Joseph Stiglitz in his latest book “The Price of Inequality” has raised many questions on the current state of America’s democracy and system of justice. He examines how monetary policy, budgetary policy and globalisation have contributed to the polarisation of society.
In his view the failure is as much political as economic. His popular phrase “Of the one per cent, by the one per cent and for the one per cent” (which inspired the slogan “We are the 99 per cent” by Occupy Wall Street movement) reflects the theme of the book which points out that on the whole, America’s wealthy prosper while the average citizen struggles.
The richest one per cent of Americans gained 93 per cent of the additional income created in 2010.
A fundamental goal of political and economic progress is to provide equality of opportunity to all. Those at the bottom of the economic strata should have equal educational facility, health care, access to law and order to come of out their economic plight.
Worldwide protests marked by Arab Spring, Occupy Wall Street movement and uprising in Spain and Greece, resonate three themes: The markets weren’t working the way they were supposed to; political system hadn’t corrected the market failures; and the economic and political systems are fundamentally unfair.
In today’s world, recovery and growth are not synonymous with jobs and well being/upward mobility of the masses. Conventional measures like GDP/ per capita incomes are not a good measure of economy’s performance.
A case in point is that one of the states in the US is spending as much on prison as on its universities.
Globalisation and technology both have contributed to polarisation of the labor market. Globalisation, which is shaped by policies, allows for protection of the vested interests.
The onslaught of hot money in and out of the country; race to the bottom of taxes to attract multinationals; lowering of benefits for the labour are some of the adverse effects of globalisation which need to be tampered with.
Capital seeking safe harbour has worked to create trade imbalance which doesn’t always work in the favour of the recipient country. Investment and innovation has to be redirected to preserve jobs and environment.
Reforms needed to build a more equitable society include greater regulation of the financial sector; investment in relocation and retraining of workers; improving corporate governance; end of hidden subsidies to the corporate sector; strengthening social protection programmes; reduction in trade imbalances and a greater reliance on fiscal policies as compared to monetary policies.
The central focus of today’s macroeconomic policy is to contain inflation which may be a yesterdays’ problem.
Today’s plight is that the regulated have the financial muscle to influence the regulators and formulate policies which serve their interests. Basically, they can have their cake and eat it too. Similarly, in many organisations powerful CEOs are able to decide their own pay structures.
The CEOs have continued to get retention bonuses (as they can no longer be called performance bonuses) while the average worker has lost his job or is working for a lot less.
Taxation reforms which close the loopholes and progressively tax the ‘rent seekers’, (basically owners of capital) as compared to those who work for a living may serve the cause of building an equitable society.
Capital gains tax may be raised to become more at par with the income tax rate.
In the presence of media moguls and their commercial mindset which is greatly influenced by the rich one percent, there is need for the government to provide a competitive marketplace of ideas. It should sponsor think tanks and a more democratic media which can present a balanced debate about wisdom of alternate policies.
The reversal of this trend where top are growing fast and bottom are declining is essential for the top one per cent as well because their fate is intertwined together with the remaining 99 per cent. Alienation as opposed to social cohesion where rich live in gated communities may become the future if the direction is not changed now.
Brazil has successfully reversed this trend by reducing social and political divisiveness and focusing on long-term economic growth. Education and social welfare programmes have played their due role.
The state’s intervention in the markets must lead to restoration of equality of opportunity, justice and most importantly a sense of fair play in order to achieve widespread prosperity. In the final analysis, words of the ex-IMF chief economist sum it up: “Ultimately, employment and equity are the building blocks of economic stability and prosperity; of political stability and peace…....It must be placed at the heart of policy agenda.”