The Price of Inequality: How Today's Divided Society Endangers Our Future
A forceful argument against America's vicious circle of growing inequality by the Nobel Prize–winning economist.America currently has the most inequality, and the least equality of opportunity, among the advanced countries. While market forces play a role in this stark picture, politics has shaped those market forces. In this best-selling book, Nobel Prize–winning economist Joseph E. Stiglitz exposes the efforts of well-heeled interests to compound their wealth in ways that have stifled true, dynamic capitalism. Along the way he examines the effect of inequality on our economy, our democracy, and our system of justice. Stiglitz explains how inequality affects and is affected by every aspect of national policy, and with characteristic insight he offers a vision for a more just and prosperous future, supported by a concrete program to achieve that vision.
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Normally a supporter of free markets I found myself mostly agreeing with the author. However I find it baffling how someone who has done so much research into inequality can miss the biggest and most obvious cause of rent seeking in our society. I wrote to the author last year and am still awaiting his response.
I have just finished reading your book “The Price of Inequality”. Even though I am generally very liberal politically I found myself agreeing with most of your points. What I am struggling to understand though is that your book talks in detail about rent seeking, yet not once do you mention that the very way our monetary system works as a possible cause for this rent seeking. You mention the Ragan error as the point in time when things really started to take a turn for the worst and blamed this on less progressive tax and lax regulation yet didn’t also note that something else took place at that time which had a huge effect on inequality.
I am of course talking about how our monetary system was decoupled from gold, or a tangible limited asset which regulated its supply. This decoupling has caused a money and debt explosion which has in the most part benefited the rich. I’m sure you realise that it is the rich who have assets to which they can leverage and borrow against, this borrowing then in turn pushes up the value of assets as the money supply increases and in effect hedges them from inflation. In addition to this the inflation data in most of our countries places very little or no weight to the increase in asset prices, so the rich actually end up ahead of inflation with their asset purchases (on borrowed money). The average person who is lucky to own one house and a few shares benefits very little from this and in effect is left behind as asset prices increase faster than wages and savings get eroded by inflation.
A quick example of how this has taken place in Australia. In the last 40 years average wages have grown by 10x (Also note the average wage is skewed significantly by the high income earners, the median wage is much less again), whereas the cost of buying a house has increased over 25x. Granted interest rates have fallen somewhat to offset this slightly (although this is more a symptom of the system than anything else) but it’s the rich who have benefited from this increased inflation. It’s now to the point that where two working parents on a median wage can’t afford to own a home in a capital city.
You talk a lot about progressive taxation to offset the rent seeking that takes place with income. Now this is all well and good for those who are rent seeking and earn large money based on this. What about someone who works hard and is caught up in this progressive tax system? Treating rent seeking like this is to me akin to a band aid solution to something that could be regulated better to stop it happening in the first place. Couldn’t we fix a lot of this rent seeking with a better regulated monetary system?
In the chapter about monetary policy you indicated that you favoured low interest rates to increase employment. There was no comment or mention however as to the negative effects this increased inflation might have on inequality. A little example again in Australia our central bank recently lowered rates to record lows to try and stimulate the economy and employement. What resulted was a 15% increase in house prices in 12 months (a massive transfer of wealth to those with more wealth in the country).
So would you have the time to comment on two things for me;
Can you comment on why you haven’t talked about the way our modern monetary system works as part of the cause of the rent seeking that takes place in our society?
Can you comment on why you ignore the effect of inflation on inequality? Bearing in mind that inflation to which wages are mostly pegged in most developed countries is very much underweight (or non-existent) on assets prices.
Thank you very much for your time
A brilliant portrait of market failures and their costs. Terrific book to learn about how economy works not only in US but Europe too.