Monday, January 5, 2015

Joseph Stiglitz and his "Radical" Ideas

(Editor's Note: Below are excerpts from Stiglitz: Theories of just Deserts and of Exploitation (by Branko Milanovic regarding Joseph Stiglitz at Global Inequality, followed by my comments.)

Economic theories, says Stiglitz, dealing with inequality fall into two groups:

1) Those that are based on marginal productivity and neoclassical production function — where the earnings of the factors of production are supposed to be determined impersonally by the market, or...

2) Where returns to capital are explained by “abstinence” or “waiting”. This second group of theories regards incomes as determined largely by exploitation, political or economic power, rent-seeking, cronyism, imperfect information and monopolies.

Stiglitz’s emphasis is on the second strand of literature. So, while his classification is useful, I thought that the real decision is whether one subscribes 100% to the marginal productivity theory (that is, all incomes are determined by the market) — in which case, there is little to say about distribution of income as such — or we accept that it is only, say 80% or 50% or 20% of all incomes that are thus determined. Perhaps one could argue that today in the US, only 50% of all incomes are determined by the market and that it used to be 80%.

Only Marx’s theory of exploitation among those listed by Stiglitz would be different, because capital earnings do not appear there as unfair, or due to some departure from a “normal” functioning of capitalism, as in rent-seeking, but are indeed part of the normal functioning of capitalism, moreover its very definition.

Stiglitz proposed an interesting view of drivers of inequality in today’s US. The principal role belongs to finance, which made credits more easily available — which in turn, led to over-investment in housing and to the increase in the wealth/GDP ratio, discussed by Piketty.

But that increase, while real, was not conducive to greater productivity — because what increased, was the value of land, not the physical quantity of productive capital. Banks, instead of lending to companies to invest in new capital, lent to the public, which spent the money on housing and unproductive assets. Stiglitz here rejoins, but Stiglitz presents it as a solution to the “Piketty puzzle”: How come the wealth/income ratio went up but the marginal product of capital did not go down, and most importantly, wages did not increase?

An important implication, if you hold that a significant number of incomes are determined by the “second” theories (exploitation and market failure) is that there is no trade-off between inequality and growth. Lower top incomes reduce inequality and increase growth.

Finally, Stiglitz thought that the sources of inequality in the United States today are so profound that, small tinkering with the minimum wage and more affordable education, (etc.) will not go to the root of the problem. He thought that more radical approaches, possibly cap on highest incomes and significantly increase tax rates (etc.) were necessary. But, to the best of my recollection, he was not very specific about the actual “more radical” measures.

One aspect in the discussions on inequality that I find strangely absent is broader ownership of capital. If one of the drivers of inequality are capital incomes (and “allied” incomes like those of top management), this is because they are heavily concentrated. “Deconcentration” of capital incomes (that is, much wider ownership, particularly of equities) is then a solution. But it is seldom mentioned.

Below is the comment that I left at Branko Milanovic's blog — because he never posted it (the hyperlinks were not included in the original comment):

No matter how much fiat currency is digitally created out of thin air (such as QE), rather than producing real wealth via labor, capital will always be the best leverage against raising wages. When capital is hoarded, it is not being circulated among the masses (the working-class), but instead, is constantly being forwarded via low-taxed inheritances.

Why does any one human being need $70 billion? There should be a maximum wage and a much higher minimum wage (aka "a living wage"). Maybe we can raise the minimum wage for companies with gross revenues over $5 million a year to $15 an hour (maybe to $10 an hour for revenues less than that); and then index it to inflation (CPI) going forward. That way Congress will never have to vote on this again. Also, raise the minimum wage for "tipped employees" from $2.13 an hour to $10 an hour (If States wish to raise theirs above that level, fine.)

Stiglitz's ideas are only thought of as "radical" today because it was never the "norm" before. And this will never change, because only Congress (who are owned controlled influenced by those with capital) can change the rules. And we can't change Congress (to change the rules) because the Supreme Court allowed those with the most capital to have the biggest and loudest megaphones.

But if we could change Congress, we could do this:

1) Give all American corporations 5 years (or maybe 10 years) to reshore all the jobs they outsourced to foreign countries over the last 30 years; then after that, ban the import of all American-made products manufactured overseas. If an American corporation chooses to use "inversion" as a way to bypass this import ban (and to avoid corporate taxes), then ban all their imports permanently. (Then see how many companies will step in to fill the void and cater to the needs of the domestic market).

2) If the GOP insists on a lower corporate tax rate (say 25%), then eliminate ALL their tax write-offs (private jets, etc) and have a flat tax of 25% on all gross revenues. Also, eliminate the provision that allows the CEO's (and other execs) to have their multimillion pay packages deducted from their taxes.

3) I would also completely eliminate the capital gain tax on income derived from the sale of stocks, fine art, wine collections, antique cars, beachfront mansions, gold, diamonds, etc. (aka SWAG investments) and tax ALL personal income at the same rate as the current tax rate is for regular wages — and tax this income for Social Security as well. (And the same would apply for inheritances and "gifts".)

4) Make it illegal for all American citizens (who reside in the U.S.) to hold personal foreign bank accounts to stash cash in IRA accounts (And have the IRS hire more tax auditors to oversee those with incomes above $5 million a year.)

My final comments: Joseph Stiglitz's ideas aren't "radical" at all. Extreme inequality is much more radical, and very destructive to humankind as well.

Our corporate "job creators" always use the argument for offshoring domestic jobs to low-wage countries as a means for being "globally competitive"; and then, to justify their actions, they point to the results of raising the standard-of-living for people in those countries — even if it's at the determent to people (workers) in their own country. Many of these foreign countries use child, prison and slave labor; but nonetheless, our corporate masters believe in consequentialism (the end justifies the means).

Which bring us back to my question: Why does any one human being need $70 billion? There is only one possible answer to that: So they can play "God" — by being the sole person to decide how resources are used and distributed — such as circumventing democracies by using labor in other countries with no democracy at all, and circumventing democracy within a democracy by using charities and "foundations" to ultimately decide how resources are used and distributed among the people (meaning, not always or necessarily for the greater good).

The super-rich are usually never in step with the will, best interests or/and the opinions of common people — so based solely on their own personal view of the world, and what they think is ethically and morally right, they decide who gets what and when and how much (by playing "God").

And to become even richer still, even though it has no bearing whatsoever on their own standard-of-living (and holds very little consequence to their heirs), they also do whatever they can to avoid any and all taxes, revenues that can be used to fund government, which allocates and distributes resources in a way that the collective will of the masses might prefer — whether it's rebuilding our collapsing infrastructure or making helicopter drops.

Joseph Stiglitz's ideas aren't "radical". What's radical is the runaway greed that our elected leaders have enabled — who themselves were enabled by our Supreme Court. Change the court, and we can change Congress. Change Congress, and the will of the people can finally prevail. But the damage that has already been done to our democracy is probably now permanent. So Joseph Stiglitz's ideas aren't "radical" — they're just pipe dreams.

And why does any one human being need $600 million yacht? (click image to enlarge)

$600 million yacht


  1. Quotable:

    “I had this discussion with Bill Gates a couple of weeks ago. He told me, ‘I love everything that’s in your book, but I don’t want to pay more tax.’” -- Thomas Piketty, author of Capital in the Twenty-First Century, Bloomberg News, January 3, 2015.

  2. The new GOP Congress is looking for ways to cut taxes, forcing cuts in social programs...

    CBS News: "Now that Republicans have taken control of the House and Senate, they are pushing to change how the Congressional Budget Office (CBO) and the Joint Tax Committee (JTC) evaluate tax legislation. The effort is being made on two fronts. The first is an attempt by many Republicans to replace the director of the CBO, Doug Elmendorf, with someone more sympathetic to a new approach to evaluating the budgetary impact of proposed legislation. The second is a push from Rep. Paul Ryan, R-Wisconsin, who will take over as chair of the to the Ways and Mean Committee ... Some Democrats worry that CBO director Elmendorf will be replaced by someone willing to cherry pick the evidence on tax cuts to benefit Republican proposals and minimize benefits of the change to Democratic legislation. That would politicize an institution that has done its best to evaluate the budgetary impact of legislative proposals based upon solid evidence rather than politics and ideology and do great harm to an important part of the legislative process."

    New York Times: A Republican Ruse to Make Tax Cuts Look Good: "The Republicans’ interest in dynamic scoring comes from political factions convinced that tax cuts are the panacea for all economic ills. They will use dynamic scoring to justify a tax cut that, under conventional scorekeeping, loses revenue. When revenues do in fact decline and deficits rise, those same proponents will push for steep cuts in government insurance or investment programs, because they will claim that the models demand it. That is what lies inside the Trojan horse of dynamic scoring."

    1. The typical GOP “Starve the Beast” strategy.

  3. Paul Krugman (January 2015)

    I think if you were going to name the two current econoheroes of U.S. liberals they would probably be Joe Stiglitz and yours truly.

    Now, who would be the conservative counterparts? Who gets cited by, say, Republican governors seeking authority for their tax cuts, or published on a regular basis on conservative opinion pages? I’d say Stephen Moore and Arthur Laffer. And it’s not as if Moore and Laffer are guys who may lack academic cred but have proved themselves as working analysts. On the contrary, they’re guys who can’t even cook numbers without screwing up, who have spent years telling us to get ready for soaring interest and inflation rates. But it doesn’t matter; being right is not what they’re paid for. So in trying to understand where the Milton Friedmans of yore have gone, you want to look at the demand side. The right lacks heavyweight economists with independent reputations partly because they are hard to find, but also because it doesn’t want them. Only hacks need apply.