Review of Joseph Stiglitz, The Price of Inequality: How Today's
Divided Society Endangers Our Future (Norton, 2012)
Herbert Gintis
Joseph Stiglitz is one of the greatest economists of our time, a Nobel Prize winner,
former head of the World Bank and Chairman of the President’s Council of Economic
Advisors. He is also seriously concerned about poverty and inequality in America. I
remember well hearing him on NPR radio being interviewed on the day he was
informed that he was awarded the 2001 Nobel Prize in Economics: he spoke
passionately and almost exclusively about the need for eradicating poverty in
America and around the world.
The economic argument for policies that favor the poor over the rich are very
simple, being based on the universally accepted principle of the declining marginal
utility of income. What that means is that one dollar is worth a lot more to a person
who makes $20,000 a year than it is to a person who makes $200,000 a year. Thus
a policy that gives $1 to the poorer and reduces the income of the richer by the
same amount will increase general social welfare. Some people have argued that
this is a value judgment rather than a fact, but that is just wrong. It is a fact, pure
and simple.
The bottom half of the income distribution in America earns only 12% of total
income. Why don’t they just vote to take money from the top 1% of earners, who
capture about 20% of total income? If voters took away half of the earnings of the
top 1% and gave it to the bottom 50%, each recipient household would receive
about $14,000, a not insignificant sum.
I do not know why voters do not expropriate the rich (both supporters and
opponents in the Eighteenth and Nineteenth centuries certainly expected that to
happen upon the advent of democracy with universal suffrage), but there is one
strong arguments against expropriating the rich: to the extent that high incomes
motivate the talented to acquire and exercise skills and to take risks, excessive
taxation will lead to economic stagnation.
In fact, my observation of American politics leads me to a very simple
understanding of voter sentiments: people care about injustice but not about
inequality. The current wave of anger at the top 1% is not fueled by resentment
against inequality, but rather against the injustice of the people at the top gaining
while others are losing jobs and houses due to the economic elite’s anti-social and
greedy machinations.
There are of course societies where people care about inequality per se. But those
are invariably relatively poor, clannish societies. For instance, in hunter-gatherer
societies without forms of material wealth, when one family is very successful,
others who are less successful will demand sharing the bounty. This of course
eliminates the incentive to be successful and entails enduring social poverty of the
group. In rich societies such as our own, people are used to congratulating the
successful, whether sports stars, movie stars, real estate wheeler-dealers, and
other celebrities. People object only when they feel success was based on some
form of injustice, or the well-off are behaving uncharitably. Inequality per se is
simply not something people think is wrong (except, of course, for a fringe of
super-liberals, who are politically irrelevant).
Stiglitz draws precisely on this sentiment in this spirited call to action for income
redistribution towards the less well off. Recounting the well-established fact that the
very rich have done extremely well in the past few decades while the fortunes of
those below the top 10% have stagnated, Stiglitz argues that the good fortune of
the winners is indeed unjust, being a reward for their inveterate rent-seeking rather
that their contributions to society. Stiglitz writes: “This book is not about the
politics of envy: the bottom 99 percent by and large are not jealous of the social
contributions that some of those among the 1 percent have made, of their welldeserved incomes. This book is instead about the politics of efficiency and fairness.
The central argument is that the model that best describes income determination at
the top is not one based on individuals’ contributions to society… Much of the
income at the top is instead what we have called rents. These rents have moved
dollars from the bottom and middle to the top…In the United States the “Occupy
Wall Street” movement echoed the same refrain. The unfairness of a situation in
which so many lost their homes and their jobs while the bankers enjoyed large
bonuses was grating.”
Stiglitz recognizes that because the increase in inequality is due to rent-seeking
rather than inexorable “market forces,” it can be reversed by ending the rentseeking---in effect by changing tax laws. He writes “while we may be able to do
only a little to change the direction of market forces, we can circumscribe rent
seeking. Or at least we could, if we managed to get our politics right.” Much of the
book consists of suggestions to this end. These include curbing the financial sector,
stronger pro-competition and anti-trust laws, limiting the power of CEOs, eliminate
“corporate welfare” in the form of subsidies to privileged sectors of the economy,
improve access to education, institute comprehensive and universal health care,
follow a vigorous full-employment fiscal policy, expand affirmative action for
minorities, and restore the power of workers’ unions.
Perhaps Stiglitz’ most ambitious suggestion is his proposal for curbing the
inegalitarian effects of globalization. He writes, “Globalization and technology both
contribute to the polarization of our labor market, but they are not abstract market
forces that just arrive from on high; rather, they are shaped by our policies. We
have explained how globalization— especially our asymmetric globalization—is tilted
toward putting labor in a disadvantageous bargaining position vis-à-vis capital.
While globalization may benefit society as a whole, it has left many behind— not a
surprise given that, to a large extent, globalization has been managed by corporate
and other special interests for their benefit. Too often, the response to the threat of
globalization is to make workers even worse off, not just by cutting their wages but
also by lowering social protections. The growth of the antiglobalization movement
is, under these circumstances, totally understandable. There are myriad ways in
which globalization could be brought back into a better balance.”
It strikes me that Stiglitz’ analysis and his policy recommendations are closely
tailored to what progressive Democrats in America are thinking, and to what
seasoned politicians believe it is possible to attain politically. However, and while I
fully agree with many of his policy recommendations, I disagree with some crucial
recommendations, and there are important policy options that he does not discuss.
Most important, I think it is likely that the increase in before-tax inequality that we
have experienced in the past few decades is in fact market-driven rather than rentseeking-driven. This is because there are similar trends in all the advanced market
economies, the increases in income accrue to members of high-skilled professions,
such as law, medicine, and management, and the most income-skewed sector,
finance, as grown exponentially through increased public demand for financial
services. I should note that Stiglitz himself admits that his rent-seeking thesis is
more or less untenable, and he accepts it for reasons of personal taste. He writes:
“It is essentially impossible to single out any one factor’s relative contribution,
given how intertwined the various forces shaping inequality are; there can be
honest differences of opinion. But… markets don’t exist in a vacuum. They are
shaped by our politics, often in ways that benefit those at the top. Moreover, while
we may be able to do only a little to change the direction of market forces, we can
circumscribe rent seeking. Or at least we could, if we managed to get our politics
right.”
This admonition reminds me of the old saw about the economist looking for his lost
keys one evening under a lamppost despite the fact that he dropped them in the
bushes, explaining that there is more light under the lamppost. More to the point: if
the problem isn’t rent-seeking, then you can’t reverse it by curbing rent-seeking! It
would be more plausible to say that before-tax income inequality has been caused
by market forces, but could be corrected by higher taxes on the rich (think of
avoiding taxation as a form of rent-seeking). The problem is that the well-off
already pay most of the taxes. The top 5% of the income distribution, who receive
45% of national income, pay 71% of all federal income taxes, while the bottom
50%, who receive 12% of national income, pay only 2% of all federal income taxes.
There is not likely much leeway for increasing tax rates on the rich much more
without generating very strong tendencies for tax avoidance and reduced economic
participation of the economic elite.
Another indication of Stiglitz’ adherence to the agenda of the Democratic Party is
his pandering to unions. Public sector unions are especially great contributors to the
Democratic Party coffers, but it is not clear that they are in any way a force for the
mitigation of inequality. Take for instance the teachers’ unions, which are
inveterately hostile to competition in education, and which must be pulled kicking
and dragging even to allow the firing of incompetent teachers. Stiglitz repeats
several times in the book that teachers are underpaid, but never mentions the fact
that incentive pay is virtually impossible without serious educational reform. He
does not include charter schools or education voucher plan in his recommendation
for progressive policy reform.
I have an alternative vision for progressive reform in America. It is not predicated
on redistribution through tax laws, strong unions, or crippling the power of business
and banking leaders. It is through what Samuel Bowles and I have called
“productivity enhancing redistributions” (PEDs) These are policies that both improve
the productivity of the economy and at the same time materially benefit the lesswell-off. To the extent that a more competitive educational system contributes to
the work skills and attitudes of poor youth, it is a productivity enhancing
redistribution. The Earned Income Tax Credit (EITC) is a productivity enhancing
redistribution, as are on-the-job apprenticeship programs, support for some forms
of job retraining, and support for community health programs. Probably most such
policy endeavors can be implemented without increasing tax rates.
Perhaps the political types are correct in believing that productivity enhancing
redistribution are not politically feasible, but I cannot imagine why not.