Thursday, July 23, 2015

"The Great Divide" (Joseph Stiglitz) How inequality makes the economy unstable

Author: Joseph E. Stiglitz

Title: “The Great Divide: Unequal Societies and What We Can Do About Them
Publication: New York: W. W. Norton, 2015; ISNB 978-0-393-24857-9, 428 pages, hardcover (also e-books); Prelude, Afterword and 8 Parts; about 66 short essays, as unnumbered chapters; concluding interview with Cullen Murphy; no index is provided.

Amazon link
The book follows “The Price of Inequality: How Today’s Divided Society Endangers our Future”.  The author is an economics professor at Columbia University.

It should not be confused with a similarly titled book by William D. Gairdner, reviewed here May 15.  But perhaps it has more in common with that book than I first thought, although Gairdner takes the divide in thinking down to some personal moral levels.

The book also seems to be largely an anthology of similar essays, many published in other places (like Vanity Fair). The Prelude seems to have been written before Obama took office in 2009, and the others fill in the history since then. But the essays tend to make the same points repeatedly, without a gradual buildup of argument, because of the organization of the book.

In many essays he mentions Thomas Piketty’s “Capital” (July 20, 2014).  I don’t see a lot of difference between Stiglitz’s ideas and Piketty’s.  Stiglitz places great emphasis on the observation that unregulated markets don’t work very well when there is exaggerated economic inequality.
And like Piketty, he is “critical” (to say the least) of “rent seeking” behavior in our culture.  The preferential tax treatment for income based on capital rather than on labor tends to depress wages and eventually weakens demand.
He does introduce some interesting terms, such as the Palma Ratio (p. 291) and the “Gini Coefficient” (p. 336). Good test questions.

Most of his prescriptions are at the abstract policy level, mostly tax policy.  He would tax incomes and wealth much more as is done in much of Europe. He aptly calls the 2008 bailout "socialism for banks". 

However, sometimes he dives into the issue of personal morality.  He notes that the burdens of the past military draft weren’t shared equitably, and he points out (in an essay about Mitt Romney) that, really, no one is completely self-made.  He says we all depend on infrastructure that is in large part publicly financed.  I certainly agree with that.  If the Metro doesn’t run, or the power or telecommunications grid is unreliable, then I cannot be personally productive, and ultimately it comes back upon me in my situation.

He talks about some foreign economies, and has some praise for the somewhat authoritarian city-state of Singapore, which mixes personal responsibility with government support in what he sees as constructive. However, authoritarianism often assumes it can ensure stability by regulating and “right-sizing” the individual. While the Right has wanted to regulate sexual and social mores, the Left wants to see everybody "pay his dues" and really work for a living, and experience solidarity emotionally. I would add that gross inequality (especially "inequality of opportunity") tends to undermine the incentives of many people to abide by the rule of law and creates eventual threats to security. 
He also is critical of the way the Eurozone is managed.  But his book was written before the current crisis in Greece came to a head.  But his comparison of the U.S. and Europe is appropriate.

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