Joe Stiglitz: "We Are Not Embracing A Politics Of Envy If We Reverse A Politics Of Greed"

The word on the street: rigged. It's certainly the central theme of what we're hearing from Elizabeth Warren-- and has a lot to do with why voters in Massachusetts replaced Wall Street's favorite senator with her. Yesterday we read, watched and listened to Nick Hanauer warn his fellow billionaires of the dangers inherent in too much and too blatant rigging. And today let's look at it from the perspective of one of the world's foremost economists, Joseph Stiglitz, who seems to believe we've already reached the inequality tipping point and that rigging is sending America down an ugly, scary road. It doesn't augur well for our democratic system of government when he can write that "We can more aptly be described as having a political system with '$1, one vote' than 'one person, one vote.'"

A new Pew Survey this week tells us that most conservatives believe the poor have it too easy. When asked which proposition they agree with more-- "poor people have hard lives because government benefits don’t go far enough to help them live decently" or "poor people have it easy because they can get government benefits without doing anything," conservatives overwhelmingly agreed with the latter, that the poor "have it easy." Apparently they haven't ready Thomas Piketty's new book, Capital in the 21st Century, which warns that "the natural state of capitalism seems to be one of great inequality" and that the situation is likely to get worse-- not better as it had when the "inequalities of the 19th and early 20th centuries seemed to be diminishing... during the period from World War II to 1980, when the fortunes of the wealthy and the middle class rose together.

[T]he evidence of the last third of a century suggests this period was an aberration. It was a time of war-induced solidarity when the government kept the playing field level, and the GI Bill of Rights and subsequent civil rights advances meant that there was something to the American dream. Today, inequality is growing dramatically again, and the past three decades or so have proved conclusively that one of the major culprits is trickle-down economics-- the idea that the government can just step back and if the rich get richer and use their talents and resources to create jobs, everyone will benefit. It just doesn’t work; the historical data now prove that.

But it has taken us far too long as a country to understand this danger. Changes in the distribution of income and wealth occur slowly, which is why it requires a grand historical perspective of the kind that Piketty provides to get a feel for what is happening.

Ironically enough, the final proof debunking this very Republican idea of trickle-down economics has come from a Democratic administration. President Barack Obama’s banks-first approach to saving the nation from another Great Depression held that by giving money to the banks (rather than to homeowners who had been preyed upon by the banks), the economy would be saved. The administration poured billions into the banks that had brought the country to the brink of ruin, without setting conditions in return. When the International Monetary Fund and the World Bank engage in a rescue, they virtually always impose requirements to ensure the money is used in the way intended. But here, the government merely expressed the hope that the banks would keep credit, the lifeblood of the economy, flowing. And so the banks shrank lending, and paid their executives megabonuses, even though they had almost destroyed their businesses. Even then, we knew that much of the banks’ profits had been earned not by increasing the efficiency of the economy but by exploitation-- through predatory lending, abusive credit-card practices and monopolistic pricing. The full extent of their misdeeds-- for instance, the illegal manipulation of key interest rates and foreign exchange, affecting derivatives and mortgages in the amount of hundreds of trillions of dollars-- was only just beginning to be fathomed.

Obama promised to stop these abuses, but so far only a single senior banker has gone to jail (along with a very few mid- and low-level employees). The president’s former Treasury secretary, Timothy Geithner, in his recent book, Stress Test, made a valiant but unsuccessful attempt to defend the administration’s actions, suggesting that there were no alternatives. But Geithner clearly worried excessively about the “moral hazard” of helping underwater homeowners—in other words, encouraging lax borrowing habits—while seeming to care far less about the moral hazard of helping banks, or the culpability of the banks in encouraging excessive indebtedness and in marketing mortgages that put unbearable risks on the poor and middle classes.

In fact, Geithner’s attempts to justify what the administration did only reinforce my belief that the system is rigged. If those who are in charge of making the critical decisions are so “cognitively captured” by the 1 percent, by the bankers, that they see that the only alternative is to give those who caused the crisis hundreds of billions of dollars while leaving workers and homeowners in the lurch, the system is unfair.

This approach also exacerbated one of the country’s most pressing problems: its growing inequality. Only with a vibrant middle class can the economy fully recover and grow faster. The more inequality, the slower the growth-- a conclusion now endorsed even by the IMF. Because the less wealthy consume a greater share of their income than do the rich, they expand demand when they have more income. When demand is expanded, jobs are created: In this sense, it is ordinary Americans who are the real job creators. So inequality commands a high price: a weaker economy, marked by lower growth and more instability. It is not very complicated.

None of this is the outcome of inexorable economic forces, either; it’s the result of policies and politics-- what we did and didn’t do. If our politics leads to preferential taxation of those who earn income from capital; to an education system in which the children of the rich have access to the best schools, but the children of the poor go to mediocre ones; to exclusive access by the wealthy to talented tax lawyers and offshore banking centers to avoid paying a fair share of taxes-- then it is not surprising that there will be a high level of inequality and a low level of opportunity. And that these conditions will grow even worse.

And now it’s also clear that the high level of economic inequality has translated into gross new forms of political inequality-- to the point where we can more aptly be described as having a political system with “one dollar, one vote” than “one person, one vote.” The Supreme Court’s Citizens United decision in January 2010 gave corporations more rights to influence politics than ordinary individuals--without making them, or their officers, really accountable. This year’s follow-on McCutcheon decision eliminated aggregate limits on individual contributions to national candidates and parties. So today, the richer you are, the more you are able to influence the political process and the economic decisions that stem from it, and to rig it all in favor of the 1 percent. Is it any wonder the rich keep getting richer?

…[L]ower taxes on capital and lower inheritance taxes are allowing the accumulation of inherited wealth-- in effect, the creation of a new American plutocracy. It is even possible, as I pointed out long ago in my Ph.D. thesis and as Piketty has emphasized, that wealth will be increasingly concentrated among a select few. The shared prosperity that marked the country in that golden age of my youth-- in which every group saw its income growing but those at the bottom saw it rise the fastest-- is long gone.


Stigliz had a similar message yesterday in an OpEd for the NY Times, Inequality Is Not Inevitable, in which he points out that our "brand of capitalism is an ersatz capitalism… where we socialized losses, even as we privatized gains. Perfect competition should drive profits to zero, at least theoretically, but we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity."

If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforward answer: our policies and our politics. People get tired of hearing about Scandinavian success stories, but the fact of the matter is that Sweden, Finland and Norway have all succeeded in having about as much or faster growth in per capita incomes than the United States and with far greater equality.

So why has America chosen these inequality-enhancing policies? Part of the answer is that as World War II faded into memory, so too did the solidarity it had engendered. As America triumphed in the Cold War, there didn’t seem to be a viable competitor to our economic model. Without this international competition, we no longer had to show that our system could deliver for most of our citizens.

Ideology and interests combined nefariously. Some drew the wrong lesson from the collapse of the Soviet system. The pendulum swung from much too much government there to much too little here. Corporate interests argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.

But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.

The American political system is overrun by money. Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. In fact, as he recognizes, Mr. Piketty’s argument rests on the ability of wealth-holders to keep their after-tax rate of return high relative to economic growth. How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.

So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices. This last decision was particularly foolish. There were alternatives to throwing money at the banks and hoping it would circulate through increased lending. We could have helped underwater homeowners and the victims of predatory behavior directly. This would not only have helped the economy, it would have put us on the path to robust recovery.

OUR divisions are deep. Economic and geographic segregation have immunized those at the top from the problems of those down below. Like the kings of yore, they have come to perceive their privileged positions essentially as a natural right. How else to explain the recent comments of the venture capitalist Tom Perkins, who suggested that criticism of the 1 percent was akin to Nazi fascism, or those coming from the private equity titan Stephen A. Schwarzman, who compared asking financiers to pay taxes at the same rate as those who work for a living to Hitler’s invasion of Poland.

…We have located the underlying source of the problem: political inequities and policies that have commodified and corrupted our democracy. It is only engaged citizens who can fight to restore a fairer America, and they can do so only if they understand the depths and dimensions of the challenge. It is not too late to restore our position in the world and recapture our sense of who we are as a nation. Widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.

Stiglitz asserts that it is "disturbing" when the realization sinks in "that the American dream-- the notion that we are living in the land of opportunity—is a myth. The life chances of a young American today are more dependent on the income and education of his parents than in many other advanced countries, including 'old Europe.'" But Rick Newman, writing for Yahoo Finance, insists the 1% have nothing to worry about from the passive, preoccupied masses.

The rich ought to chill out. While the masses may envy their wealth, there’s no evidence of a revolution brewing, or even a well-behaved civil disturbance. Americans are clearly dismayed at the direction the country seems to be heading, but they are also docile in the face of decline and confused about possible solutions. Hanauer fears mobs heading for the castles of Greenwich and Palo Alto, but America’s disaffected these days are more likely to vent their rage behind closed doors as they shake their fists at Fox News or MSNBC and leave cranky comments on websites such as this one. If there’s a populist threat to the plutocrats, it’s years or even decades away.

Here’s the proof: Before the pitchforks, there will be higher taxes on the wealthy-- yet there’s meager support for more redistribution of wealth. Polls show that slightly more than half of Americans favor raising taxes on the wealthy for specific causes such as helping reduce poverty, which makes it sound like tax hikes have widespread support and are inevitable. But here’s the catch: An even higher portion of Americans are disgusted with the government, with little trust that it spends tax money wisely. That’s why Republicans can consistently block tax hikes on the wealthy with little payback at the voting booth.

He doesn't see a revolution coming the way Hanauer predicts. He seems pretty sure America will just muddle along, the rich demanding a greater and greater share of the pie for a smaller and more avaricious elite protected by the GOP, by the Republican wing of the Democratic Party and by a carefully selected Supreme Court, until "solutions… probably materialize in the usual American way-- right before disaster strikes… The rich," he assures his readers, "will have to pay more, but they’ll still be rich. And they still won't have to worry about pitchforks." We'll see… But remember, Hillary is likely to be much worse than Obama has been and Ted Cruz is likely to much worse than Bush was. Ancient history: