The price of inequality

This is the title of Joseph E. Stiglitz's book, recently published in Turkish by local publisher İletişim Yayınları. I met Professor Stiglitz, a well-known American Nobel prize-winning economist, in İstanbul, where he had been invited to a United Nations Development Programme conference. I asked him some of the questions that I had in mind after reading the book.

Prof.essor Joseph E. Stigiltz

The book, published in 2012, discusses the dangers of rising inequality in the US. Stiglitz asserts that American capitalism has for a long time been operating for the benefit of the top “1 percent.” There are multiple reasons: high unemployment causing pressure on wages, wrong Federal Reserve (Fed) policies that are too oriented toward Wall Street interests rather than those of the people, unjustified and shameless bonuses for CEOs, an unfair tax system that favors the wealthy, etc.

According to Stiglitz, equality of opportunity has disappeared, if ever it existed. According to recent research, 90 percent of the income growth realized in the aftermath of the Great Recession has been taken by the top 1 percent. Real wages are decreasing for the majority of workers while the future becomes less secure for them. In Stiglitz's opinion the US has become a class society, in the sense that the educational system and inheritance of wealth lead to existing inequalities being perpetuated. When Stiglitz was writing his book (in 2011) the US unemployment rate was quite high, over 8 percent. Nowadays it is close to 6 percent. What does Stiglitz think about this impressive improvement?

Well, he does not seem to be that impressed. He argues that “recorded unemployment” is one thing, “real unemployment” another. The decline in unemployment would have been the result of two facts: first, a decrease in the labor force, due mainly to the discouragement effect as many individuals ceased looking for jobs. Secondly, part-time jobs were an important factor in the jobs created in the last few years. To justify this, Professor Stiglitz highlights the fact that real wages continue to stagnate. Stiglitz does not believe that the full unemployment is achieved.

He thinks that the Fed's interest rate policy aimed to protect financial interests in the past, since its managers have been chosen from among either Wall Street people or those close to them. These managers focused too much on the hypothetical danger of inflation rather than on economic growth. Professor Stiglitz agrees that the Fed should be independent in its policies and asks for radical changes in the election of its managers as well as for real transparency, in order to make the central bank politically accountable for its decisions. Stiglitz said that the Fed's former chair, Ben Bernanke, has been overly obsessed with inflation, but this is not the case with Janet Yellen, the current chair, who seems more concerned with unemployment rather than the threat of inflation.

However, according to his own words, Stiglitz considers himself rather “optimistic,” unlike Thomas Piketty's “pessimism” that emerges in his bestselling book “Capital in the 21st Century,” where Piketty defends the premise that rising wealth inequality is inherent to capitalism since the era of higher per capita income growth reinforcing the working middle class is now over. Stiglitz admits that American society became a class society, but at the same time he believes that it may be cured, basically through two stages of policy: Fresh resources can be raised by canceling the special provisions on capital tax and making income tax more progressive, and then these resources must be spent in education, research and development and social aid. This will boost the economic productivity and consumption of the 99 percent and will put the US economy on the path to growth in which inequality will start to decrease.

(this article is published in Todays' Zaman, August 19, 2014)