Authors: Joseph E. Stiglitz
Tags: #Business & Economics, #Economic Conditions
Freefall: America, Free Markets,
and the Sinking of the World Economy
The Three Trillion Dollar War:
The True Cost of the Iraq Conflict
(with Linda J. Bilmes)
Making Globalization Work
The Roaring Nineties
Globalization and Its Discontents
W. W. N
To Siobhan and Michael and Edward and Julia,
In the hopes that they will inherit
a world and a country that are less divided
HERE ARE MOMENTS IN HISTORY WHEN PEOPLE ALL
over the world seem to rise up, to say that
something is wrong
, to ask for change. This is what happened in the tumultuous years 1848 and 1968. Each of these years of upheaval marked the beginning of a new era. The year 2011 may prove to be another such moment.
A youth uprising that began in Tunisia, a little country on the coast of North Africa, spread to nearby Egypt, then to other countries of the Middle East. In some cases, the spark of protest seemed at least temporarily doused. In others, though, small protests precipitated cataclysmic societal change, taking down long-established dictators such as Egypt’s Hosni Mubarak and Libya’s Muammar Qaddafi. Soon the people of Spain and Greece, the United Kingdom, and the United States, and other countries around the world, had their own reasons to be in the streets.
Throughout 2011, I gladly accepted invitations to Egypt, Spain, and Tunisia and met with protesters in Madrid’s Buen Retiro Park, at Zuccotti Park in New York, and in Cairo, where I spoke with young men and women who had been at Tahrir Square.
As we talked, it was clear to me that while specific grievances varied from country to country and, in particular, that the political grievances in the Middle East were very different from those in the West, there were some shared themes. There was a common understanding that in many ways the economic and political system had failed and that both were fundamentally unfair.
The protesters were right that something was wrong.
The gap between what our economic and political systems are supposed to do—what we were told they did do—and what they actually do became too large to be ignored. Governments around the world were not addressing key economic problems, including that of persistent unemployment; and as universal values of fairness became sacrificed to the greed of a few, in spite of rhetoric to the contrary, the feeling of unfairness became a feeling of betrayal.
That the young would rise up against the dictatorships of Tunisia and Egypt was understandable. The youth were tired of aging, sclerotic leaders who protected their own interests at the expense of the rest of society. They had no opportunities to call for change through democratic processes. But electoral politics had also failed in Western democracies. U.S. president Barack Obama had promised “change you can believe in,” but he subsequently delivered economic policies that, to many Americans, seemed like more of the same.
And yet in the United States and elsewhere, there were signs of hope in these youthful protesters, joined by their parents, grandparents, and teachers. They were not revolutionaries or anarchists. They were not trying to overthrow the system. They still believed that the electoral process
work, if only governments remembered that they are accountable to the people. The protesters took to the streets in order to push the system to change.
The name chosen by the young Spanish protesters in their movement that began on May 15 was “los indignados,” the indignant or outraged. They were outraged that so many would suffer so much—exemplified by a youth unemployment rate in excess of 40 percent since the beginning of the crisis in 2008—as a result of the misdeeds of those in the financial sector. In the United States the “Occupy Wall Street” movement echoed the same refrain. The unfairness of a situation in which so many lost their homes and their jobs while the bankers enjoyed large bonuses was grating.
But the U.S. protests soon went beyond a focus on Wall Street to the broader inequities in American society. Their slogan became “the 99 percent.” The protesters who took this slogan echoed the title of an article I wrote for the magazine
, “Of the 1%, for the 1%, by the 1%,”
which described the enormous increase in inequality in the United States and a political system that seemed to give disproportionate voice to those at the top.
Three themes resonated around the world: that markets weren’t working the way they were supposed to, for they were obviously neither efficient nor stable;
that the political system hadn’t corrected the market failures; and that the economic and political systems are fundamentally unfair. While this book focuses on the excessive inequality that marks the United States and some other advanced industrial countries today, it explains how the three themes are intimately interlinked: the inequality is cause and consequence of the failure of the political system, and it contributes to the instability of our economic system, which in turn contributes to increased inequality—a vicious downward spiral into which we have descended, and from which we can emerge only through concerted policies that I describe below.
Before centering our attention on inequality, I want to set the scene, by describing the broader failures of our economic system.
The failure of markets
Markets have clearly not been working in the way that their boosters claim. Markets are supposed to be stable, but the global financial crisis showed that they could be very unstable, with devastating consequences. The bankers had taken bets that, without government assistance, would have brought them and the entire economy down. But a closer look at the
showed that this was not an accident; the bankers had incentives to behave this way.
The virtue of the market is supposed to be its efficiency. But the market obviously is
efficient. The most basic law of economics—necessary if the economy is to be efficient—is that demand equals supply. But we have a world in which there are huge unmet needs—investments to bring the poor out of poverty, to promote development in less developed countries in Africa and other continents around the world, to retrofit the global economy to face the challenges of global warming. At the same time, we have vast underutilized resources—workers and machines that are idle or are not producing up to their potential. Unemployment—the inability of the market to generate jobs for so many citizens—is the worst failure of the market, the greatest source of inefficiency, and a major cause of inequality.
As of March 2012, some 24 million Americans who would have liked a full-time job couldn’t get one.
In the United States, we are throwing millions out of their homes. We have empty homes and homeless people.
But even before the crisis, the American economy had not been delivering what had been promised: although there was growth in GDP,
most citizens were seeing their standards of living erode
. As chapter 1 shows, for most American families, even before the onset of recession, incomes adjusted for inflation were lower than they had been a decade earlier. America had created a marvelous economic machine, but evidently one that worked only for those at the top.
So much at stake
This book is about why our economic system is failing for most Americans, why inequality is growing to the extent it is, and what the consequences are. The underlying thesis is that we are paying a high price for our inequality—an economic system that is less stable and less efficient, with less growth, and a democracy that has been put into peril. But even more is at stake: as our economic system is seen to fail for most citizens, and as our political system seems to be captured by moneyed interests, confidence in our democracy and in our market economy will erode along with our global influence. As the reality sinks in that we are no longer a country of opportunity and that even our long-vaunted rule of law and system of justice have been compromised, even our sense of national identity may be put into jeopardy.
In some countries the Occupy Wall Street movement has become closely allied with the antiglobalization movement. They do have some things in common: a belief not only that something is wrong but also that change is possible. The problem, however, is not that globalization is bad or wrong but that governments are managing it so poorly—largely for the benefit of special interests. The interconnectedness of peoples, countries, and economies around the globe is a development that can be used as effectively to promote prosperity as to spread greed and misery. The same is true for the market economy: the power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them. At their best, markets have played a central role in the stunning increases in productivity and standards of living in the past two hundred years—increases that far exceeded those of the previous two millennia. But government has also played a major role in these advances, a fact that free-market advocates typically fail to acknowledge. On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers. For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens. And that has to be done repeatedly, to ensure that they continue to do so. That happened in the United States in the Progressive Era, when competition laws were passed for the first time. It happened in the New Deal, when Social Security, employment, and minimum-wage laws were passed. The message of Occupy Wall Street—and of so many other protesters around the world—is that markets once again must be tamed and tempered. The consequences of not doing so are serious: within a meaningful democracy, where the voices of ordinary citizens are heard, we cannot maintain an open and globalized market system, at least not in the form that we know it, if that system year after year makes those citizens worse-off. One or the other will have to give—either our politics or our economics.
Inequality and unfairness
Markets, by themselves, even when they are stable, often lead to high levels of inequality, outcomes that are widely viewed as unfair. Recent research in economics and psychology (described in chapter 6) has shown the importance that individuals attach to fairness. More than anything else, a sense that the economic and political systems were unfair is what motivates the protests around the world. In Tunisia and Egypt and other parts of the Middle East, it wasn’t merely that jobs were hard to come by but that those jobs that were available went to those with connections.
In the United States and Europe, things seemed more fair, but only superficially so. Those who graduated from the best schools with the best grades had a better chance at the good jobs. But the system was stacked because wealthy parents sent their children to the best kindergartens, grade schools, and high schools, and those students had a far better chance of getting into the elite universities.
Americans grasped that the Occupy Wall Street protesters were speaking to
values, which was why, while the numbers protesting may have been relatively small, two-thirds of Americans said that they supported the protesters. If there was any doubt of this support, the ability of the protesters to gather 300,000 signatures to keep their protests alive, almost overnight, when Mayor Michael Bloomberg of New York first suggested that he would shut down the camp at Zuccotti Park, near Wall Street, showed otherwise.
And support came not just among the poor and the disaffected. While the police may have been excessively rough with protesters in Oakland—and the thirty thousand who joined the protests the day after the downtown encampment was violently disbanded seemed to think so—it was noteworthy that some of the police themselves expressed support for the protesters.
The financial crisis unleashed a new realization that our economic system was not only inefficient and unstable but also fundamentally unfair. Indeed, in the aftermath of the crisis (and the response of the Bush and the Obama administrations), almost half thought so, according to a recent poll.
It was rightly perceived to be grossly unfair that many in the financial sector (which, for shorthand, I will often refer to as “the bankers”) walked off with outsize bonuses, while those who suffered from the crisis brought on by these bankers went without a job; or that government bailed out the banks, but was reluctant to even extend unemployment insurance for those who, through no fault of their own, could not get employment after searching for months and months;
or that government failed to provide anything except token help to the millions who were losing their homes. What happened in the midst of the crisis made clear that it was
contribution to society that determined relative pay, but something else: bankers received large rewards, though their contribution to society—and even to their firms—had been
The wealth given to the elites and to the bankers seemed to arise out of their ability and willingness to take advantage of others.
One aspect of fairness that is deeply ingrained in American values is opportunity. America has always thought of itself as a land of
Horatio Alger stories, of individuals who made it from the bottom to the top, are part of American folklore. But, as we’ll explain in chapter 1, increasingly, the American dream that saw the country as a land of opportunity began to seem just that: a dream, a myth reinforced by anecdotes and stories, but not supported by the data. The chances of an American citizen making his way from the bottom to the top are less than those of citizens in other advanced industrial countries.