The Price of Inequality; How Today’s Divided Society Endangers Our Future; Joseph E. Stiglitz, 2012
See Thomas Piketty On Redistribution of Wealth and Participatory Socialism
See these other accounts of the Subprime Mortgage banking disaster of 2008 that led to the Great Recession .
The most important role of government, however, is setting the basic rules of the game, through laws such as those that encourage or discourage unionization, corporate governance laws that determine the discretion of management, and competition laws that should limit the extent of monopoly rents. As we have already noted, almost every law has distributive consequences, with some groups benefiting, typically at the expense of others.
Indeed, even the IMF (the International Monetary Fund, the international agency responsible for ensuring global financial stability) has now recognized the dangers of unencumbered and excessive financial integration: a problem in one country can rapidly spread to another. In fact, fears of contagion have motivated bailouts of banks in the magnitude of tens and hundreds of billions of dollars. The response to contagious disease is “quarantine,” and finally in the spring of 2011, the IMF recognized the desirability of the analogous response in the financial markets. This takes the form of capital controls, or limiting the volatile movement of capital across borders, especially during a crisis.
Politics–and in particular how politics shapes the laws governing corporations–is a major determinant of the fraction of a corporation’s revenues that its top executives take for themselves. U.S. laws provide them considerable discretion. This meant that when social mores changed in ways that made large disparities in compensation more acceptable, executives in the United States could enrich themselves at the expense of workers or shareholders more easily than could executives in other countries.
(Japan in 2010) paid their chief executives an average of $580,000 in salary and other compensation…about 16 times more than the typical Japanese worker ($36,000). Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses…CEO pay of major U.S. corporations (is) some 263 times that of the income of the average worker ($13,300).
It used to be that when the economy went into recession, employers, wanting to maintain the loyalty of their workers and concerned about their well-being, would keep as many as they could on their payroll. The result was that labor productivity went down, and the share of wages went up. Profits bore the brunt of the downturn. Wage shares would then fall after the end of the recession. But in this (2008 and the previous 2001) recession, the pattern changed, the wage share declined in the recession, as well as in the ensuing years. Firms prided themselves on their ruthlessness–cutting out so many workers that productivity actually increased.
The irony is that just as markets started delivering more unequal outcomes, tax policy asked less of the top. The top marginal tax rate was lowered from 70 percent under Carter to 28 percent under Reagan; it went up to 39.6 percent under Clinton and down finally to 35 percent under George W Bush.
…One of the reasons that the top has done so well is rent seeking–which entails seizing a larger share of the the pie and, in doing so, making the size of the pie smaller than it otherwise would be…Widely unequal societies do not function efficiently, and their economies are neither stable nor sustainable in the long run. When one interest group holds too much power, it succeeds in getting policies that benefit itself, rather than policies that would benefit society as a whole. When the wealthiest use their political power to benefit excessively the corporations they control, much-needed revenues are diverted into the pockets of a few instead of benefiting society at large.
Since the time of the great British economist John Maynard Keynes, governments have understood that when there is a shortfall of demand–when unemployment is high–they need to take action to increase either public or private spending. The 1 percent has worked hard to restrain government spending…(Substituting large tax cuts for the wealthy didn’t work).
There is a second way that unbalanced politics driven by extremes of inequality leads to instability: deregulation. Deregulation has played a central part in the instability that we, and many other countries, have experienced. Giving corporations, and especially the financial sector, free rein was in the shortsighted interest of the wealthy; they used their political weight, and their power to shape ideas, to push deregulation, first in airlines and other areas of transportation, then in television, and finally, and most dangerously, in finance.
In the aftermath of the Great Depression, an event preceded by similar excesses, the country enacted strong financial regulations, including the Glass-Steagall Act of 1933. These laws, effectively enforced, served the county well: in the decades following passage, the economy was spared the kind of financial crisis that had repeatedly plagued this country (and others). With the dismantling of these regulations in 1999 (Clinton), the excesses returned with even greater force: bankers quickly put to use advances in technology, finance, and economics. The innovations offered ways to increase leverage that circumvented the regulations that remained and that the regulators didn’t fully understand, new ways of engaging in predatory lending, and new ways to deceived unwary credit card users.
The losses from the under utilization of resources associated with the Great Recession and other economic downturns are enormous. Indeed, the sheer waste of resources brought on by this crisis caused by the private sector–a shortfall of trillions of dollars between what the economy could have produce and what it has produced–is greater than the waste of any democratic government ever.
For several decades America has suffered from under investment in infrastructure, basic research, and education at all levels. Further cutbacks in these areas lie ahead, given the commitment by both parties to bringing down the deficit and the refusal of the House of Representatives to raise taxes. The cuts come despite evidence that the boost these investments give to the economy far exceeds the average return in the private sector, and is certainly higher than the cost of funds to the government. Indeed, the boom years of the 1990s were buoyed by innovations made in previous decades that finally took their place in our economy. But the well from which the private sector can draw–for the next generation of transformational investments–is drying up. Applied innovations depend on basic research, and we simply haven’t been doing enough of it.
The financial sector succeeded in making student loans non-dischargeable in bankruptcy, which meant that the lenders had little incentive to see to it that the schools for the which the students were borrowing money were actually providing them with an education that would enhance their income. Meanwhile, private for-profit schools with richly compensated executives have defeated attempts to impose high standards that would make schools that exploit the poor and ill informed-by taking their money and not providing them with an education that enables them to get jobs to repay the loans–ineligible for loans.
Rent seeking distorts our economy in many ways–not the least of which is the misallocation of the country’s most valuable resource: its talent. It used to be that bright young people were attracted to a variety of professions–some to serve others, as in medicine or teaching or public service; some to expanding the frontiers of knowledge. Some always went into business, but in the years before the (Great Recession) crisis an increasingly large fraction of the country’s best minds chose finance. And with so many talented young people in finance, it’s not surprising that there would be innovation in that sector. But many of these “financial innovations” were designed to circumvent regulations, and actually lowered long-run economic performance. These financial innovations do not compare with real innovations like the transistor or the laser that increased our standard of living.
Someday, perhaps soon, we too will see how globalization as currently managed promotes neither global efficiency nor equity; even more importantly, its puts our democracy in peril. Another world is possible: there are alternative ways of managing globalization that are better for both our economy and our democracy; but they do not entail unfettered globalization. We have learned the lessons of unfettered markets for our economy and how to temper capitalism so that it serves the majority of citizens, not a tiny, powerful fraction. So too, we can temper globalization; indeed, we must if we want to preserve our democracy, prevent our rampant inequality from growing worse, and maintain our influence around the world.