Joseph Stiglitz: Inequality is preventing a recovery

The New York Times’ Opinionator features a great piece by Nobel Prize-winning economist Joseph Stiglitz about a subject that gets far too little attention: the relationship between economic inequality and the wretchedly slow pace of our alleged economic recovery. Stiglitz points to four main reasons inequality is, as he puts it, “squelching” our recovery:

The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth.

[Snip]

Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.

Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks.

[Snip]

Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable.

Stiglitz also notes that, contrary to the myth of America as a land where anyone can make it, social mobility is actually much higher in countries like Sweden, Canada, France, and Germany. He also highlights this shameful statistic:

More than a fifth of our children live in poverty — the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece

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What, then, can we do to increase equality? Well, Stiglitz does point out that “the countries that responded most effectively to the global financial crisis, like Germany and Sweden, have strong unions and strong systems of social protection.” He also adds:

What’s needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.

That is clearly the case, but that is also just the beginning. Earlier in the piece Stiglitz writes that, “Economic inequality leads to political inequality and a broken decision-making process.” Sadly, this is a vicious cycle; economic inequality tends to entrench our broken political system, which in turn makes in very difficult to do anything about inequality. Under even the most optimistic scenarios, Obama’s second term is not likely to bring anything better than mild to moderate improvements in a few discrete economic areas. But it’s highly unlikely to reverse the overall dynamic.

UPDATE: On his blog, Paul Krugman writes that, in spite of his great respect for Stiglitz and his general concerns about inequality, he disagrees with Stiglitz’s argument.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee