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May 16, 2015
Nobel Laureate Joseph Stiglitz Takes on Income Inequality
    by Robert Kropp

“It would be easier, politically, to push for one or two policies on which we have consensus, but that approach would be insufficient to match the severity of the problems posed by rising inequality,” his new report states. First of a two-part series.


Economist Joseph Stiglitz received the Nobel Prize in 2001 for his research into information asymmetries in the capital markets, which, as he stated in his acceptance lecture, undermined the eighteenth century concept of the invisible hand developed by Adam Smith.

Increasingly complicated revisions of the invisible hand hypothesis have been propounded by a wing of economics—and politics as well—over much of the past four decades in the US, either as outright fantasy or as justification for short-termism and unprecedented wealth inequality. As a result, of course...but we know the results. A hypertrophied financial sector, for one, whose share of Gross Domestic Product—and the compensation of whose executives—have grown at astronomical rates since advocates of the invisible hand began deregulation in earnest with the arrival of the Reagan Presidency.

In a paper entitled
Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity, recently published by the Roosevelt Institute, Stiglitz delves into the root causes of rampant wealth inequality in the US. No doubt, most of those causes are familiar to those who seek to ground their investment strategies in environmental and social justice. I expect that in the second article of this series, when I cover a talk given on the issues by Stiglitz and others (including Senator Elizabeth Warren), more specifics will be addressed.

The point that Stiglitz emphatically makes, however, is clear: while wealth has been concentrated in the hands of a very few, not only the outcomes for the 99% but the strength of the economy itself has been compromised.

In a section of the paper entitled Fix the Financial System, Stiglitz wrote: “First, we aim to prevent the sector from imposing harm on the rest of society, either on individuals (as evidenced in predatory lending and market manipulation) or on the economy as a whole (through the systemic effects cascading from individually reckless financial behaviors).”

“Second, we aim to develop a financial system that actually serves our society,” he continued.

The solutions outlined by Stiglitz are too numerous to include in a single article, but suffice it to say that the main point of his paper is that the deregulatory impulse since 1980 has to be reversed. Because we are in the midst of a crisis, his solutions necessarily mirror in a contemporary context the actions Franklin Roosevelt took during the Great Depression. We took action following the second Great Depression brought on by the financial crisis in 2008, but we were far too timid in doing so.

Addressing a financial system that has only grown more corrupt in response to our too timid responses, Stiglitz recommends that we end too big too fail; regulate shadow and offshore banking; mandate transparency; and restructure executive compensation.

The relatively scant attention given to Stiglitz's paper has focused on the implications for the positions of Presidential candidates. We know the accumulation of Republican candidates profess contentment with business as usual, and that Senator Bernie Sanders of my home state of Vermont would agree with the majority of Stiglitz's conclusion. So where does that leave Democratic frontrunner Hillary Clinton, in the administration of whose husband Stiglitz served for a time? Will Rewriting the Rules provide positions for the message of her campaign?

The reference to globalization in the paper struck me, because it confirms that the trend in and of itself does not lead to an economic downturn. While it certainly did in the United States—the role of deregulation cannot be overlooked—it was not equally so in the developed nations of the European Union.

The issue is especially compelling given the argument over the proposed Trans Pacific Partnership (TPP). President Obama's insistence upon it passage under conditions of dubious transparency has called it into question. Stiglitz opposes it too.
In The New York Times in March he wrote, “There is a real risk that it will benefit the wealthiest sliver of the American and global elite at the expense of everyone else. The fact that such a plan is under consideration at all is testament to how deeply inequality reverberates through our economic policies.”

“Every new policy, program or law should be examined from the perspective of its impact on inequality,” Stiglitz continued. “Agreements like the TPP have contributed in important ways to this inequality.”

 

 
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