Stiglitz, a former chief economist of the World Bank, is the author of dozens of books about inequality, globalization, and the follies of American leadership, most recently The Great Divide: Unequal Societies and What We Can Do About Them. He is the most prominent liberal economist this side of Paul Krugman. We spoke to him at his Columbia University office about how America can navigate its way out of three-plus decades of growing inequality, before the chasm grows so wide that it swallows us all up.
Gawker: Have you seen progress on inequality since the financial crisis and the Occupy movement made it a mainstream issue?
Joseph Stiglitz: What I’ve seen, I would say, is progress in the discussion. It has moved up to the mainstream, with people in both parties talking about it, all the presidential candidates, and that’s obviously a major step forward. If anything, I suppose, inequality in some dimensions has gotten worse. There have been a few steps forward—the raising of the minimum wage, the number of cities passing local minimum wages. But at the other end I guess you’d say that the statistics in many ways have gotten worse. The share of the top 1%—almost all of the increases in income from 2009 to 20102 went to the top 1%. Ninety one percent of the increases. Probably the most unequal growth we’ve had. CEO pay continues to rise. And the second quarter data on wage increases were the weakest in 37 years. Hardly a rosy picture.
Gawker: What’s been your assessment of Obama’s record on inequality?
Stiglitz: I think some of the people in the Obama administration have played a really important role in highlighting the issues... The president’s given three very powerful speeches. And I think those have played an important role in elevating the subject. There are some very specific things that he’s done that I think are important: new regulations about retirement accounts that are subject to fiduciary standards. A minor, minor thing you might say, in the scope of things, but it’s taking away billions of dollars and putting it in the pocket of retirees rather than in the banks. It highlights the point that we made in our report “Rewriting the Rules,” that little rules can have huge consequences.
Overall though, I would say that Obama, in the response to the 2008 crisis, relied basically on trickle down economics. He was throwing money at the banks rather than helping homeowners. Rather than a rescue strategy that focused on building the economy up from the bottom. And it didn’t work very well.
Gawker: A question a lot of regular people ask is, why was all that bailout money in the financial crisis directed to the banks, and not directly to the people? Common sense would dictate that money given directly to people would be more effective.
Stiglitz: It would have been. That’s a political question. It’s almost tautological, but: [Obama] listened to bankers. His chief economic adviser, the Secretary of the Treasury, was Tim Geithner, very closely associated with the financial sector, the New York Fed, which had been responsible for the crisis, and spends all of their time talking to the banks. And clearly had not done a good job in regulating the banks. So from the very beginning you might say it was who he chose to give him guidance. That doesn’t answer “why did he choose those people?” I think probably he didn’t have a deep enough understanding of what was going on. As a politician, he’s sensitive to the most vocal voices, who are the major contributors. He got the advice that you ought to pay more attention to homeowners, but didn’t listen.
Gawker: How would you rate the overall response to the financial crisis, six years out now?
Stiglitz: Maybe a B minus. What does that mean? [Obama] makes a big deal of saying he deserves credit for avoiding another Great Depression. I think that’s right, but he can’t be given credit for having restored the economy quickly to robust growth, and the loss of GDP and the mound of human suffering is huge. I’ve done a back of the envelope calculation—the loss of output because of not bringing the economy back to full employment quickly is at least $5 trillion. That’s a big loss.
He might have said “Could it have been done?” I think absolutely it could have been done. Could it have been done politically? That’s a more contentious issue. What we know is he didn’t fight very hard, or at all. And when he got discretion, more of the $700 billion under TARP could have been spent for homeowners. He had a big pocket, a war chest. And he chose to give it to the banks. I think it would have been both politically and economically better if he had given more to homeowners.
Gawker: Do you think the next financial crisis will be handled in a way that you think is better, based on the outcome of the last financial crisis?
Stiglitz: That will depend very much on who’s in the White House and in Congress. I think if we have the present political conjunction, there’s a very serious risk it will be handled worse, because what is necessary is more fiscal policy. Anybody who looks at our roads and our bridges says there is room for spending that would not strain the economy. Anybody that looks at our ability to borrow would say that there’s no risk—we can borrow at a negative real interest rate. So that’s clearly what should be done. But if we had another crisis, it’s likely that Congress, as it’s constituted today, focused on the larger deficit, may be even tighter and less willing to give a stimulus. And it’s unlikely that the Fed would be willing to engage in a magnitude of quantitative easing that would be effective. And even worse, you can’t bring interest rates lower than zero. They’re now zero. So we don’t have another gun. One might say we’re out of ammunition.
Gawker: What do you say to people who are concerned about our national debt level? How do you explain to people the value of economic stimulus?
Stiglitz: There are two ways of trying to explain it. The simplest way is that if we spend that money well, the return is so much greater than the cost of capital that we become wealthier. So it’s not a threat. The other way to think about it is to even ignore the direct benefit—the investment, what you buy with it. Let’s say you spend $100, and there’s a multiplier, say 1.5, you get $150 of GDP. And the interest rate on $100 is a dollar a year, and that $100 is buying an investment. It’s a small price to pay. So the basic point is the cost to society. We know that if you have unemployment and underemployed individuals, you’re wasting resources. So one way to look at it is, it’s a minimal cost to pay for not wasting resources.
Gawker: Is there a red line level of inequality past which you think there will be some sort of tipping point?
Stiglitz: We’re always gonna have some inequality. There is a small enough level of inequality that, while you might worry about it, it doesn’t have a corrosive effect. We’ve reached a level of inequality where it’s unambiguously clear to me and to most observers that it’s interfering with our economic performance. It’s having a corrosive effect on the way our democracy works. It’s having a corrosive effect on the way our society functions. So we’re in the bad regime. We’re facing very large costs.
The other question that you’re asking is, “Is there a tipping point, a dynamic where things get more and more unequal and increasingly hard to pull back?” I would say yes, and what that point is depends on a number of factors, including the political landscape. I believe a lot of inequality is a result of the policies we make. Those policies are a result of political processes. Political processes are affected by the rules that [govern] how money gets translated into politics. So if you have a political system like the US, where money talks more than in Europe, that is going to have a more corrosive effect—a lower tipping point. I try to be optimistic. I wouldn’t be working so hard if I believed we were over that tipping point. There’s some chance we are over it, but there’s some chance that we’re not. The fight right now is to make sure we don’t go further over it.
Gawker: Is it possible to rein it in with our current campaign finance system?
Stiglitz: It’s possible, and difficult. We’ve seen successes in the minimum wage campaign. We’ve seen successes in when the Republicans try to restrict voting rights in Pennsylvania, it backfired and people got so angry that they came out and voted. So every once in a while you see an outpouring of democratic forces.
Gawker: Where would you set the income tax rates, if it was up to you?
Stiglitz: The first order of business should be creating a fair tax system, so that we tax dividends and speculators at the same rate that we tax ordinary income. That would be huge. That’s where I’d begin. Then after that, the second thing for raising more revenue that I’d focus on is environmental taxes. They have the advantage of taxing bad things rather than good things. Everybody agrees you should pollute less, and you can raise revenue by encouraging people to pollute less. A carbon tax. Those are the two places I’d begin. I do think we can sustain a significant increase in [income tax] progressivity. But for the additional sources of revenue, I would begin with those two first...
One of the reasons I’m hesitant to [pick a number for the highest income tax bracket] is because one has to integrate state and local and federal taxes. So if you worry about incentives, it’s not just the federal income tax, it’s that in combination with other taxes. The best studies of what the comprehensive rate, which would be all three of them, would be that we could clearly manage—in the sense of benefits to our equality—at least 70% or 80%, as an integrated rate. Remember during the Eisenhower years we had a 91% federal rate at the top.
Gawker: How do you explain to people the role that Wall Street and big banks play in inequality?
Stiglitz: I think they play three distinct roles. One is the most obvious: that because they pay themselves so well, and the whole variety of reasons why they can get away with that and the sector is not as competitive as it should be, means a lot of inequality at the top is related to excessive compensation and bonuses in the financial sector.
The second thing is that what they do lowers the standard of living of people at the bottom and in the middle. When they engage in predatory lending, they’re stealing money from working people for themselves. So it’s both increasing poverty and moving money from the bottom of the pyramid to the top. But even in other areas, like the market power over debit and credit cards, has the effect of raising prices of all goods in our economy. Even people in the middle are suffering. Even if you don’t succumb to the predatory lending, you’re suffering because of the banks. You’re moving money into the pockets of the guys at the top.
The third way in which the banking sector contributes to inequality is a more general effect that it has on the function of our economic system. It helps encourage short-termism, which in turn leads to lower investments in people. Studies we did at the Roosevelt Institute showed that the financial sector—the standard story is that it brings money from households and gives it to corporations. In the last 10-15 years, it’s been taking money from corporations and giving it to households—to rich people. So it’s been disintermediating, not intermediating.
Gawker: And what are your remedies of choice for this situation?
Stiglitz: What the banking system is supposed to do is give money to new firms to start new businesses rather than engage in speculation. So regulatory reforms would not go far enough. Going further, to make them do what they’re supposed to do, would serve the American economy. One way of thinking about what’s happened since 2008 is that the focus of reform has been stopping the banks from harming the rest of us. It’s a peculiar agenda. Let’s not just focus on their harming us, let’s try to focus also on making them do what they’re supposed to do, on a positive agenda. Let’s make sure they act more competitively. Let’s stop the overcharges on credit cards and debit cards. Let’s stop the predatory lending. And then there are a whole set of reforms on CEO pay that would help curb excesses there.
Gawker: When you talk about fighting against inequality being “enlightened self-interest” for rich people, what do you mean by that?
Stiglitz: There are three levels. I know a lot of people in the 1% who approach the issue very much through a moral point of view. They view that their success was partly a matter of luck, and they should share that success. It’s a deeply felt vision of what a moral economy and world should be. That’s the strongest view of enlightened self-interest, that you look at it not just in a selfish way, but as what kind of society we want.
The second is, what are the conditions that would lead to a better performing market economy? The fundamental problem in the United States is a lack of demand, because ordinary people don’t have any income. And if you redistribute income, you’d probably get a better functioning economy. That’s really the IMF stance.
And the third... is the social unrest... [The rich] are still are aware that there’s such a big divide that if the majority of Americans, the 99%, could get organized, they are at risk. The real battle is to make sure their billions offset the people power.
Gawker: How effective is charity as a tool to fight inequality? Ethical philosophers often focus on the imperative to give money to charity, but is charity a strong enough tool?
Stiglitz: Charity might suffice in a primitive agricultural economy, where the very poor are people who have the bad fortune of not having physical strength, or illness, or some particular misfortune. So it’s not systemic. But when you have systemic problems, they have to be addressed systemically. I do think there’s an important role for charity, and I do think that people engaging in things in a voluntary way in civil society enriches the people, and can be an important way of addressing new experiments. But when it comes to the underlying societal problems... that can’t be done with charity.
Gawker: So when you talk to members of the 1%, what do you tell them to do with their money and resources?
Stiglitz: I tell them first, make sure the way they are making money is not exploiting other people. The second thing is, they should use their wealth or political clout to change the rules—the political sphere is the way we act collectively, to improve our society. So you have to act in the political sphere. Unfortunately, some are acting in the political sphere in ways to make inequality larger. And then third, obviously there are specific innovations where the political sphere is not able to act. Some people get engaged and experiment and try some new way of organizing education. That’s fine—the government might not be able to do such experiments.
Gawker: And what would you tell poor people they can do?
Stiglitz: Again, the political sphere. They need to get engaged. It is totally understandable why so many think the cards are stacked. They voted for Obama, “Change you can believe in,” and they got the same trickle down economics. The banks got help, not poor people losing their homes. So I understand their frustration, I understand their sense of powerlessness. But the fact is they do have power when they act collectively. So I would say first, get engaged. Mobilize politically.
Secondly, it’s really hard to say this, but: educate themselves a little bit better not to be taken advantage of... A lot of the private sector, including banks, make their money by looking for fools and taking advantage of other people. You can say, “Well, they only have themselves to blame, caveat emptor.” But we have an education system that is not designed to help them... They have a responsibility to try to understand that’s what’s happening.
[Photo via AP]