The Price of Inequality

This chapter examines the second battlefield upon which inequality is fought: the budget, and how government spending and taxes can be used to lessen inequality and encourage fair economic growth that can “bring the deficit under control” (208). Stiglitz explains that budget negotiations in 2011 led to brinkmanship that hid the real problems underlying the nation’s debt and budget: unemployment, the gap between the economy’s “potential output and actual output” (209), and long-term inequality. Instead, the debate focused on the deficit.

Yet the Right’s position on this issue was contradictory, since they consistently advanced tax cuts that favored the 1 percent as a way to resolve the budget deficits, even though “around a fifth” (209) of the 2012 budget was attributed to the Bush tax cuts from the early 2000s. The budget would balance with tax policies that actually increased taxes on the wealthy, cut out loopholes, taxed the financial sector, and made those who exploit the country’s natural resources pay for them. Even with limited demand, Stiglitz argues that the budget would balance if the government made public investments (e.g., building schools, investing in technology) because it can borrow at a low cost and get more bang for its buck. The economic term for this is the balanced-budget multiplier: When “each dollar of spending generates more overall GDP” (208), then an increase in taxes and spending will engender economic growth. This way, the government can put less money into low-multiplier programs and more money into higher ones, like Social Security or benefits for American workers, which will stimulate growth across the economy.

Stiglitz suggests that the deficit can be reduced by doing the exact opposite of what the government did between 2000 and 2012. For starters, even though people disagree about how to reduce the deficit, they can agree that what they are doing now is not working. But the real reason it is not working is because of myths about the budget and the budget process. First, there is the “supply-side” myth that assumes the economy will be harmed if the rich are taxed. Stiglitz counters that the problem is with demand: If corporations make investments and put more resources into the hands of the 99 percent, then demand will certainly increase. Second is the idea that if the rich are taxed, it will hurt small business and lead to loss of jobs. Stiglitz counters that less than 1 percent will be affected, and it is only their profits, so it could be done.

Another set of myths concerns two big government spending programs, Social Security and Medicare. Social Security has nearly ended elderly poverty in America and is a valuable program. Stiglitz argues it could easily be solvent by changing the tax structure. But the Right attacks the program and argues that it should be privatized, sold, and run by private industry. Stiglitz explains that they want to do this because if Social Security were privately managed, the 1 percent could expect $26 billion in annual income from the $2.6 trillion fund. As for Medicare, the budget would go down if the United States invested in better healthcare for the 99 percent. Linked to this set of myths is the idea of “moral hazard” (229). This argument suggests that if people are given benefits, they will become dependent on them. Stiglitz believes this argument blames the wrong people; the 1 percent must share more blame, but they are unwilling to accept any.

Stiglitz also notes that austerity programs that seek to cut spending on government entitlement programs like Medicaid will not reduce debt or help the economy recover. However, investing in public programs and infrastructure, since the US can borrow at low rates, will lower the national debt. The national debt, unlike household debt, requires loans because the investments from loans will encourage growth that will pay down the debt while stimulating more growth. In the past, stimulus packages intended to stimulate growth were either too small or not in place for the right length of time, or the government looked only at financial problems and failed to look at structural problems like job loss and sectoral change. When the Right argues that stimulus packages do not encourage growth when the economy is on a downturn, Stiglitz contends that clearly the blame lays not with the stimulus but with “the country’s leaders [who] hadn’t grasped what was going on” (234).

Stiglitz believes that the problem with the economy is lack of demand, so a spend/tax balance will restore the budget and stimulate growth. The right spending will kick-start the multiplier effect, leading to employment and growth. However, austerity will do the opposite.

This chapter examines the third battlefield upon which inequality is fought: macroeconomic policy. Macroeconomics matters because it concerns the output of the entire US economy, including employment, inflation, and interest rates. Macroeconomic policy affects inequality because it shapes the distribution of income. However, the 1 percent, the financial sector, and the government steered macroeconomic policy toward fighting inflation to the detriment of other important economic indicators, such as unemployment, and ignored inequality all together.

Monetary policy (the control of the money supply or the short-term borrowing interest rate), macroeconomic policy, and the Federal Reserve’s policy combine to keep unemployment at higher rates than needed, offer little protection from aggressive bank behavior, create a jobless recovery, hide subsidies for the financial sector, and implement policies to fight inflation to protect the 1 percent’s investments. Stiglitz argues that none of these outcomes were accidents, but the Great Recession did destroy these three myths about inflation: that everyone was benefiting from America’s economic growth, that a focus on inflation alone would lead to economic growth, and that an independent central bank (the Federal Reserve) was a guarantor of economic stability.

During crises like the Great Recession, workers and small businesses are hurt the most. But banks tighten credit in a crisis, pushing up the unemployment rate, while calling for a flexible labor market, which means lower wages for workers. But this is just one problem, since the banks’ macroeconomic models exclude discussion of distribution. So, when the economy goes into crisis, banks lower rates to expand the economy, and vice versa. But in the Great Recession, the change in rates actually helped the banks, and rather than hire labor, corporations went after cheaper capital, so they set up a recovery that would likely be jobless. The top 1 percent made money from low-cost loans and bailouts, but they were also aided by deregulation.

Bankers and the 1 percent have taken risks with the economy since the 1980s because when they fail, they are bailed out by the taxpayers. The 99 percent are subsidizing reckless risk-taking with financial instruments like derivatives, but they’re getting none of the benefits.

When the government tried to regulate the banks after 2010, the banks fought back and won. They were allowed to keep trading in derivatives, which caused so much damage in the Great Recession, because the Federal Reserve had been captured by the “perspectives and worldview of the bankers” (248). Stiglitz wants to democratize the Federal Reserve, to make it more independent, because the Federal Reserve is also obsessed with inflation. The Fed and the 1 percent see inflation as an evil. So, the Fed agrees that inflation must be low for economic growth, and it maintains that the entire economy benefits when inflation is low. Stiglitz argues that both ideas are myths. While the Federal Reserve is focused on inflation, it is missing unemployment and other potential crises, like it missed the Great Recession in 2007. And the Fed also continues to rely on models that ignore distribution, so the country’s central bank is doing little to conquer inequality.

But the Fed, the banks, and other inflation haters missed other things too. When the housing bubble was forming, they could have simply adjusted the amount of money new homeowners had to put down rather than tackling the problem by adjusting interest rates. Also, in looking at unemployment as in line with a natural rate, they made it seem as if the rate was OK. But the government missed the need to increase demand by moving workers that had lost their skilled jobs in one part of the economy into another sector. Stiglitz maintains that the United States cannot afford to have a system that is run by people captured by bankers and “run for the benefit of those at the top” (264).