Stiglitz and his co-authors argue that “the rules shaping our current economy were informed by an economic orthodoxy that we now know is incorrect and outdated,” namely, the “supply-side” economics that became fashionable during the Reagan-Bush era. They see that as an underlying cause of many of our recent economic problems, especially the concentration of economic benefits at the top. In the last part of the book, they make a number of recommendations for rewriting those rules. I will summarize them only very briefly here, since there are too many to discuss in any detail.
The recommendations include many familiar proposals that progressives will find more acceptable than will conservatives. I don’t think they can be dismissed as a “knee-jerk liberal” agenda, however, since there is a clearly stated rationale for the whole package based on the authors’ institutionalist understanding of how the economy works. Thus the recommendations have two main objectives: (1) “to tame rent-seeking behaviors that unduly reward those at the top while raising costs for the rest and reducing the efficiency and stability of the U.S. economy,” and (2) “to restore the rules and institutions that ensure security and opportunity for the middle class.”
Taming the top
The first goal here is to make markets more competitive. Limit corporate domination of certain markets by reforming intellectual property rights and giving government more freedom to bargain with pharmaceutical companies over drug prices. Strike a better balance between creditor and debtor rights by expanding bankruptcy laws to cover homeowners and students. Structure trade agreements so that companies can compete globally, but not in a race to the bottom where the most business goes to the worst employers. Require companies exporting to the US to have their labor practices certified by an organization such as the International Labor Organization.
Second, fix the financial sector to prevent abuses such as predatory lending and market manipulation, and to encourage useful financial services such as financing small business, education and housing. Require big banks to develop plans showing how they could liquidate assets in bankruptcy without clobbering the whole economy, and break them up if they cannot do so. Increase regulation and transparency in areas such as offshore banking and hedge funds, and more strictly enforce financial rules. Reduce the fees charged by credit and debit cards, which “do not reflect the cost of services provided but rather a monopoly rent on the country’s networked payments infrastructure.” Reform Federal Reserve governance to reduce conflicts of interest and keep the Fed from being dominated by the largest financial interests.
Third, increase incentives for long-term business growth, rather than rewarding executives so extravagantly for short-term increases in share value. Stop giving dividends and capital gains such favored tax treatment, and use the tax code to reward companies that keep the ratio of CEO pay to median worker pay within bounds. Discourage short-term trading by means of a transactions tax and a longer holding period for long-term capital gains tax treatment. Put workers on corporate boards. Require all retirement account managers to act in the long-run interest of account holders.
Fourth, make the tax and transfer system fairer and more progressive. Raise the tax rate at the top. Tax all forms of income at the same rate, since tax breaks on capital income don’t actually appear to increase investment. (This is not to be confused with proposals for a flat tax that would tax all income levels at the same rate; that usually means another big tax cut for the wealthy.) Stop taxing corporations when they take profits earned abroad and invest them in the US, but do tax them on whatever portion of profits they earn from activities here.
Growing the middle
The first goal here is to create more jobs by making public investments in such areas as infrastructure and public transportation. The authors also recommend placing the emphasis of monetary policy on reducing unemployment, but with interest rates already so low, I don’t see a whole lot of potential there.
Second, increase the power of workers. Strictly enforce the right of workers to bargain collectively, and hold employers who outsource and subcontract jobs more responsible for worker treatment. Give public contracts only to companies that have high labor standards and strong antidiscrimination policies. Raise both the minimum wage and the income threshold for mandatory overtime pay (currently, only the 11% of salaried workers earning less than $455 a week qualify).
Third, give people more access to labor markets and opportunities for advancement. Reduce the size of the prison population. Put more immigrants on a path to citizenship, rather than leaving them in the more exploitable position of undocumented alien or guest worker. Make it easier to balance family and work responsibilities by subsidizing childcare, legislating paid family leave and sick leave, and protecting women’s access to reproductive health services.
Fourth, expand economic security and opportunity in general. Start with early childhood by providing universal preschool and other child benefits. Make higher education more affordable by increasing public financing and restructuring student loans. Continue to move toward more universal and affordable health care by adding a public option (Medicare for all) to health insurance choices. Create a similar public option for housing lending. Set up a savings bank through the postal system to provide banking services to the “unbanked or underbanked,” giving them some protection from predatory lending. Expand Social Security to offer an option for additional annuity benefits, giving people an alternative to products of questionable cost effectiveness from financial firms.
The standard reaction to many of these proposals is that the country cannot afford them. But who knows what we could have afforded if we hadn’t given up trillions of dollars of revenue on tax cuts that were supposed to bring us widespread prosperity but didn’t, or wars that were supposed to make us safer but didn’t. The United States remains a wealthy country, but we could do a lot more to channel our resources into the most productive areas. Surely putting more money into good child care, education, health care, infrastructure, and decent wages would be at least as cost effective as what we’ve been doing. One example: “For an extra $50,000 taxed on every $1 million of a wealthy individual’s income [a tax increase of only 5%], the United States could make all public college education free and fund universal pre-K.”
Progressive economic reforms cannot succeed if political inequality is just as extreme as economic inequality. In theory, majority rules, but maybe not if a powerful minority can dominate the airwaves or induce politicians to pass restrictive voting laws. So the authors also advocate campaign finance reform and some measures to make voting as easy as possible, such as automatic voter registration, voting by mail, elections on weekends or national holidays, and online voting.
Given the many ways that voters are divided, those measures may not be enough to produce a progressive coalition either. Many working-class whites who might well benefit from more progressive economic policies nevertheless vote Republican, in the hope of being saved from higher taxes, immigrant competition for jobs, affirmative action, affronts to their religious beliefs, confiscation of their guns, or some other real or imagined misfortune. As the share of the national income going to the working class declines, many lose confidence in their party’s establishment, but even then they may not support constructive institutional reforms. Instead they may rally behind a candidate who gives voice to their frustrations and directs their anger toward immigrants, racial minorities and foreigners.
Well I seem to be drifting from economics to politics. The next book I discuss will deal specifically with progressive coalition building.
Beneath the Surface 