Wednesday, November 4, 2020

Review of The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

This review was written by Eugene Kernes

Elaborate Description

There is a huge difference between what economic and political systems are supposed to do and what they actually do. Not delivering what was promised but delivering what was not promised such as inequality, pollution, unemployment, and degradation of values. Different legal frameworks have different implications for economic and political outcomes. The problem is that the wealthy have altered the framework in their favor at the expense of everyone else. Stiglitz expresses that inequality is a result of political and economic forces. As governments set the rules and enforce them, they can create policies that either generate appropriate competition or policies which favor certain groups and institutions.

Primarily, inequality is caused because the growth in incomes are higher at the top than other incomes. With increased incomes, the system benefits the wealthy in terms of legal and health services. The increased incomes comes from obtaining rents. Their income is derived not from creating wealth, but from diverting it from other sources of the economy. Rents are obtained thought modification to income distribution from tax code, social expenditures, and resource use. Rents distort the allocation of resources which lowers productivity and creates a waste of resources. Rents are in essence corporate welfare subsidies. As wealth concentrates, those who have the wealth have a greater incentive to protect their wealth and more resources to protect it with.

Loopholes within the tax code favor the rich who can exploit them which creates a regressive tax system regressive as the wealthy pay less as a share of tax than does everyone else. Taxes that would go into social investments which sustain growth, rather go to the wealthy. Government set up the legal and physical infrastructure that lets companies earn an income but the wealthy are trying to reduce those very investments which allow them to flourish. Not pricing natural resources appropriately is also a subsidy for businesses. Damage to the environment hurts present and future citizens in many ways, allowing the firms to avoid the costs of repairing the damage is a gift at everyone else’s’ expense.

A role of government is to fix market failures. Policies do not always fix market failures, but reasonable policies can facilitate economic prosperity. Profits should be limited by competition, but government can prevent market competition. Regulations work best when social returns and private rewards are aligned, but business have increased their innovation into circumventing regulations. The problem is that the wealthy write the rules of the game in their favor. This is done via regulatory capture which is when the wealthy use their political influence to appoint people who are sympathetic with the values set by the wealthy. This aligns the incentives of the regulatory commission with the wealthy which are not aligned with protecting society.

In terms of globalization, giving more to the wealthy will move the money to highest returns such as investments in emerging markets rather than to creating employment. Capital mobility is a substitute for labor. Imported goods means that labor is taking place elsewhere. To compete, labor has to either obtain higher skills or accept lower wages. Firms also tend to seek to protect themselves from foreign competition and claim it benefits the community rather than just them.

It used to be that employers protected their employees from economic downturns but lowering their profit. Now, to keep profits, they reduce their labor force. Firms now pride themselves on earning higher profits at the expense of firing labor. History and research show that if workers are treated fairly, they will be productive and vice versa. Firms need to garner loyalty in workers as that is an investment into increased productivity.

During the Great Recession of 2007-2009, banks received government bailouts while the government did little to help those unemployed. Bailouts themselves are a form of socialism which the banks themselves are usually critical of, until when they need them. The US government provided the bailouts even though they are a way to subvert the laws of capitalism. Much of the money went to people’s bonuses who caused the Great Recession rather than to lending. The Federal Reserve lent money to many banks, even foreign banks, because of large US bank investments in them.

Democracy is supposed to be representative of every individual, but it has turned into system that favors the status quo. With lower voter turnout, those who vote generally have an incentive to preserve the system that favors them. Those who the system does not favor, frequently decline to vote. The way we engage with society is shaped by perceptions. Economic systems function based on how people perceive them, shaping reality. The wealthy buy and control media outlets which have greater capacity to express their ideas. Greater capacity to shape public perception which changes interactions with reality.

This book provides very powerful arguments but is at times very inconsistent. The same economic tool in one chapter that Stiglitz denounces as creating inequality, in a different chapter the tool was explained as providing equality. From protectionism to incentives, claiming they bad for competition and appropriate firm behavior, but using the same economic logic to later claim to help reduce inequality. Although there is a trend to see inequality as being shaped by firms and government, the former received only negative remarks while the latter is supported. The author does try to maintain neutrality and consider the economic functions of the idea, but many times the ideas are subject to maintenance of his own prevailing biases and favored groups.

Policies that enhance inequality create a negative-sum game as the gains to the few are smaller than the losses of the many. The economic and legal system rewards bad behavior. America is no longer a land of opportunity as there is little income mobility. Reduced equality of opportunities squanders the most valuable asset, people. Inequality and rent seeking have eroded the credibility of America as it was America who was persistent in trying to reduce inequality and rent seeking in other counties, while America has a huge problem with them as well.

Book Details

Edition ISBN:  9780393345063
Pages to read:   419
Publication:     2013
1st Edition:      2012
Format:            Paperback

Ratings out of 5:
Readability     5
Content          5
Overall           4