copyright terms
have gotten longer. Occupational licensing rules (which protect
professionals from competition) are far more common. Tepid antitrust
enforcement has led to reduced competition in many industries. Most
importantly, the financial industry is now a much bigger part of the
US economy than it was in the 1970s, and for Stiglitz, finance profits
are, in large part, the result of what he calls predatory
rent-seeking activities, including the exploitation of uninformed
borrowers and investors, the gaming of regulatory schemes, and the
taking of risks for which financial institutions dont bear the full
cost (because the government will bail them out if things go wrong).
surowiecki_2-092415.png
All this rent-seeking, Stiglitz argues, leaves certain industries,
like finance and pharmaceuticals, and certain companies within those
industries, with an outsized share of the rewards. And within those
companies, the rewards tend to be concentrated as well, thanks to what
Stiglitz calls abuses of corporate governance that lead CEOs to take
a disproportionate share of corporate profits (another form of
rent-seeking). In Stiglitzs view of the economy, then, the people at
the top are making so much because theyre in effect collecting a huge
stack of rents.
This isnt just bad in some abstract sense, Stiglitz suggests. It also
hurts society and the economy. It erodes Americas sense of identity,
in which fair play, equality of opportunity, and a sense of community
are so important. It alienates people from the system. And it makes
the rich, who are obviously politically influential, less likely to
support government investment in public goods (like education and
infrastructure) because those goods have little impact on their lives.
(The one percent are, in fact, more likely than the general public to
support cutting spending on things like schools and highways.)
More interestingly (and more contentiously), Stiglitz argues that
inequality does serious damage to economic growth: the more unequal a
country becomes, the slower its likely to grow. He argues that
inequality hurts demand, because rich people consume less of their
incomes. It leads to excessive debt, because people feel the need to
borrow to make up for their stagnant incomes and keep up with the
Joneses. And it promotes financial instability, as central banks try
to make up for stagnant incomes by inflating bubbles, which eventually
burst. (Consider, for instance, the toleration, and even promotion, of
the housing bubble by Alan Greenspan when he was chairman of the Fed.)
So an unequal economy is less robust, productive, and stable than it
otherwise would be. More equality, then, can actually lead to more
efficiency, not less. As Stiglitz writes, Looking out for the other
guy isnt just good for the soulits good for business.
This explanation of both the rise in inequality and its consequences
is quite neat, if also bleak. But its also, it has to be said,
oversimplified. Take the question, for instance, of whether inequality
really is bad for economic growth. It certainly seems plausible that
it would be, and there are a number of studies that suggest it is. Yet
exactly why inequality is bad for growth turns out to be hard to pin
downdifferent studies often point to different culprits. And when you
look at cross-country comparisons, it turns out to be difficult to
prove that theres a direct connection between inequality and the
particular negative factors that Stiglitz cites. Among developed
countries, more unequal ones dont, as a rule, have lower levels of
consumption or higher levels of debt, and financial crises seem to
afflict both unequal countries, like the US, and more egalitarian
ones, like Sweden.
This doesnt mean that, as conservative economists once insisted,
inequality is good for economic growth. In fact, its clear that
US-style inequality does not help economies grow faster, and that
moving toward more equality will not do any damage. We just cant yet
say for certain that it will give the economy a big boost.
Similarly, Stiglitzs relentless focus on rent-seeking as an
explanation of just why the rich have gotten so much richer makes a
messy, complicated problem simpler than it is. To some degree, he
acknowledges this: in The Price of Inequality, he writes, Of course,
not all the inequality in our society is the result of rent seeking
.
Markets matter, as do social forces
. Yet he doesnt really say much
about either of those in The Great Divide. Its unquestionably true
that rent-seeking is an important part of the rise of the one percent.
But its really only part of the story.
When we talk about the one percent, were talking about two groups of
people above all: corporate executives and what are called financial
professionals (these include people who work for banks and the like,
but also money managers, financial advisers, and so on). These are the
people that Piketty terms supermanagers, and he estimates that
together they account for over half of the people in the one percent.
The emblematic figures here are corporate CEOs, whose pay rose 876
percent between 1978 and 2012, and hedge fund managers, some of whom
now routinely earn billions of dollars a year. As one famous statistic
has it, last year the top twenty-five hedge fund managers together
earned more than all the kindergarten teachers in America did.
Stiglitz wants to attribute this extraordinary rise in CEO pay, and
the absurd amounts of money that asset managers make, to the lack of
good regulation. CEOs, in his account, are exploiting deficiencies in
corporate governancesupine boards and powerless shareholdersto
exploit shareholders and appropriate for themselves firm revenues.
Money managers, meanwhile, are exploiting the ignorance of investors,
reaping the benefits of what Stiglitz calls uncompetitive and often
undisclosed fees to ensure that they get paid well even when they
underperform.
The idea that high CEO pay is ultimately due to poor corporate
governance is a commonplace, and certainly there are many companies
where the relationship between the CEO and the board of directors
(which in theory is supposed to be supervising him) is too cozy. Yet
as an explanation for why CEOs get paid so much more today than they
once did, Stiglitzs argument is unsatisfying. After all, back in the
1960s and 1970s, when CEOs were paid much less, corporate governance
was, by any measure, considerably worse than it is today, not better.
As one recent study put it:
Corporate boards were predominately made up of insiders
or friends
of the CEO from the old boys network. These directors had a largely
advisory role, and would rarely overturn or even mount major
challenges to CEO decisions.
Shareholders, meanwhile, had fewer rights and were less active. Since
then, weve seen a host of reforms that have given shareholders more
power and made boards more diverse and independent. If CEO
compensation were primarily the result of bad corporate governance,
these changes should have had at least some effect. They havent. In
fact, CEO pay has continued to rise at a brisk rate.
Its possible, of course, that further reform of corporate governance
(like giving shareholders the ability to cast a binding vote on CEO
pay packages) will change this dynamic, but it seems unlikely. After
all, companies with private ownerswho have total control over how
much to pay their executivespay their CEOs absurd salaries, too. And
CEOs who come into a company from outsidemeaning that they have no
sway at all over the boardactually get paid more than inside
candidates, not less. Since 2010, shareholders have been able to show
their approval or disapproval of CEO pay packages by casting
nonbinding say on pay votes. Almost all of those packages have been
approved by large margins. (This year, for instance, these packages
were supported, on average, by 95 percent of the votes cast.)
Similarly, while money managers do reap the benefits of opaque and
overpriced fees for their advice and management of portfolios,
particularly when dealing with ordinary investors (who sometimes dont
understand what theyre paying for), its hard to make the case that
this is why theyre so much richer than they used to be. In the first
place, opaque as they are, fees are actually easier to understand than
they once were, and money managers face considerably more competition
than before, particularly from low-cost index funds. And when it comes
to hedge fund managers, their fee structure hasnt changed much over
the years, and their clients are typically reasonably sophisticated
investors. It seems improbable that hedge fund managers have somehow
gotten better at fooling their clients with uncompetitive and often
undisclosed fees.
So whats really going on? Something much simpler: asset managers are
just managing much more money than they used to, because theres much
more capital in the markets than there once was. As recently as 1990,
hedge funds managed a total of $38.9 billion. Today, its closer to $3
trillion. Mutual funds in the US had $1.6 trillion in assets in 1992.
Today, its more than $16 trillion. And that means that an asset
manager today can get paid far better than an asset manager was twenty
years ago, even without doing a better job.
This doesnt mean that asset managers or corporate executives
deserve what they earn. In fact, theres no convincing evidence that
CEOs are any better, in relative terms, than they once were, and
plenty of evidence that they are paid more than they need to be, in
view of their performance. Similarly, asset managers havent gotten
better at beating the market. The point, though, is that attributing
the rise in their pay to corruption, or bad rules, doesnt get us that
far. More important, probably, has been the rise of ideological
assumptions about the indispensability of CEOs, and changes in social
norms that made it seem like executives should take whatever they
could get. (Stiglitz alludes to these in The Price of Inequality,
writing, Norms of what was fair changed, too.) Discussions of
shifts in norms often become what the economist Robert Solow once
called a blaze of amateur sociology. But that doesnt mean we can
afford to ignore those shifts, either, since the rise of the one
percent has been propelled by ideological changes as much as by
economic or regulatory ones.
Complicating Stiglitzs account of the rise of the one percent is not
just an intellectual exercise. It actually has important consequences
for thinking about how we can best deal with inequality. Strategies
for reducing inequality can be generally put into two categories:
those that try to improve the pretax distribution of income (this is
sometimes called, clunkily, predistribution) and those that use taxes
and transfers to change the post-tax distribution of income (this is
what we usually think of as redistribution). Increasing the minimum
wage is an example of predistribution. Medicaid is redistribution.
Stiglitzs agenda for policywhich is sketched in The Great Divide,
and laid out in comprehensive detail in Rewriting the Rulesrelies on
both kinds of strategies, but he has high hopes that better rules,
designed to curb rent-seeking, will have a meaningful impact on the
pretax distribution of income. Among other things, he wants much
tighter regulation of the financial sector. He wants to loosen
intellectual property restrictions (which will reduce the value of
patents), and have the government aggressively enforce antitrust laws.
He wants to reform corporate governance so CEOs have less influence
over corporate boards and shareholders have more say over CEO pay. He
wants to limit tax breaks that encourage the use of stock options. And
he wants asset managers to publicly disclose holdings, returns, and
fee structures. In addition to bringing down the income of the
wealthiest Americans, he advocates measures like a higher minimum wage
and laws encouraging stronger unions, to raise the income of ordinary
Americans (though this is not the main focus of The Great Divide).
These are almost all excellent suggestions. And were they enacted,
someincluding above all tighter regulation of the financial
industrywould have an impact on corporate rents and inequality. But
it would be surprising if these rules did all that much to shrink the
income of much of the one percent, precisely because improvements in
corporate governance and asset managers transparency are likely to
have a limited effect on CEO salaries and money managers
compensation.
This is not a counsel of despair, though. In the first place, these
rules would be good things for the economy as a whole, making it more
efficient and competitive. More important, the second half of
Stiglitzs agendaredistribution via taxes and transfersremains a
tremendously powerful tool for dealing with inequality. After all,
while pretax inequality is a problem in its own right, whats most
destructive is soaring posttax inequality. And its posttax inequality
that most distinguishes the US from other developed countries. As
Stiglitz writes:
Some other countries have as much, or almost as much, before-tax
and transfer inequality; but those countries that have allowed market
forces to play out in this way then trim back the inequality through
taxes and transfer and the provision of public services.
The redistributive policies Stiglitz advocates look pretty much like
what youd expect. On the tax front, he wants to raise taxes on the
highest earners and on capital gains, institute a carbon tax and a
financial transactions tax, and cut corporate subsidies. But dealing
with inequality isnt just about taxation. Its also about investing.
As he puts it, If we spent more on education, health, and
infrastructure, we would strengthen our economy, now and in the
future. So he wants more investment in schools, infrastructure, and
basic research.
If youre a free-market fundamentalist, this sounds disastrousa
recipe for taking money away from the job creators and giving it to
government, which will just waste it on bridges to nowhere. But here
is where Stiglitzs academic work and his political perspective
intersect most clearly. The core insight of Stiglitzs research has
been that, left on their own, markets are not perfect, and that smart
policy can nudge them in better directions.
Indeed, Creating a Learning Society is dedicated to showing how
developing countries can use government policy to become high-growth,
knowledge- intensive economies, rather than remaining low-cost
producers of commodities. What this means for the future of the US is
only suggestive, but Stiglitz argues that it means the government
should play a major role in the ongoing structural transformation of
the economy.
Of course, the political challenge in doing any of this (let alone all
of it) is immense, in part because inequality makes it harder to fix
inequality. And even for progressives, the very familiarity of the
tax-and-transfer agenda may make it seem less appealing. After all,
the policies that Stiglitz is calling for are, in their essence, not
much different from the policies that shaped the US in the postwar
era: high marginal tax rates on the rich and meaningful investment in
public infrastructure, education, and technology. Yet theres a reason
people have never stopped pushing for those policies: they worked. And
as Stiglitz writes, Just because youve heard it before doesnt mean
we shouldnt try it again.