“The price of inequality”

By Styliani Kampani. Originally published on 2012/10/26

Some days ago I had the chance to attend Prof. Dr. Stigltz’s presentation of his latest best-selling book “The Price of Inequality”. The event took place at the German Council on Foreign Relations in Berlin.

Who is he?

Let me introduce you shortly to the author before getting to the gist of the presentation. He was born in the USA and is one of the world’s the most popular economists, apart from teaching at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and theJohn Bates Clark Medal (1979). Even though he was a senior vice president and chief economist of the World Bank, he keeps a critical view of the management of globalization, free-market economists and some international institutions like the International Monetary Fund and the World Bank.

The book

I cannot use another quote than this: “The top 1% of Americans control 40% of the nation’s wealth”. As he comments, those at the top enjoy the best health care, education, and benefits of wealth, while they fail to realize that “their fate is bound up with how the other 99 percent live.”

Not much of a positive signal for the majority of the population. He describes that today’s divided society is endangering the future of the next generations. Statistically speaking, the level of inequality has risen which can be confirmed by the amount of wealth and total income gathered at the hands of this minority, 30% and 25 % respectively. Last but not least, another reason why inequality is on rise is due to lack of opportunities. During the 50s the USA used to be the country where everyone could chase and realize their dreams. The American dream seems to be fading away. Just think about the percentage of students who have access to higher education, not to mention access to the top-ranked universities and institutions. Prof. Stiglitz mentioned, and I totally agree, that young people are in most cases dependent on their parents’ background and wealth. For instance a daughter coming from a well settled family is more likely to enter MIT than another one coming from the lower social class.

The same pattern applies for the social commodity of public health. The fact that the average life expectancy in the US has dropped by 4 years underlines a growing malfunction. In good and prosperous times humans live longer, because they enjoy the high quality of social welfare, including public healthcare. He also marks the fact that this 1% of the privileged population does not really need public commodities. What they do care about is a powerful state and what they fear is any potential threat to their wealth accumulation circle.

Later in the presentation he referred to some countries that have reversed the process of growing inequality, such as the Scandinavian countries and Brazil. These countries continue to preserve a strong public welfare system while providing opportunities to their citizens. As for the hosting country, Germany, he said that it is moving away from the “equality model”, in comparison to 30 years ago.

The financial crisis was discussed, too, since it has widened the gap between the social layers. According to Stiglitz, someone should earn as much money as their respective contribution to the society. Something that did not exactly happen with the bankers, who earned and are earning money from bonuses just because they were profiteering. In addition to this he named “the trickle down theory” a big lie. Why? Simply enough because the leading 1% is controlling the amount of money “trickling down” to the remaining 99%.

The causes of inequality:

1) “Rent seeking”

The reason, according to Stiglitz that our economy is being overwhelmed by politically engineered market advantages—special deals that he labels with a term familiar to economists: “rent-seeking.” By this, he means economic returns above normal market levels that are derived from favorable political treatment. He also chronicled the blatant tax and spending giveaways to big agriculture, big energy, drug trade and even students’ loans. Yet he also pointedly argues that much of the rent-seeking that plagues our economy takes a more subtle form, “negative externalities,” or costs those economic producers impose on society for which they don’t pay. As such no real wealth is created.

2) Bankruptcy law provisions (law terminology)

3) Deconstruction of the middle class

The middle class and traditionally the wider social layer in the Western societies is paying a high price. It is frustrating, not to mention unacceptable, to hear some people supporting that the middle class should not complain since it was “created” thanks to a wealthy minority that decided to through some money to the population and take advantage of the benefits. In other words, the middle-low class is working harder and produces wealth, the biggest amount of which is going to the pockets of the “leaders”. They give jobs, they define wages.

Closing up

Stiglitz passionately defended economic theories by passing the buck to politics. “The more economic instability, the more political turbulences”, he argues. He also underlined the need for a stronger regulatory system and thus some restriction to free market capitalism. Even the IMF itself claimed the necessity of rules in capitalism. He added that globalization is better understood now than in 90s, which shall be a good beginning for the writing of a new brighter future.

To the tricky question “Is there any hope?” Mr Stiglitz expressed himself positively yet diplomatically, saying that inequality can be tackled with sacrifices.

The glass is half empty or half full? I am leaving it up to you.