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Tue June 5, 2012
Growing Economic Inequality 'Endangers Our Future'
Originally published on Tue June 5, 2012 1:45 pm
Nobel Prize-winning economist Joseph Stiglitz grew up in Gary, Ind. — a city that has weathered many economic storms over the past half-century.
Stiglitz went on to study at Amherst College and MIT, where he received a Ph.D. in economics. He later served on and chaired President Clinton's Council of Economic Advisers and became the chief economist at the World Bank. But even as a child, Stiglitz says, he noticed ways in which the markets weren't working.
"I saw discrimination lead to poverty, I saw episodic high levels of unemployment, I saw business cycles, and I saw all kinds of inequalities," he tells Fresh Air's Terry Gross. "It was clear that America wasn't quite the dream that was depicted in some textbooks, and I wanted to understand why those textbooks were wrong and I wanted really to make a contribution to do something about it."
In his latest book, The Price of Inequality: How Today's Divided Society Endangers Our Future, Stiglitz argues that widely unequal societies don't function effectively or have stable economies and that even the rich will pay a steep price if economic inequalities continue to worsen.
In the current system, top income earners who make their money through capital gains and stock dividends pay lower effective tax rates than the average person. Those capital gains tax rates were first lowered during the Clinton administration, when Stiglitz led the Council of Economic Advisers.
"I very strongly opposed [lowering the tax rate]," he says. "I thought it was wrong because it increased inequities in our society and it encouraged speculation, and [I thought] that it would not lead to faster real economic growth. And unfortunately, all three of those concerns came to be true. ... And that has led to a period in which the growth of inequality has been higher than it has ever been and led to the kind of instability that led to the great [economic] crisis."
The past 30 years have been markedly different for the middle class, says Stiglitz. Income levels have dropped, and fewer and fewer people are climbing to new income brackets.
"The nature of our growth today is markedly different than in the decades after World War II," he says. "There, we had shared prosperity. More recently, what we've had is exactly the opposite. ... Right now, most Americans are worse off than they were 15 years ago. There has not been shared prosperity."
"People come from Wall Street and go into government and then leave government and go back into Wall Street. When you have this kind of revolving door, it's not just that their interests are not well-aligned with the public; it's that their mindset is captured by the industry from which they come. They see their interest — the interest of Wall Street — as if it were in the public interest. We call that cognitive capture. But you also see it through campaign contributions which affect both the administration and Congress. It's the interaction of the two which is so strong. Because the administration might say, 'Oh, we think we ought to do it differently, but we won't be able to get it through Congress.' Unfortunately, some parts of the administration are so influenced by the financial sector that they take a more active role and see the world through the eyes of the financial sector. There used to be an expression, 'What's good for General Motors is good for the United States and vice versa.' I think increasingly, given the strength of the financial sector, many thought, 'What was good for the financial sector was good for the economy.' And they're obviously wrong in their judgment."
On President Clinton's decision to lower the capital gains tax rate
"The Republicans controlled Congress, and he wanted, like any president, to show that he was doing something. The view among some of the political advisers was that doing something was better than doing nothing. My view was that doing something that was wrong was worse than doing nothing. And unfortunately that was one of those instances where the political advisers won and I think a wrong decision was made."
On tax policy
"I think most Americans today understand that our system isn't fair. One of the roles of the government is to try to make our system fair. And one part of fairness is that everybody ought to pay a fair share of their income in taxes. A basic premise that I think most Americans believe is that if your income is very, very high, you ought to pay at least the same percentage of your income in taxes as somebody whose income is lower. Most Americans would not agree with the view that speculators ought to be taxed half the rate as those who work for an income."
On the 1 percent
"It's a very small group; it's a very elite group of people whose incomes are very high. This 1 percent gets about 20 percent of all of the nation's income. It consists disproportionately of CEOs, of those in the financial sector — but there's an array of other people — high-paid lawyers who help serve the CEOs and those in the financial sector."
On student loans
"Market forces do play a role in shaping inequality, but market forces are shaped by political processes, by legislation that can either give more scope for inequality or restrict it. So, take student loans. Here, it's understandable why poor people understand that their future prospects depend on education. But we've passed a bankruptcy law that totally distorts the market. It allows derivatives to get priority over any other claimants. At the same time, it says students cannot discharge their debt, even in bankruptcy, even if the school that was purportedly supposed to give them an education actually doesn't deliver on what it promised. They wind up without an education, without prospects of a higher education and yet are saddled for the rest of their lives with these student debts. People are graduating with a huge burden — $25,000 is now the average student debt."