Monday, August 6, 2012

The Price of Inequality by Joseph Stigliz

I started watching the book talk given by Joseph Stiglitz on his book, "The Price of Inequality: How Today's Divided Society Endangers Our Future."  You can find the talk at C-SPAn's Book TV, here.  Here is his article, in Vanity Fair, that inspired the book: Of the 1%, by the 1%, for the 1%.

I wanted to listen to this author because I am interested in economics from both sides.

After ten minutes of his talk I found myself disagreeing with nearly everything that he said.  I then decided that I would like to try to rebut his argument.

I shall comment line for line on his article. My comments are italicized.

Of the 1%, by the 1%, for the 1%

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.
Joseph E. Stiglitz

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year.

The top 1% also paid 38.02% of federal personal income tax.  Nearly 25% of income, and 38% of taxes.  Is this not unfair?

In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided.

25 years ago everyone bought cars that lasted only 150,000 miles, had no personal computers, let alone no: cell phones, iPhones, internet, tablets, gps in their phones and cars, PlayStations, x-boxes, etc. 

While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.

Haiti, Tanzania, North Korea, and every other third world country also have a lack of income inequality.  It's not a surprise that European countries, who are poorer than America, have less income inequality.

Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

The majority of poor in America have tvs, refrigerators, cars, cell phones, air conditioning, etc.

Poor living quarters in Brazil, from here:

What's better the pictured equality above, or the inequality suffered by the poor here in America?

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today.

Remember when we had less inequality in the mid-19th century, and how electricity, for example, had not even been invented yet?  Were electricity, the phone, radio, tv, etc, invented in a country with little or lots of income inequality? Hint: most of the guys who invented those things became rich.  And their income was then unequal to the people who had not invented such things.

The justification they came up with was called “marginal-productivity theory [of wages].” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin.

Definition from the free "In economics, the theory that firms will pay a productive agent only what he or she adds to the financial earnings of the firm. Developed by writers such as John Bates Clark and Philip Henry Wicksteed at the end of the 19th century, marginal productivity theory holds that it is unprofitable to buy, for example, a man-hour of labour if it costs more than it contributes to its buyer's income. The amount in excess of costs that a productive input yields is the value of its marginal product; the theory posits that every type of input should be paid the value of its marginal product"

I have not studied this theory, but lets try an example:  You are a manufacturer of shirts.  One of your shirts sells for $10.  The materials to create one shirt cost $2.  If you hire a person who makes one shirt an hour, you must pay him $14 an hour.  How many employees should you hire?

It sounds to me that " is unprofitable to buy, for example, a man-hour of labour if it costs more than it contributes to its buyer's income."

The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses.

Since he thinks that corporate executives "whose contribution to our society, and to their own companies, have been massively negative" then it only makes sense for him to avoid patronizing those companies.  If you see him ask him what its like living without electricity, cars, tv, and the other things provided by the big companies.

Or perhaps he thinks that is just the executives who do not contribute to society.  And I suppose that he, an economist, not someone who works at a big company knows what those companies should be doing better than those companies themselves.

He also seems to think that corporate executives should not get large bonuses.  What makes more sense: companies paying what they think they need to or someone unrelated to the company deciding the bonuses?  

Since he's so smart about what big companies should be doing why is he not a corporate executive with big bonuses himself?

Since he knows so much about each of these companies, we should ask him, "How much should we pay the CEO of Ford? And his secretary? How about the janitor who cleans their offices, how much should he make?

In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance).

As opposed to the government; which is the entity that bailed out those big businesses, with taxpayer dollars, and can't even balance its own budget.

Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

We are on the receiving end of a long line of information and progress.  The kings of 1000 years ago would kill to live at the poverty line in today's America.  Of course those who came before received less.  If we continue to advance, those that come after us will have even more than we do.

He's pointing out once again that it was the big companies that caused our current depression, without pointing out that had they not known that the government would "save" them if things go wrong, then they probably would not have been as inclined to take those risks.

Let companies rise and fall on their own.  If the taxpayers bail out companies who make bad decisions there will be not incentive to try and avoid those bad decisions.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong.

My thoughts on the argument are here: "What is fair?"

my conclusion:

"If we choose to have equal results there will be no incentive to work hard.

An equal playing field does not exist in this world.

If the rules are the same for all, an unequal playing field still gives everyone a chance for success.

If the playing field is unequal and the rules are unequal, or worse, random or biased, then we get a world where you may, or may not, succeed, and your actions will not influence the outcome"

An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

Let's see if he mentions the government and its 300,000 pages of rules, regulations, taxes, budget deficit, debt, favoring of some businesses over others, etc.

First, growing inequality is the flip side of something else: shrinking opportunity.

See: US Code, link immediately above.

Tax the rich more and we will get more rich people, right?

Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.

One common monopoly that is often mentioned when we think of "big bad monopolies" is Standard Oil.  Around the time Standard oil started out the price of oil, to the consumer, was $0.30 per gallon.  At the height of Standard Oil's "monopoly" the price of oil, to the consumer, was $0.06 per gallon.  Standard Oil even had about 150 competitors when the Supreme Court decide to break them up in 1911. (100 years of Myths about Standard Oil)

I submit to you: There is no example of a monopoly, which was not made a monopoly through the use of government, or was/ is not the government itself.

This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

If the government did not bail out companies who fail, then there would be less incentive to go into risky careers like finance.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology.

Says who? How is he so sure that private education, roads, and infrastructure would not better than the government controlled stuff the government provides us?  Oh that's right, I seem to have forgotten how good our schools roads and bridges are here in this country, and how they always take care of business under budget.  He's right, the fact that we pay more per student than most countries and get less in terms of results is a good thing.  And of course the government funded bridges, for example, never fall down and kill anybody.

The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on.

Who invented: aspirin, vaccines, antibiotics, etc.? Oh that's right, it was the government, cleverly disguised as big bad pharmaceutical companies.

But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

Tax the rich to pay for it all!

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided.

Or the government is in charge.

The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs.  The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had.

The more we're taxed the more we expect the government to take care of the poor.  The more the government spends on Social Security, Medicare, medicaid, unemployment, food stamps, etc. the more we expect the government to take care of the poor.

The less we're taxed, and the less the government spends, the more private citizens donate, and have to donate, and volunteer to help the poor.

The government has forcefully taken over the responsibility to help the less fortunate.

They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Its true that some wealthy claim to want higher taxes on themselves, but when they are given the chance to volunteer to pay more taxes they never do.

Economists are not sure how to fully explain the growing inequality in America.

This economist may not know but this doctor sure does!

"Millions upon millions of penniless immigrants came here from all over the world to live free and to become rich.  We are not free in America because we are rich; we are rich in America because we are free, or were."

People want to be rich, and work hard to make it happen!

The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas.

I suppose that none of that was caused by: labor laws, OSHA, or the unions.

Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

And yet they still cause a ruckus whenever the unions are asked to help advance the company or the state that is paying for them; see Wisconsin 2011, GM, Ford, and Chrysler.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way.

The rich want to keep what they earned, go figure.

The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.

If your options for income are: salaries, which are highly taxed, or capitol gains, which are less highly taxed, where should you aim to get your income? Hint: if you said salaries, you'll never get rich yourself.

Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end.

Do you remember how I mentioned John Rockefeller's Standard Oil "monopoly" earlier?  Oh, how terrible it was when the big bad Standard Oil "monopoly" caused the price of oil to drop dramatically!

Wouldn't it be great if Bill Gates never got rich?  You know how he's way over there in Washington being rich.  And I'm way over here not being rich.  I hate that guy!  He can take his software improvements that paved the way for the personal computers, iPhones, iPads, user friendly internet... and he can shove it!

Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent.

Do you remember how the government saved us from the Standard Oil "monopoly"? and their 150 competitors?  That was great!
Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever.

 300,000 pages of rules, regulations, and taxes covering all facts of life listed right here in the U.S. Code.  Our friend, the article author, would like to see all 300,000 pages of those laws enforced.

The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

Government caused a big problem, then spent a lot of money to make it worse; what else is new?

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level.

And with only: more wealth, prosperity, technical progress, healthcare progress, etc  to show for it.

And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth.

Don't worry the government is here to prevent us from making more progress.  Its already spent our grand kids' money.  So they'll all be poor equally.

During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending.

Ah, that's it.  The reason we're in a depression is because companies donate too much to politicians!  If only we could infringe on the right of free speech, we could get prevent companies from donating to political campaigns which means we'd elect different politicians, who'd be totally different from the lying baby kissers we currently have!

The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.

And the left wants these people to have more power so that they can protect us peons from illnesses, big bad companies, and sodas that are too big.

By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

We agree! The government should stop interfering in the private market. (Not sarcasm.)

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means.

As opposed to the poor who always pay their debts and never go bankrupt.  If only everyone were poor.  Hey! then we'd have no inequality!

Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far.

How did not having a draft enter into this discussion?  Why do the democrats keep proposing one?

Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that.

The rich's taxes don't pay for trivial things like "interest on the debt."  The rich's taxes only pay for subsides back to themselves and the National Endowment for the Arts, so that they can see crucifixes in urine called "art."

Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the “core” labor rights, which include the right to collective bargaining.

And we get stuff that's made in China for a fraction of what it'd cost to be made here.  How
d you like to pay double, or triple, for all your consumer electronics, clothes, toys, etc?

Imagine what the world might look like if the rules were designed instead to encourage competition among countries for workers.

We'd have a paradise like: the Soviet Union, China, Venezuela, Cambodia, Cuba, or North Korea!  Let's totally tax ourselves more so that we can be like North Korea!

Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

Wait. How can we have a worker's paradise if the rich are still around?  Isn't the first thing we need to do: kill the rich, intellectuals, and anyone with glasses?  That's what the other worker's paradises did.

Or, more accurately, they think they don’t. Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe.

HA! HA! HA! I was beginning to think that this author was serious. But that's a good one: easier chance of becoming wealthy in Europe. HA!

The cards are stacked against them.

Did I mention: 300,000 pages of rules, regulations, and taxes?

It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling.

Aha. See, because their is income inequality in America (birth year 1776) the middle east has had issues since before the year 0.  Makes perfect sense.  And you're a close minded idiot if you don't see that.

With youth unemployment in America at around 20 percent

Thanks for lowering unemployment Obama!

(and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else.

Did I mention $15 trillion $16 trillion in debt? Sorry, it went to $16 trillion when I wasn't looking.

All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

And we got Obama! Who ended the wars, closed gitmo, ended unemployment, and got all foreign nations to love us.  Thanks Obama!

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

I don't think that this guy understands that the top 1% mostly became wealthy thanks to their own efforts, and those of their parents.  And the wealthy in other countries mostly get wealthy through more nefarious means, like: government.  It would explain a lot if this author told us how exactly he thinks the rich get rich in this country.  I don't think that he realizes that people get rich here by selling goods and services to willing buyers.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

If we re-elect Obama maybe we too can be like one of those distant lands where everyone is equal...and poor.

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key.

What's wrong with the first two?  That's it everybody, forget your own needs in favor of the poor.  What? You're a millionaire with a broken leg? Too bad we're helping the poor by x-boxes instead.

Everyone possesses self-interest in a narrow sense: I want what’s good for me right now!

He's right the wealthy are terrible savers, and don't make any money from capitol gains.

Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s(sic) self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The more we expect the government to look after the poor the less we do it ourselves.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles,

And yet the poor in this country have similar stuff as the rich.  If a millionaire or poor guy buys a Pepsi, its the same Pepsi for both guys.  Sure, one's got a mercedes and the other has a Kia, but both are cars and are both tremendously better off than the average person in country with income equality: like Cuba. (Some paraphrasing came from "The Road to Freedom")

but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

This guy truly does not understand how wealth is created.

Had he written this before the industrial revolution, and before America, then he would have been right in what he has said.  Prior to free markets, personal liberty and personal freedom the wealth was only owned by those who exploited the poor.  But wealth is not created that way today (unless the government gets involved).

Who'd be better off in today's America: a company that creates a life saving drug, and makes millions, or the person who's life was saved by that drug, even if it cost him a lot?

I started reading, and writing, this in good faith and with the thought that this article's author might have some good points against income inequality.  But near the end I realized this is just so much misinformation and useless "knowledge."

To summarize my position: Ask yourself this: America has income inequality.  In Haiti there is little income inequality.  Where would you rather live?

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