Review: The Price of Inequality

The Price of InequalityAlthough I took only one economics class, in the 1970s, I am interested in the subject. After all I have to survive in whatever economy the United States has and for the last forty years the economics that politicians talk about is farther and farther from anything that Sorenson wrote about. Ohio’s Governor Kasich says that we need to give companies more money so they will hire more people. If I remember my lessons companies hire to expand their production capacity when the demand is larger than their current capacity. I don’t remember anything about hiring to relieve an over full bank account.
Obviously I need a refresher in economics. Milton Friedman is the current darling among politicians but, while studying history, I learned what happened when countries such as Chile adopted his ideas. Surely nobody in their right mind would want to do that to the United States? Studying history I learned that Adam Smith, yes, THAT Adam Smith, wrote that people worked hardest when it was for their own gain. I also read that many people complained that their slaves were lazy. It occurred to me that since slaves gained nothing from their hard labor there could be a connection between Smith’s theory and slave owners observations. When I went to find if anyone else had considered a correlation between the two ideas I found the name Joseph Stiglitz. He also was a winner of the 2001 Nobel Memorial Prize in Economics and an economic adviser to the last President to run a surplus. That was enough for me to decide to read his most recent book.
“The Price of Inequality” is written in plain language, mostly. Of the few economic terms that I had some difficulty with, mostly because they have meanings to economists slightly different than what they have in standard English, Stiglitz eventually got through even to me. “Rents” are bad because they add cost without adding value. My grandparents rented rooms but they had to maintain the buildings, which added value back to the buildings as they naturally depreciated over time. When my parents rented the family farm to someone else they added nothing. The farmer paying the rent also made all the investments in tools, seed, fertilizer, and labor. The land could have laid fallow and still maintained its value. “Rent” to an economist is income that comes not from work but from special situations such as possessing capital (my parents farm), monopolies, and subsidies.
Stiglitz is very good at explaining economic concepts. It seems that demand is out of fashion at the moment but it is still very important in the real world, as is most of what I learned from studying Sorenson 40 years ago. Friedman, in his day made some very important observations but when the data disputed his claims the Chicago School became more faith based than data driven. They adopt stands like “the market is right, but even when it’s wrong its not the market’s fault” and “the government is incapable of beneficial actions, even when they save our bacon”
One of the interesting topics Stiglitz examines is the question “is inequality necessary to provide incentives to work hard”. His answer seems to be a qualified yes with the stipulation that incentive pay has to be designed to be just that. As he pointed out bankers received what were originally called “incentive bonuses” even when they banks failed miserably. After some public outcry over millions of taxpayer dollars being paid out as bonuses for essentially mortally wounding the world economy the the only concession bankers made was to change the name of the payments to “retention bonuses”. Why anyone responsible for the meltdown was retained is beyond my imagination. In fact I agree with Stiglitz that many of them should have been detained in jails for the blatant fraud they perpetrated on their clients.
Every government policy has winners and losers. Adjusting government policy to assure that the top never lost, even when it failed, is what has created the massive inequality we face today. Stiglitz shows us how it came about and explains the dangers involved in allowing it to continue. His explanations are clear and he provides good foundations for his arguments but I do wish he had limited his use of“as we saw in a previous chapter” and the “now we will examine” but that is a minor point. The only real problem I have with Stiglitz is that he is so pessimistic.

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