Stiglitz on Inequality (Part 1)

Recently a French economist, Thomas Picketty, has been making headlines around the world with the publication of his book Capital in the Twenty-first Century.  In it, Picketty describes the sharp rise in the incomes and wealth of the top 1% and 10% of society.  This, claims Picketty, suggests that politics and how wealth is distributed must be addressed.

Yet, Picketty and his ideas are not new.  Richard Wilkinson and Kate Pickett’s excellent book The Spirit Level¹ (first published 2009) showed the damaging relationship between inequality and social ills in society.  Joseph Stiglitz, ex-Chief Economist at the World Bank and Nobel prize winner in economics, has been studying inequality since the 1960s and published The Price of Inequality in 2013.

On 8 July 2014 Joseph Stiglitz discussed his ideas about inequality and the perils of not addressing it to an audience at the Sydney Town Hall.  A member of the Economic Society was in the audience and wrote this guest blog for Rainbow Juice.



Joseph Stiglitz with Sydney Mayor: Clover Moore

 

“Regardless of which side of the Pacific you’re on, the laws of economics remain the same,” says Joseph Stiglitz, Nobel Laureate in Economics and author of The Price of Inequality.  Stiglitz suggests that it is politics and policies which, for good or bad, govern the degree of inequality that a society permits.  The role of government, Stiglitz argues, is to step in where the market fails and to craft the most appropriate rules for an equitable distribution of income, wealth and resources.  In The Price of Inequality, Stiglitz appeals to the economist’s bent to put a “price on everything,” but his arguments extend beyond the economic domain.  Over the past 40 years, the rising disparity in health, wellbeing, access to justice and political representation for the citizens of many advanced economies has accompanied the divergence in their money incomes.  A number of such citizens packed Sydney’s Town Hall to watch Stiglitz discuss the dimensions, causes and consequences of rising inequality, and to hear how to close the gap.  A video of the lecture and of the panel discussion which followed can be found here. 

Dimensions of Inequality

Stiglitz has studied inequality for nearly 50 years, beginning with his PhD research in 1966 and culminating in The Price of Inequality, published in 2013.  Although he has mainly traced the re-emergence of inequality in the United States economy over the past half century, Stiglitz contends that similar troubling trends are emerging in Australia and other nations of the western world.  He suggests that if Australia wants to emulate the policies of the US, which is “the world’s largest producer of inequality,” it should also be prepared to suffer a more divided and malcontent society.

In the United States, inequality has afflicted all three tiers of the income distribution.  The income received by the highest-earning 1% of the population has roughly doubled over the past 30 years.  Despite the US recession technically ending in 2009, the top percentile has claimed almost 95% of the total income earned in the intervening years.  The middle class in the United States works harder than it ever has, but continues to struggle: meanwhile average workers can now produce twice as much as they could 40 years ago, yet the reward for production - average hourly wages - has fallen by almost 10%.  Furthermore, the ranks of the lowest income earners have swelled, stifled by a minimum wage which is unchanged from its level 50 years ago.  Although Australia may not produce the most inequality, it is quickly catching up to the standard set by the US.  The distribution of Australia’s income to citizens is the third most skewed among developed economies.  Government redistribution, in taxes and welfare payments, does little to improve Australia’s relative ranking among its peers.


Stiglitz argues that a resource-rich economy such as Australia should be far more equal.  Resources are pure “common wealth”, which can be taxed much more heavily, for the benefit of citizens, who can be compensated more justly.


Stiglitz suggests that Norway, rather than the United States, should be Australia’s role model in this sense.  Similarly endowed with natural resources, Norway has the most equal distribution of incomes among advanced economies, due to taxes on oil and gas exploration and a sovereign wealth fund which belongs to all citizens.


Stiglitz notes that countries which have tried to impose the ‘US model’ have mostly succeeded in creating a less egalitarian society. (my emphasis - ed)


1. Richard Wilkinson & Kate Pickett, The Spirit Level: Why equity is better for everyone, Penguin, London, 2009, 2010.


Part 2 (next week) will continue Stiglitz’s discussion of the causes of inequality, the consequences of inequality and suggest some ways to address inequality.