The central message of Stiglitz’s latest book is this: “The American economy is not out of balance because of the natural laws of economics. Today’s inequality is not the result of the inevitable evolution of capitalism. Instead, the rules that govern the economy got us here.”
We have been operating under a set of rules that were inspired by the largely discredited “supply-side” economics. The aim was to free up capital by cutting taxes, regulation, and wasteful social spending. That would promote more investment and economic growth, with the benefits flowing to all levels of society (what critics call “trickle-down” economics). This was in contrast to the traditional Keynesian approach preferred by liberals, which stressed the importance of maintaining aggregate economic demand through government spending beneficial to the middle class and the poor. Stiglitz and his co-authors regard the supply-side approach as a failure. “These policies increased wealth for the largest corporations and the richest Americans, increased economic inequality, and failed to produce the economic growth that adherents promised.”
Greater wealth at the top does not necessarily translate into greater productive capacity for the economy. Wealth becomes capital only when it is invested in productive activity, but wealth that is not so invested can still produce an economic gain. Property owners in a hot real estate market can collect rents and/or capital gains without making anything or creating any jobs. If the rules of the game encourage it, those with wealth and power will devote too many resources to “rent-seeking,” that is, “obtaining wealth not through economically valuable activity but by extracting it from others, often through exploitation.” The rule changes inspired by supply-side economics shifted the balance of power toward the wealthy and made it easier to make money without serving society very well.
Deregulation of industries such as airlines, railroads, telecommunications, natural gas, and trucking, as well as legal rulings limiting regulation in general, made it easier for big companies to accumulate market power and ultimately limit competition. Some public policies have contributed directly to that accumulation, such as intellectual property rights laws that favor the rights of pharmaceutical companies to profit from a drug over the rights of other companies to make it and sick people to obtain it at a reasonable cost. International trade agreements that failed to include proper safeguards made it too easy for corporations to locate their operations wherever worker bargaining rights and environmental laws were weakest.
The rapidly growing financial sector was allowed to shift “away from its essential function of allocating capital to productive uses and. . .toward predatory rent-seeking activities.” Never had so many people become so rich by producing so little of real value. Market power became enormously concentrated, with the share of assets held by the top five banks increasing from 17% to 52%. The complexity of modern finance puts ordinary consumers at a disadvantage to begin with, but the lax regulatory environment made it worse, allowing predatory lending, fraud and discrimination to run rampant. Meanwhile, the financial industry became less efficient at performing its basic function of providing credit, since the cost-per-dollar of credit actually went up.
Within corporations, the “Shareholder Revolution” increased the pressure on CEOs to generate quick profits. CEO compensation was increasingly tied to rising company stock prices. “The idea that corporations exist solely to maximize current shareholder value and that all other goals are secondary reversed decades of management theory that prioritized firm longevity and saw corporations as more broadly advancing societal interests.” This encouraged several unfortunate corporate practices: favoring shareholder payouts over long-term investments, taking excessive risks (since executives with stock options could profit from financial bubbles), paying executives much more than their productivity could justify, and treating employees “as short-term liabilities rather than as long-term assets.” The bottom line: “Corporate profits are at record highs, with no increase in investment.” Here, corporate culture is as much to blame as public policy, a reminder that the relevant rules of the game include private social norms, not just public policies and laws.
The Reagan and Bush tax cuts favored the wealthy by reducing both the upper-bracket income tax rates and the taxes on dividends and capital gains. This contributed not only to greater after-tax inequality, but surprisingly, to greater pre-tax inequality as well. It increased the pressure on companies to pay out more in executive compensation and dividends, since the payments would be more lightly taxed. International comparisons show that such tax cuts increased economic inequality but failed to boost per capita income. US Federal Reserve policy also contributed to inequality by prioritizing fighting inflation over reducing unemployment, although both goals are mandated by law. The impact of unemployment on family income varies by social class, reducing income by a higher percentage at the lower end of the income scale. In addition, “episodes of below-full employment do lasting damage to productivity, equity, and opportunity.”
During this period, US employers were generally successful in resisting any expansion of worker rights. Within the 30 democracies in the OECD, “an average of 54 percent of the workforce is covered by union collective bargaining agreements, 4.5 times more than in the US.” Companies increasingly used outsourcing and franchising to circumvent labor laws, while continuing to set the terms of employment. Wage growth fell far behind productivity growth (19% vs. 161% between 1973 and 2013), and the federal minimum wage failed to keep up with inflation. To make matters worse, one study found that about a quarter of low-wage workers were getting paid less than the minimum wage, and three quarters weren’t receiving the overtime pay they were due. One major goal of public policy was to reduce dependency on government by creating jobs and cutting social welfare payments. Instead, spending on programs like Medicaid and food stamps remained high as more working families found themselves unable to make it on their own. Conservatives deplore this, but generally oppose efforts to raise wages or strengthen the bargaining position of workers.
The final post will cover the book’s recommendations for rewriting the rules.