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January 20, 2013 8:55 AM Joseph Stiglitz: Inequality is preventing a recovery

By Kathleen Geier

The New York Times’ Opinionator features a great piece by Nobel Prize-winning economist Joseph Stiglitz about a subject that gets far too little attention: the relationship between economic inequality and the wretchedly slow pace of our alleged economic recovery. Stiglitz points to four main reasons inequality is, as he puts it, “squelching” our recovery:

The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth.
[Snip]
Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.
Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks.
[Snip]
Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable.

Stiglitz also notes that, contrary to the myth of America as a land where anyone can make it, social mobility is actually much higher in countries like Sweden, Canada, France, and Germany. He also highlights this shameful statistic:

More than a fifth of our children live in poverty — the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece
.

What, then, can we do to increase equality? Well, Stiglitz does point out that “the countries that responded most effectively to the global financial crisis, like Germany and Sweden, have strong unions and strong systems of social protection.” He also adds:

What’s needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.

That is clearly the case, but that is also just the beginning. Earlier in the piece Stiglitz writes that, “Economic inequality leads to political inequality and a broken decision-making process.” Sadly, this is a vicious cycle; economic inequality tends to entrench our broken political system, which in turn makes in very difficult to do anything about inequality. Under even the most optimistic scenarios, Obama’s second term is not likely to bring anything better than mild to moderate improvements in a few discrete economic areas. But it’s highly unlikely to reverse the overall dynamic.

UPDATE: On his blog, Paul Krugman writes that, in spite of his great respect for Stiglitz and his general concerns about inequality, he disagrees with Stiglitz’s argument.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • jhm on January 20, 2013 10:46 AM:

    Just in case you didn't hear of it before, you can support better dissemination of these important ideas at http://thespiritleveldocumentary.com/

  • c u n d gulag on January 20, 2013 11:07 AM:

    There has been a concerted effort by Conservatives for over 40 years to kill the middle class.
    "MISSION ACCOMPLISHED!!!" - almost...

    Read the great Thom Hartman's short piece in the Huff Po 7 years ago:
    http://www.huffingtonpost.com/thom-hartmann/theres-nothing-normal-abo_b_32532.html

    He does a great job of explaining what's been going on here in America, so I won't bother wasting anyones time with my own word-turd version of events.

    Btw - he also, somewhere else (sorry, I can't find is), wrote about where there was a middle class throughout the worlds history - and, as you probably guessed it - it was usually in countries and era's when human progress, and civil and human rights, moved forward.

  • Doug on January 20, 2013 6:26 PM:

    It appears to me as if the good Doctor is misreading what Stiglitz is writing, epitomized by his query "So am I saying you can have full employment based on purchases yachts, luxury cars and the services of personal trainers and celebrity chefs?", which he (Krugman) then answers in the affirmative.
    Stiglitz, on the otherhand is attempting to explain why the recovery is so slow, NOT whether or not we might eventually reach full employment without changing the inequality that currently exists. There IS a difference.
    The other point where Krugman uses the reduction in the rate of savings to show that drop as not being connected to our current slow recovery. The drop in savings starts during the recession in the early 1980s, is briefly reversed, then begins dropping again; at alonst the exact time wages began that period of stagnation that still continues. It's also the same time the marginal rates were reduced to below 50%.
    The lack of savings seems, to me at least, better explained by people trying to maintain their standard of living by spending their reserves; aka savings. Because what would normally have been saved wasn't, those reserves aren't available to help restart our economy.

  • BillB on January 20, 2013 10:12 PM:

    Well we have to wonder why our friend BHO lets his wall street masters borrow [keep] trillions of our dollars to float the casino. YO BARRY, think you could send just one trillion to all of us Americans who need it to keep the body and soul of this country together.
    P.S. Everyone go read Taibbi on this.

  • Doug on January 20, 2013 10:30 PM:

    BillB, perhaps the money went to Wall Street because that's what CONGRESS wanted? While there was a lot of talk on blogs and in columns about tackling WS, I don't recall any legislation that would do so getting much traction. The President can propose or suggest legislation, but unless Congress acts...

  • esaud on January 21, 2013 9:08 AM:

    Krugman's criticism is as an economist, not a liberal. Of course he thinks that the income inequality we have is terrible.

    Thing is, there are plenty of things to get angry about out of concerns for fairness, truth, justice. Imagine the wonderful country we could have were it not for a critical mass of cruel, willfully ignorant right wingers, permanantly outraged over imaginary things like birth certificates, racism, misogyny, etc.