Rewriting the Rules of the American Economy

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Joseph E. Stiglitz. Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity, with Nell Abernathy, Adam Hersh, Susan Holmberg and Mike Konczal. New York: W. W. Norton & Company, 2015.

This book began as a report from the Roosevelt Institute directed at policy makers. The general public should find it useful as well, since it clearly and simply lays out a new way of thinking about economic problems, especially economic inequality.

The general approach is “institutionalist,” based on the assumption that “rules matter and power matters.” In other words, what happens in the economy is not just a result of natural economic laws, but of larger social processes such as rule-making and jockeying for power. “Rules include all the regulatory and legal frameworks and social norms that structure how the economy works.” Power is important because markets rarely conform to an idealized model of perfect competition, in which no one actor can control outcomes. In reality, markets can be dominated by one or only a few actors; they can be closed to entry by additional actors; and actors who are “in the know” can take advantage of those with less information. Just think of how marketers of esoteric financial instruments took advantage of investors before the financial crash. Rules and power are closely related, since the prevailing rules can either favor or limit the accumulation and exercise of market power.

Obviously this perspective can shed some light on one of the major economic concerns of our time, rising inequality. Rule changes and power shifts are relevant both to the dramatic increase in wealth at the top and income stagnation at the middle and below. Stiglitz uses the metaphor of an iceberg to distinguish three aspects of the problem. At the tip of the iceberg are the everyday experiences that people have with inequality, such as small paychecks and insecure futures. At the base of the iceberg are large-scale economic forces like globalization, new technologies, and demographic changes. But in-between, above the base but beneath the surface (where have I heard that?) lie the rules and power structures that most interest the authors:

These are hard to see but vitally important: the laws and policies that structure the economy and create inequality. These include a tax system that raises insufficient revenue, discourages long-term investment, and rewards speculation and short-term gains; lax regulation and enforcement of rules to make corporations accountable; and the demise of rules and policies that support children and workers.

I find the iceberg metaphor really helpful in avoiding two theoretical and practical mistakes. One is treating the large-scale economic forces as having inevitable economic effects, effects that lie beyond the reach of policy. Sorry, globalization and technological change are just leaving many workers behind, so they’ll just have to get poorer while others grow richer. But international trade agreements don’t have to permit a race to the bottom in which countries compete for jobs primarily by cutting labor costs. “The premise of this report is that we can reshape the middle of the iceberg–the intermediating structures that determine how global forces manifest themselves.”

The other mistake is focusing too heavily on the tip of the iceberg, trying to correct economic inequality just by redistributing wealth from the top to the bottom. A more effective approach is to steer the economy toward productive participation by economic actors at all levels. That means good jobs for most workers, as well as the most productive use of capital by businesses. Don’t play the game by the same rules and then try to redistribute the prizes, but change the rules of the game themselves. “This means that we can best improve economic security and opportunity by tackling the technocratic realms of labor law, corporate governance, financial regulation, trade agreements, codified discrimination, monetary policy, and taxation.”

In the rest of the book, Stiglitz explains what is wrong with the rules that have governed the economy in recent decades and lays out his proposals for reform.

Continued

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