For Stiglitz, inequality the crux of the problem
IGE Chairman SaKong Il, left, discusses global economic issues with Joseph Stiglitz, professor at Columbia University, in February on the campus in New York. Photo by Ahn Jeong-gyu
This time, they got together on the campus of Columbia University in New York to have a discussion on current issues surrounding the global economy.
SaKong: I am sure the Korean audience would be very much interested in knowing what occupies you most nowadays and what the INET is about.
Stiglitz: I guess I would say there are three different areas that I have been involved in recently. One of them is inequality, which has become a very big issue. I had this book “The Price of Inequality” that came out about how today’s divided society hampers our future. The second is another book that just came out a few months ago, “Creating a Learning Society,” which is about innovation and how government policies affect innovation.
Joseph Stiglitz
SaKong: It’s interesting because the current Korean government put out a policy objective of establishing a “creative economy.”
Stiglitz: Right. I tried to understand what it is that we need to stimulate that kind of creativity and that kind of learning society. I chose the title “Creating a Learning Society” to emphasize it’s not just the economy, it’s the whole way we structure our entire society.
SaKong: The Korean audience would also share your views regarding the current state of the world economy, specifically that of the United States, eurozone, Japan and China, from both short term and medium to long term points of view. First, how do see the U.S. economy?
Stiglitz: Clearly, the U.S. is doing better than the rest. But it’s a low benchmark. We are coming up a little bit. But it’s very weak. Labor force participation is still lower than it has been for the past 30 years or so. So it’s still the case that very large numbers of Americans who would like a full-time job can’t get one. When I was chairman of the Council of Economic Advisers, we were growing in the 1990s at 3 to 3.5 percent. No one sees that on the immediate horizon. And what’s so striking is that when you have a deep downturn like we did in the 1980s, we then normally have 6 percent growth. The recession began in 2007 and we are now in 2015, eight years later, and the comeback is below the historic trend. So we can feel good that things are better, but we should feel worried that we are not doing as well as we should be. This is where inequality comes in. The median income of people in the middle is lower than it was a quarter century ago. The median income of a full-time male worker is lower than it was 40 years ago. So the GDP per capita may be going up inimically, slowly, but even that low growth is not shared. And if you are asking about a country where people in the middle have had no growth for 25 to 40 years, you have to say that’s a failed economy. I’d say something is fundamentally wrong. But we are better than Europe.
SaKong: So your major concern from a mid- to long-term perspective is inequality. It’s not just a sociopolitical issue. It can become an economic issue in itself. Can you elaborate more on that?
Stiglitz: Inequality is both a short-run problem and a long-run problem. I think inequality weakens our economy and the way our economy is organized feeds inequality. It also has broader political and social consequences. So I think that you’re hearing economic complacency and a certain degree of optimism because we are doing better than Europe. I don’t want to be a dismal economist, but when I look at what’s happening to the vast majority of Americans, it’s not very good.
SaKong: What are the main causes and remedies you would suggest?
Stiglitz: Well, that is the major source of debate. When I look at America vis-a-vis, say, Scandinavian countries, the same rules of economics apply in Northern Europe and the U.S. Yet the outcomes are very different. So it says to me it’s not just about economics, but it’s about government policies and politics. We shaped our economy in ways that help the 1 percent, but not the rest. So just to give you a couple of important examples, people like Warren Buffet pay a tax at a rate that’s half of what people who are not so rich pay. Half [of the rich] underreported their income, but they don’t have to report most of their income because it’s unrealized capital gains. So we have a tax system that feeds this inequality. And then we have problems in corporate governance. We have problems in monopolies by Microsoft and telecom companies. We have problems, a whole variety of rent seeking, particularly in the financial sector. The banks took advantage of everybody. They took advantage of poor people with abusive credit card practices and predatory lending. They took advantage of rich people with market manipulation. But what they did didn’t lead our economy to grow faster. It led to more instability. We’re still fighting that battle.
SaKong: But you wouldn’t go as far as Thomas Piketty’s policy recommendations on wealth.
Stiglitz: Well, some of my work has been directed at the same issues. That’s right. Those are the issues I worked on for my thesis. I don’t think it’s about capitalism in the 21st century as much as it is about democracy and politics in the 21st century. So I don’t think it’s inevitable. I do think that you have to at least tax capital at the same rate you tax workers. You have to have a fair tax system. I think you do have to think about taxing inheritances if you want to prevent the creation of plutocracies. In the United States, we have an education system where we effectively spend more on the rich than we do on the poor. We have 25 percent of our young people grow up in poverty. They don’t have enough food, they don’t have adequate health care and they don’t have access to a good education. And that’s part of the perpetuation of inequality.
SaKong: I agree. A badly organized education system will worsen intergenerational income distribution and perpetuate poverty and inequality.
Stiglitz: There’s no inherent reason why you should treat so many of your young children that way. It’s not their fault. It’s a question of making sure everybody has opportunities. We don’t have that. We talk about the American Dream, about America being a land of opportunity. But it’s not true anymore. It’s not true.
SaKong: I’m afraid Korea needs a major reform in the nation’s education system as a whole.
Stiglitz: What worries me is that so many other countries are going in an undesirable direction. America has always been the heart of influence on the world, but I’m afraid we’re now setting a very bad example.
SaKong: I personally feel that Piketty made a contribution to the global community by drawing attention to this serious global phenomenon of inequality. But again, we can have different views from his policy prescriptions. What bothers me the most is in regard to his analysis of return on capital. How do you distinguish the reward for entrepreneurship from just the provider of capital? How can you separate this out in an empirical context?
Stiglitz: My own view is disproportionately in rent seeking. In the U.S. not that long ago, CEO pay was 30 times that of average worker. In many countries in Asia, it’s 10 times. It’s now 250 to 300 times. Has there been an increase in productivity? No. It’s not about entrepreneurship, not about incentives. And CEOs were engaged in a real swindle to take money from the rest of the corporations and then say we don’t have enough money to pay our workers. I find it unconscionable.
SaKong: What I am saying is that for taxation purposes, we have to go beyond the very simple minded Neoclassical model.
Joseph Stiglitz
* Born in 1943
* Massachusetts Institute of Technology, Ph.D. in economics
* Recipient of the Nobel Memorial Prize in Economic Sciences, 2001
* Senior vice president and chief economist of the World Bank
* Chairman of the (U.S. president’s) Council of Economic Advisers
* Founder of the Initiative for Policy Dialogue
* Professor at Columbia University
BY KANG NAM-GYUE [song.suhyun@joongang.co.kr]
with the Korea JoongAng Daily
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