INEQUALITY DAMAGES ECONOMIC GROWTH

“More interestingly (and more contentiously), [Joseph] Stiglitz argues that inequality does serious damage to economic growth: the more unequal a country becomes, the slower it’s likely to grow. He argues that inequality hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst. (Consider, for instance, the toleration, and even promotion, of the housing bubble by Alan Greenspan when he was chairman of the Fed.) So an unequal economy is less robust, productive, and stable than it otherwise would be. More equality, then, can actually lead to more efficiency, not less. As Stiglitz writes, “Looking out for the other guy isn’t just good for the soul—it’s good for business.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.

ECONOMICS AND EQUITY

“Historically, inequality was not something that academic economists, at least in the dominant neoclassical tradition, worried much about. Economics was about production and allocation, and the efficient use of scarce resources. It was about increasing the size of the pie, not figuring out how it should be divided. Indeed, for many economists, discussions of equity were seen as perilous, because there was assumed to be a necessary “tradeoff” between efficiency and equity: tinkering with the way the market divided the pie would end up making the pie smaller. As the University of Chicago economist Robert Lucas put it, in an oft-cited quote: “Of the tendencies that are harmful to sound economics, the most seductive, and…the most poisonous, is to focus on questions of distribution.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36..

RICH PAID MUCH MORE FOR THEIR WORK

“[. . . .the rise of high-end incomes in the US is still largely about labor income rather than capital income. [Thomas] Piketty’s book is, as the title suggests, largely about capital: about the way the concentration of wealth tends to reproduce itself, leading to greater and greater inequality. And this is an increasing problem in the US, particularly at the highest reaches of the income spectrum. But the main reason people at the top are so much richer these days than they once were (and so much richer than everyone else) is not that they own so much more capital: it’s that they get paid much more for their work than they once did, while everyone else gets paid about the same, or less. Corporate CEOs, for instance, are paid far more today than they were in the 1970s, while assembly line workers aren’t. And while incomes at the top have risen in countries around the world, nowhere have [incomes at the top] risen faster than in the US.

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.

NOT A REWARD FOR DOING BETTER WORK

“One oft-heard justification of this phenomenon [income inequality] is that the rich get paid so much more because they are creating so much more value than they once did. Globalization and technology have increased the size of the markets that successful companies and individuals (like pop singers or athletes) can reach, so that being a superstar is more valuable than ever. And as companies have gotten bigger, the potential value that CEOs can add has increased as well, driving their pay higher.

“[Joseph] Stiglitz will have none of this. He sees the boom in the incomes of the one percent as largely the result of what economists call ‘rent-seeking.’ Most of us think of rent as the payment a landlord gets in exchange for the use of his property. But economists use the word in a broader sense: it’s any excess payment a company or an individual receives because something is keeping competitive forces from driving returns down. So the extra profit a monopolist earns because he faces no competition is a rent. The extra profits that big banks earn because they have the implicit backing of the government, which will bail them out if things go wrong, are a rent. And the extra profits that pharmaceutical companies make because their products are protected by patents are rents as well.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.

MONEY MANAGERS

“While money managers do reap the benefits of opaque and overpriced fees for their advice and management of portfolios, particularly when dealing with ordinary investors (who sometimes don’t understand what they’re paying for), it’s hard to make the case that this is why they’re so much richer than they used to be. In the first place, opaque as they are, fees are actually easier to understand than they once were, and money managers face considerably more competition than before, particularly from low-cost index funds. And when it comes to hedge fund managers, their fee structure hasn’t changed much over the years, and their clients are typically reasonably sophisticated investors. It seems improbable that hedge fund managers have somehow gotten better at fooling their clients with ‘uncompetitive and often undisclosed fees.’”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.

‘OUR POLICIES AND POLITICS SHAPE INCOME INEQUALITY’

“In the years since the financial crisis, [Columbia University economist Joseph] Stiglitz has been among the loudest and most influential public intellectuals decrying the costs of inequality, and making the case for how we can use government policy to deal with it. In his 2012 book, The Price of Inequality, and in a series of articles and Op-Eds for Project Syndicate, Vanity Fair, and The New York Times, which have now been collected in The Great Divide, Stiglitz has made the case that the rise in inequality in the US, far from being the natural outcome of market forces, has been profoundly shaped by “our policies and our politics,” with disastrous effects on society and the economy as a whole. In a recent report for the Roosevelt Institute called Rewriting the Rules, Stiglitz has laid out a detailed list of reforms that he argues will make it possible to create “an economy that works for everyone.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.

ONE PERCENT MANIPULATES MARKETS AND THE POLITICAL PROCESS

“As a collection of columns, The Great Divide is somewhat fragmented and repetitive, but it has a clear thesis, namely that inequality in the US is not an unfortunate by-product of a well-functioning economy. Instead, the enormous riches at the top of the income ladder are largely the result of the ability of the one percent to manipulate markets and the political process to their own benefit. (Thus, the title of his best-known Vanity Fair piece: ‘Of the 1 percent, by the 1 percent, for the 1 percent.’) Soaring inequality is a sign that American capitalism itself has gone woefully wrong. Indeed, Stiglitz argues, what we’re stuck with isn’t really capitalism at all, but rather an “ersatz” version of the system.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.