The American Bear


Well, capitalism does have a lot of strengths, including producing things that are very innovative. But what drives capitalism is the profit motive. You can profit not only by making good things, but also by exploiting people, by exploiting the environment, by doing things that are not so good. The narrative that you describe ignores the extent to which a lot of the inequalities in the United States are not the result of creative activity but of exploitive activity. And if you look at the people at the top, what is so striking is that the people who’ve made the most important creative contributions are not there. By that I mean the really foundational things like the computer, the transistor, the laser. And how many people at the top are people who made their money out of monopoly — exercising monopoly power? Like bankers who exploited through predatory lending practices and abusive credit card practices. Or CEOs who took advantage of deficiencies in corporate governance to get a larger share of the corporate revenues for themselves without any regard to the extent to which they have actually contributed to increasing the the sustainable well-being of the firm. Joseph Stiglitz (via azspot)

(via azspot)

From The Price of Inequality: Joseph Stiglitz on the 1 Percent Problem | Vanity Fair


Adapted from The Price of Inequality, by Joseph Stiglitz, to be published in June

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price. […]

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb. […]

The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. […]

In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

But there is a broader economic consequence: the fight to acquire rents is at best a zero-sum activity. Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else. Countries rich in natural resources are infamous for rent-seeking activities. It’s far easier to get rich in these places by getting access to resources at favorable terms than by producing goods or services that benefit people and increase productivity. That’s why these economies have done so badly, in spite of their seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re not Congo. But the rent-seeking dynamic is the same. […]

In a society in which inequality is widening, fairness is not just about wages and income, or wealth. It’s a far more generalized perception. Do I seem to have a stake in the direction society is going, or not? Do I share in the benefits of collective action, or not? If the answer is a loud “no,” then brace for a decline in motivation whose repercussions will be felt economically and in all aspects of civic life. […]

There are many costs to this lack of opportunity. A large number of Americans are not living up to their potential; we’re wasting our most valuable asset, our talent. As we slowly grasp what’s been happening, there will be an erosion of our sense of identity, in which America is seen as a fair country. This will have direct economic effects—but also indirect ones, fraying the bonds that hold us together as a nation. […]

Widening inequality is corrosive of trust: in its economic impact, think of it as the universal solvent. It creates an economic world in which even the winners are wary. But the losers! In every transaction—in every encounter with a boss or business or bureaucrat—they see the hand of someone out to take advantage of them.

Nowhere is trust more important than in politics and the public sphere. There, we have to act together. It’s easier to act together when most individuals are in similar situations—when most of us are, if not in the same boat, at least in boats within a range of like sizes. But growing inequality makes it clear that our fleet looks different—it’s a few mega-yachts surrounded by masses of people in dugout canoes, or clinging to flotsam—which helps explain our vastly differing views of what the government should do. […]

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment. Nixon even floated the idea of a guaranteed annual income.

This book is next on my reading list.

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment. Joseph Stiglitz (via azspot)

(via zeitvox)

To cure the economy | Joseph Stiglitz

Without [tech and housing] bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to one per cent, and the bottom 80 per cent of those in the US were spending, every year, roughly 110 per cent of their income.

Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100 per cent of their income. So anyone who talks about the consumer “coming back” - even after deleveraging - is living in a fantasy world.

Fixing the financial sector was necessary for economic recovery, but far from sufficient. To understand what needs to be done, we have to understand the economy’s problems before the crisis hit.

First, the US and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labour had to shift to services.

The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labour to move from rural areas to urban manufacturing centres. With a decline in farm income in excess of 50 per cent from 1929 to 1932, one might have anticipated massive migration. But workers were “trapped” in the rural sector: They didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

For the US and Europe, the need for labour to move out of manufacturing was compounded by shifting comparative advantage: Not only are the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.

“Globalisation has been one, but only one, of the factors contributing to the second key problem - growing inequality.”

Globalisation has been one, but only one, of the factors contributing to the second key problem - growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognising the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves - partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury.

Countries recognised that, without reserves, they risked losing their economic sovereignty. Many said: “Never again.” But, while the buildup of reserves - currently around $7.6 trillion in emerging and developing economies - protected them, money going into reserves was money not spent. […]

The prescription for what ails the global economy follows directly from the diagnosis: Strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves.

Eventually, the world’s leaders - and the voters who elect them - will come to recognise this. As growth prospects continue to weaken, they will have no choice. But how much pain will we have to bear in the meantime?

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves. Eventually, the world’s leaders – and the voters who elect them – will come to recognize this. As growth prospects continue to weaken, they will have no choice. But how much pain will we have to bear in the meantime? Joseph E. Stiglitz (via azspot)

(via azspot)

The evils of unregulated capitalism | Joseph Stiglitz


Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.

Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.

Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn’t, but increasingly it appears that we will have to endure another one nonetheless.

A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous - even if the major emerging-market countries have attained self-sustaining growth.

Unfortunately, unless wiser heads prevail, that is the way the world is heading.

Why Washington Ignores an Economic Prophet

Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how “imperfect” information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: “Globalization opened up opportunities to find new people to exploit their ignorance. And we found them.”

(Source: azspot)

Gambling with the Planet by Joseph E. Stiglitz - Project Syndicate

From Dr. Stiglitz:

Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.

Before the Great Recession, America’s economic gurus – from the head of the Federal Reserve to the titans of finance – boasted that we had learned to master risk. “Innovative” financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy. We now know that they deluded not only the rest of society, but even themselves.

Of the 1%, by the 1%, for the 1% | Society | Vanity Fair

Socio-economic inequality in the United States. From economist Joseph Stiglitz.

Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.