Stiglitz, The Economist and the 1%

Posted on April 15, 2011

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An article earlier this month by Nobel winning economist Joseph Stiglitz on inequality and political power has sparked a very interesting exchange within The Economist’s ‘Democracy in America’ blog. Stiglitz makes four basic arguments: (1) that the USA has grown more unequal over recent decades, with the top 1% capturing an increasing proportion of national income and wealth; (2) that inequality undermines the economy by encouraging credit bubbles and reducing efficient allocation of resources and use of skills; (3) that this rising inequality has led to greater influence of special interests over politics so that government now serves the 1% more than the population as a whole; (4) that the political and economic consequences of extreme inequality are bad for everyone and need to be tackled head on. None of this is particularly radical or new, and yet it seems to have upset some diehard elements within The Economist who are still searching in vain for a ‘big state’ explanation for the financial crisis.

In a venomous blog post a member of the Democracy in America team launches a nasty attack not only at Stiglitz’s ‘misguided conception of political economy’, but at his right – as a ‘powerful academic’ and member of the ‘technocratic elite’ – to make it at all. A response from another blogger within Democracy in America (remember all news and opinion in The Economist is written anonymously) takes issue with several of the points raised. Let’s look at the arguments to see how they stack up. (I will refer to the two anonymous bloggers as A and B.)

For a start Blogger A questions the data suggesting that the 1% has become as wealthy as Stiglitz argues. S/he jumps on data offered by blogger ScottWinship that suggests the 1% make more like 18% of national income than the 25% quoted. So Stiglitz, the ideological crusader, misleads his readers (we are left to decide ourselves whether this is for reasons of self-delusion or deliberate fact-twisting.) Aside from the fact that once capital gains are introduced into the equation the figure is more like 25%, the debates begs the question as to what proportion of national income Blogger A and Mr Winship would deem an appropriate (or inappropriate) amount for the top 1% to earn.

Different data sets always produce different results but few argue that the USA has not become significantly more unequal in recent years (the Gini index, another measure which measures inequality across income deciles, shows a steady climb since the 1970s.) The Economist itself recently reported that the proportion of economic growth captured by the top 1%, rather than 10% or 20% as previously, had grown dramatically in the last decade (see my post below). As Blogger B argues, whether it is a quarter or a fifth of all income seems pretty trivial, unless they believe that passing 25% would suddenly become unacceptable (an interesting position seeing as they claim that inequality is a red herring.)

As to whether inequality damages an economy and whether it can be seen as an underlying cause of the crash there is a wide literature which I will not go into here. (The best accounts of this kind that I’ve come across are Graham Turner,David HarveyRobert FrankRichard Reich and R. G. Rajan.) Suffice to say that these theories which are dismissed by Blogger A as ‘speculative’ are still in development. We are of course less than three years on from the banking crisis and still dealing with its consequences. It is worth noting however that in their own recent discussion of these arguments The Economist failed to discredit them in any serious way (and not for want of trying!)

So how about the question of whether the growing wealth of the top 1% has a negative impact on democracy? Stiglitz argues that “wealth begets power, which begets more wealth.” This is dismissed by Blogger A as the type of ‘vague slogan’ which ‘progressives’ enthusiastically trot out without ever explaining. In fact Stiglitz does offer a quite clear example of how the financial lobby was able to translate its growing wealth into political influence – in the form of legislation (eg. repeal of Glass-Steagall), lax regulation, low taxation and an enormous bank bailout when things went wrong. Even since the bailout the lobby’s continuing influence has so far prevented meaningful reform in legislation, regulation or taxation.

While Blogger A agrees that special interests do undermine effective democracy, s/he does not see what this has to do with inequality. This is very poor reasoning. What is complicated about the idea that money buys power, and the more money you have the more power you can buy? It stands to reason that if a special interest group has a larger proportion of wealth than any other political parties will have to compete more aggressively to retain their good will, creating a downward pressure on measures to curb their wealth and influence. This may act as much through informal networks and favours (often entirely legal) and collective understanding, as through actual donations and collaboration in investment projects etc. (Milo Vandermoortele at the Overseas Development Institute offers a useful framework for seeing how this occurs through the contraction of ‘policy space’ and the distortion of institutions.)

Of course in a democracy with a relatively plural media and elections there is some check on this influence in the sense that if a majority of the population realises they are being screwed they may abandon one or the other, or all of the mainstream parties. So far, however, the inertia of the party system, growing political apathy and the resort to (unsustainable) credit to placate economically stagnant middle- and lower-income groups have averted this. Politics remains securely in the hands of mainstream parties in the US (Tea Party included), the UK and elsewhere, and all are subject to the same influence of the 1%.

What Blogger A believes is the real cause of the unseemly relationships between government and big business (including the ‘financial-industrial complex’, the ‘military-industrial complex’ and the ‘health-industrial complex’) is not the capture of government by big business, but the incursion of the state into realms which should rightfully fall to the private sector. This is not far from the argument (mentioned in my post below) that these self-nourishing ‘complexes’ that become too big to fail are the result of government-created distortions (like teachers’ unions!) rather than private interests using their influence to recreate the public sphere in their own image. Blogger B destroys this argument so effectively that there is little need for further comment:

Here are some examples of bad public-private partnerships: the growth in outsourcing of military and intelligence missions to private security contractors like Blackwater/Xe; the semi-private for-profit but implicitly state-guaranteed status of Fannie Mae and Freddie Mac; implicit government bail-out guarantees for too-big-to-fail financial institutions (TBTFs) such as Citibank, AIG et al.

In the first case, defence and intelligence were formerly government monopolies, and the explosion in extremely profitable outsourcing was a result of the privatisation mania of the 1980s, driven by radical-right free-enterprise fanatics like Eric Prinz. Government control over the military has decreased, not increased, and that trend is certainly not the fault of progressive ideologues. In the case of Fannie Mae and Freddie Mac, LBJ’s decision to privatise them was driven by a desire to minimise the government’s balance sheet, and had little ideological character; had they remained straight-up government agencies as they were from the 1930s to the late 1960s, they would have played an even more marginal role in the financial crisis. You certainly can’t argue that their public-private character resulted from a drive for “ever greater government control over everything”; it was the opposite. In the case of implicit government guarantees for TBTFs, the problem was precisely a lack of explicit rules for government’s role regarding systemically important financial institutions, particularly non-bank institutions. The only way to argue that the problem here is too much liberal-driven government involvement would be to argue that we should a) do away with federal deposit insurance and the rest of the New Deal/Basel underpinnings of the modern financial system as they obtain in every developed country, and b) that we should have let the banks, insurers and hedge funds all fail in September 2008. This would not be a serious position and I’m sure my colleague doesn’t hold it.

There it is. If big government and overregulation are the causes of the growth of these too-big-to-fail ‘complexes’ then up is down, black is white, and there are several bridges I currently have on the market that you may interest you.

The last and, in my view, most sinister of Blogger A’s attack is his/her ad hominem attack on Stiglitz for using his position of influence to espouse a position that does not follow his own (class?) interests. Let’s excuse for a moment the provocative talk of Stiglitz’s ‘gold-encrusted CV’ and his writing in the ‘perfumed pages of Vanity Fair’. We all resort to sarcasm at times to get our point across (and we can probably detect some kind of personal resentment here.)

The more aggressive accusations of Stiglitz being a ‘progressive ideologue’ and member of a ‘liberal technocratic elite’ are less easy to take, because by placing him within a tarnished group (which, incidentally, doesn’t exist) they deny him his right to speak. After all an ideologue or a technocrat can’t have valid opinions because they do not reach them through rational thought, but by following a party line. Even this can probably be tolerated as part of the armoury of intellectual combat – those on the left are certainly prone to hurling accusations of neo-liberal and neo-conservative fundamentalism. Furthermore it is quite easily refuted. The technocratic elite (if such as thing exists) are mostly not ‘progressive’ (Alan Greenspan, Ben Bernanke and Mervyn King are also members, I presume?) Having experienced his anti-neoliberal conversion after many years of imposing structural adjustment programmes on poverty stricken nations, Stiglitz hardly presents the trajectory of an unthinking ideologue.

What is much more disturbing than the language used is the message behind it. Stiglitz and other leading public intellectuals merely by speaking out against inequality and the power of special interests become inhuman. Instead of acting in his own self-interest as a member of the elite – as the economic model would predict – Stiglitz is speaking on behalf of others and society as a whole. Like the Jacobins, the Bolsheviks, the Khmer Rouge, those who try to speak on behalf of others or all end up imposing their will in blood. The comparison is not only wrong, but self defeating.

This prevalent and dangerous trope within the thinking of the free-market right played a large role in producing the financial crisis. In its obsession with mathematical modelling, economics lost sight of the social and moral reasons for why people act the way they do, and therefore got the sums wrong. They apparently can’t understand why someone with Joseph Stiglitz’s wealth and influence should be concerned about the impact of inequality on democracy, economic sustainability and social cohesion. If that is so they would be wise to spend more time themselves on thinking about these things and less on petty character assassinations.

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Posted in: Elites, Inequality, US