Economy might be a boring subject for the majority of readers, however, a number of economists have been trying to popularise important debates on economic issues. Such arguments have caught the imaginations of several citizens concerned with their economic prospects. Joseph E. Stiglitz, Nobel Laureate and former chief economist of the World Bank, has raised serious concerns about the distribution of wealth — in the USA in particular and across the world in general — in his latest book, quite provocatively (yet aptly) titled The Great Divide. It is a compilation of articles written for The New York Times over the past seven years.
The concept of income inequality is not a new one. However, it has long been neglected by mainstream economists and policymakers. Income inequality refers to the uneven distribution of wealth in a society which results in a widening gulf between the rich and the poor. Stiglitz has explained that conservative economists have focused only on increasing the size of the economy (or GDP). The distribution of wealth was considered a question of politics despite having enormous economic implications. This is why, Stiglitz states, that “while GDP was growing, the incomes of most Americans were stagnating.” This stagnating income of the middle class meant stagnant demand, and that resulted in economic slowdown. Therefore, according to Stiglitz, taxing the rich does not cause an economic slowdown, rather, stagnating incomes of the middle class cause economic slowdown. This is how Stiglitz challenges the basic tenet of trickle-down economics.
The failure of market economies to fairly distribute wealth has caused several analysts, particularly those on the left of the politico-economic spectrum, to question the very basis of the system, i.e. capitalism. On the eve of the global financial crisis that started in 2007, Marx’s critique of capitalism was once again analysed thoroughly, in an attempt to find a cure for the ills which haunt our global economic model. Such rethinking also gave rise to political agitations, such as in the form of the Occupy Wall Street movement. The history of capitalism has been marred by successive recessions and a persistent existence of inequality in the distribution of wealth. Stiglitz points out that, “in the aftermath of the 2008 crisis, hundreds of billions went to save the banks, and little went to help homeowners.” What sparked this rebellion on both academic and practical planes were the shocking statistics revealed by economic measures. Hence, the global rallying for ‘capitalism v2.0’ was not as much ideologically motivated as it was grounded in economic data.
Joseph E. Stiglitz’s latest publication is a scathing, statistically-backed indictment of modern-day capitalism, which is accessible to the layperson and expert alike
Stiglitz has backed his arguments with hard facts. The average wage of male high-school leavers has declined by 12pc in the past 25 years, while CEOs’ salaries have swelled from 30 times the average worker’s wage to 300 times. The concern is not only limited to the historical comparison of the US’s economy, it also extends to the decline of these measures in comparison to other global statistics. The economic and employment prospects of top-performing students from poor families in the US are now lower than those of the weakest-performing students from families in the top economic quartile. A bus with some 85 billionaires has as much wealth as the bottom half of the world’s population, some three billion people.
Comparing the economic performance of USA with China, Stiglitz states that China “moved some 500 million out of poverty over the same period that stagnation seized America’s middle class.” Furthermore, he informs readers that “we [USA] had become the advanced country with the highest level of inequality, and we had among the lowest levels of equality of opportunity.” Keeping in mind the prevailing politico-economic system, it was Stiglitz who, in a Vanity Fair essay in 2011, coined the catchphrase ‘of the 1pc, by the 1pc, for the 1pc’, which aptly encompasses his main contentions.
Stiglitz has argued that successive governments in the US have not only been complicit in worsening the situation but that, through their fiscal and monetary policies, they have actively contributed towards it. Big businesses, large banks, and financial regulators have also collaborated with these administrations.
Stiglitz’s efforts to popularise these economic issues did not begin with this book. In his 2012 book, The Price of Inequality, he introduced concepts such as “the 99pc and the 1pc”. Popular awareness of these issues, in Stiglitz’s opinion, is the first step towards solving them. Following this trend, a number of books on the subject have been penned by other contemporary economists. One such book is Thomas Piketty’s Capital in the Twenty-First Century, a remarkable treatise which became an unlikely bestseller. Everyone now understands that a large percentage of wealth is amassed by the elite class and that the gap between rich and poor is widening day by day.
“The crisis confronting the United States and the world in 2008 was, as noted earlier, a manmade disaster. [...] As chief economist of the World Bank, I had observed how, after the end of colonialism, the West managed to push ideas of free market fundamentalism — many of which reflected the perspectives and interests of Wall Street — on developing countries. Of course, the developing countries didn’t have much choice: colonial powers had ravaged these countries, exploiting them ruthlessly, extracting their resources, but doing little to develop their economies. They needed assistance from the advanced countries, and as a condition of that assistance, officials at the IMF and elsewhere imposed conditions — that the developing countries liberalise their financial markets and open up their domestic markets to a flood of goods from the advanced countries, even as the advanced countries refused to open their markets to the agricultural goods of the south. The policies failed: Africa saw its per capita income fall; Latin America saw stagnation, with the benefits of the limited growth going to a small sliver at the top.” — Excerpt from the book
Stiglitz is not just a doomsday prophet. He has, along with criticising the current economic policies, suggested remedial measures too. He vehemently states that “widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves.” His central message is that any government can address the issue of inequality by astutely utilising the economic tools on hand — such as finding the right placement for the burden of taxation, effective monitoring and regulation of financial institutions, investing in human resources to gain long-term benefits, providing for the essential needs of its citizens, etc. Moreover, he cites the example of free university education introduced in Mauritius which, according to him, should also be adopted by the US.
The central theme of the book is also relevant to the economic issues and policy-making in Pakistan. Although Pakistan’s GDP has been increasing over the last 25 years, a larger share of income is concentrated in the hands of a few. According to figures released by the government, the reported income of the richest 20pc of households has been almost 7pc higher than the poorest 20pc households over the last 25 years. To improve this situation, important lessons can be learnt from the ideas proposed by Stiglitz. We need to create a fairer economic regime and a political system that treats everyone equally.
The strength of this book is that although it has been written for the layperson, it addresses such issues in a way that can be useful to economists and policymakers as well. Stiglitz weaves his narrative in an easy to comprehend style. The central message of the book is very clear: “the level of inequality in America is not inevitable; it is not the result of inexorable laws of economics. It is a matter of policies and politics.”
The reviewer is a civil servant and a freelance writer.
The Great Divide
By Joseph E. Stiglitz
Allen Lane/Penguin Books,
Published in Dawn, Books & Authors, June 12th, 2016