Stiglitz: ‘Inequality is holding back the American economy’

Joseph Stiglitz [GovernmentZA/Flickr]

The US economic recovery is false, according to Nobel Prize winner Joseph Stiglitz. He told La Tribune that sustainable growth can only be achieved by tackling inequality, limiting the power of the financial sector, and reempowering trade unions.

Joseph Stiglitz is an American economist and a professor at Columbia University. He won the Nobel Prize for economics in 2012, and has recently published The Great Divide: Unequal Societies and What We Can Do About Them.

The American economy is doing well, as we saw in the second quarter, with an annual growth rate of 3.7%, while Europe is still struggling to lift itself from the crisis. Is this the effect of a trade-off between inequality and growth, with the Americans accepting higher levels of inequality in return for faster economic growth?

First of all, we shouldn’t get too hung up on quarterly growth. In the first quarter, growth in the US was negative and GDP actually declined. This economy is very volatile. The figures can be positive one quarter and negative the next. The truth is that economic growth in the US is weak, very weak, even if it exceeds European levels. We expect to see a 2.2% increase in GDP this year, which is well below pre-crisis levels.

Secondly, if the fruits of economic growth all end up in the pocket of, say, Bill Gates, then it is meaningless for the vast majority of citizens. Between 2009 and 2012, 91% of all salary increases ended up in the pockets of 1% of Americans. 99% of people never saw any benefit from this growth. Median income today is lower than it was 25 years ago. At the bottom end of the scale, salaries are almost identical to what they were 50 years ago!

That’s why, when I have to judge the health of the American economy, I say it is really sick. It is failing. Rising GDP and economic growth tell us nothing about the vast majority of citizens. The economy should serve society. It should not just exist for the profit of the top 1%.

The consequences of this situation are clearly visible when we look at how the vast majority of people live. Insecurity is rampant, people are afraid of losing their houses, their jobs… Obama’s health reforms are a step in the right direction, but they do not lessen the overriding feeling of insecurity.

But American companies are doing better, consumption is rising…

Businesses don’t have to care about the plight of American citizens if they do business elsewhere, like an economically strong China, for example. But China is no longer doing so well! So this is a risky move. As far as consumption is concerned, if it appears to be high, it is purely thanks to credit! Before the 2008 crisis, 80% of the least rich Americans spent 110% of their income. This habit of people spending more than they earned did come to an end, but now people are once again spending more than 100% of their income. It cannot last! We can’t keep on buying cars on credit for ever. This is how credit bubbles are formed.

A will these bubbles burst?

Maybe it will not exactly burst, but sooner or later, consumption will be held back by low wages. America’s richest 20% save up to 15% of their income, which represents 6% of GDP. Yet the total rate of saving is lower than this. That proves that 80% of people consume more than their income. So consumption has to fall. And this will hold back economic growth.

You mentioned the role of finance in increasing inequality. What role is this exactly?

Interest and commission payments mean that the financial sector is the big winner in a system where people live on credit. American citizens’ money goes straight into the bankers’ pockets. The financial sector in the US has grown from 2.5% of GDP to 8%. But it has not improved the economy.

Paying such a high price for an effective driver of the economy could be worth it. But paying more and more for a financial system that is less and less efficient, that raises serious questions. One example is this: for a local grocery shop, the commissions on card payments alone consume half of the shop’s profits! It is easy to understand why the brightest people look to the banks for work.

How did we get to this point?

Reagan deregulated the financial sector, which was a big mistake. This deregulation has spread to all businesses, which have succumbed to this ‘dictatorship of short-termism’. Banks are supposed to take money from individuals and put it back into businesses. Today, money is being taken from businesses by rich individuals.

But Barack Obama wanted to regulate the financial sector. Did he fail?

Yes, on this issue, he failed. The problem is that the financial sector had far too much influence in his administration. Tim Geitner, of the US Federal Reserve, was called up to be one of the principle advisors on banking reform. They actually asked someone who had previously failed to supervise the financiers, who was very close to the sector, to come and reform it. It couldn’t possible work! And now Tim Geitner has gone back to the financial sector, just as he planned. He was hardly going to make life hard for his future employers!

Don’t the bosses that bank-roll electoral campaigns have a major influence?

They do, but the problem is vast. Obama has been intimidated by the bankers. They told him: if you do not treat us well, the economy will get even worse. So he was scared of them. Rather than listen to the economists that wanted to regulate finance, he prioritised the bankers’ advice.

What should he have done? If Obama has asked for your advice, what would you have told him?

I would have asked two questions he failed to ask. Firstly, concerning the influence of the banks on our society. And secondly, whether or not the banks really do their job.

Eight years after the start of the recession, loans to businesses are below pre-crisis levels, while loans based on speculation have taken off. I would have made the banking system more competitive. I would have imposed limits on credit and debit card commission. I would have restricted the use of Credit Default Swaps and other speculative products. I would have told the bankers: your job is to loan money! I would have increased the transparency of the system and fought shadow banking.

None of this has been done.

What can be done to tackle inequality today? Is raising income tax the only answer?

I think efforts should focus on income before any redistribution occurs, before income tax. Not only on redistribution by taxation, particularly in the United States. There is no doubt that other Western countries would follow suit.

The truth is that productivity has risen in the last 30 years in the United States, but wages have been completely left behind. This is totally anomalous. Normally, wages follow productivity. To break this salary ceiling, we have to give employees the power to negotiate and limit the power of COEs. I remind you that the salaries of American bosses have risen from 20 times to 300 times higher than those of their workers… And this is not justified by gains in productivity. The productivity of bank bosses, who are the best paid, has been negative in recent years! This is the central problem of inequality that needs to be addressed.

How do we reverse this trend?

By increasing the power of the unions and improving company governance by placing more constraints on directors and improving transparency over pay and the influence of shareholders. The tax system can also play an incentivising role in the primary distribution of income (before the intervention of the redistribution system). Today in the United States, and in many other countries, revenue from speculation is taxed at a far lower rate than wages. These revenues (from dividends, stock options, etc.) are the prerogative of the richest in society, who then benefit from a lower tax burden. The tax system is regressive. The richer you are the less tax you pay. This has to change.

Aligning the tax on capital gains and wages would discourage the distribution of dividends and stock options. It would, in contrast, encourage more productive activities.

From a more general point of view, many legislative and regulatory changes over the last 30 years have contributed to the growth of inequality. We should reexamine these rules. What we seem to have forgotten is that the market does not work without a minimum of regulation.

But how, for example, would you give power back to employees?

In the United States, companies have done everything they could to weaken the unions and make their organisation, their very existence, more difficult. They have encouraged employees not to pay union subscription fees, which has obviously undermined them. This is how the protection of workers has been eroded little by little.

What do you think of Thomas Piketty’s idea of establishing a global tax on wealth?

I am not sure this is the best approach to take. The rise of inequality is linked to the regulatory changes I have mentioned, and to the regressive tax system. The increase in the global stock of capital highlighted by Piketty is linked to rises in the price of land and property. This added value is not connected to the growing wealth of the richest in society, which is much more closely linked to capital gains from shares or stock options. Capital and wealth should not be confused. A nation’s wealth is no longer linked to its stock of capital. That is why Piketty’s suggestion is not necessarily the best option.

How far can inequality really go? Isn’t there a limit?

We may end up in a situation similar to that of many under-developed countries, where inequalities become so serious that the rich are obliged to live in gated, guarded communities, and send their children to school in the United States so they don’t get kidnapped…

We are not there yet. But if the current trend continues, there is a real risk that we might end up in a similar position.

This article was previously published by EURACTIV France.

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