I don’t think I’ve ever agreed with an op-ed by economist Joseph Stiglitz as much as I do this one in the New York Times, connecting the dots between income inequality, the policies that have been adopted in reaction to the financial crisis and subsequent “Great Recession”, and the phlegmatic recovery. I particularly liked this section:
Instead of pouring money into the banks, we could have tried rebuilding the economy from the bottom up. We could have enabled homeowners who were “underwater” — those who owe more money on their homes than the homes are worth — to get a fresh start, by writing down principal, in exchange for giving banks a share of the gains if and when home prices recovered.
We could have recognized that when young people are jobless, their skills atrophy. We could have made sure that every young person was either in school, in a training program or on a job. Instead, we let youth unemployment rise to twice the national average. The children of the rich can stay in college or attend graduate school, without accumulating enormous debt, or take unpaid internships to beef up their résumés. Not so for those in the middle and bottom. We are sowing the seeds of ever more inequality in the coming years.
I don’t agree with everything in the op-ed. I don’t know that I agree with anybody on everything. Dr. Stiglitz, sadly, shares the problem of too many pundits in commenting on our economic doldrums: his post mortem analysis of what happened is much better than his prescription for moving forward. He provides few solutions other than these implied approaches:
Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.
and a few brief mentions at the end of the op-ed:
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.
We don’t need jobs in five or ten years; we need them now and I see very little in those prescriptions that will produce the jobs we need now. Is the reason jobs aren’t being created fast enough too much financial speculation? Or that our tax system isn’t progressive enough? In terms of marginal rates our system is already among the most progressive among developed countries. It would be even more progressive if the Congress and president hadn’t decided to reinstate the payroll tax.
Let’s define our terms. I think the problem of inequality in the U. S. is not that the people in the top 10% of income earners don’t earn enough or that the people in the top .1% earn too much. I think it’s that the people in the bottom 90% don’t earn enough. We will do more to improve income equality in the U. S. by increasing the incomes of the people in the bottom 10% of income earners than we will by lowering the incomes of the top .1% of income earners. Do the math and you’ll see what I mean.
Increased consumption, e.g. “investment”, of education and healthcare, in the absence of the creation of new jobs in education and healthcare, will do very little to improve income equality but will increase the incomes of the highest earners in those fields—causing the situation to deteriorate even farther. The increased “investment” in education of the last 20 years hasn’t increased the amount of health or education. It has increased the costs of administration in both areas.
Even assuming that more spending on education (we already spend more per capital on education than any other country in the world by a substantial margin) actually leads to more education, will that create more jobs? How would we be better off with PhDs in astrophysics working at the Jiffy Mart than with high school grads working there?
I think that Dr. Stiglitz is confusing today with the 1930s. Infrastructure investment, defined as roads and bridges, no longer consists of hiring large gangs of men with shovels. It involves letting contracts to a handful of approved, frequently politically-connected vendors who already own the equipment they need to do the job and employ the crews to do the work.
I do not believe that we don’t have enough roads or bridges. If anything, we have too many. I’ve documented this in the past. Towns of any great size already have ready access to an interstate highway (Any minute now someone will trot out the Civil Engineers’ report on bridges. It doesn’t say what you think it does—for example it doesn’t tell us which bridges are worth repairing.) Filling potholes in city streets may be worthwhile but I wouldn’t characterize that as investment. It’s ordinary maintenance. More of it would get done if we abandoned Davis-Bacon wages.
What are the actual reasons that we don’t have enough job creation in the U. S.? I think it’s mostly a combination of predatory monetary policy on the part of our trading partners, one-way free trade, subsidies to people in the top 10% of income earners, and rent-seeking having become a surer way to fortune than saving and investing. I would have loved to see Dr. Stiglitz’s proposals for dealing with those problems but, alas, he doesn’t mention any of them.
David Henderson has a commentary on Paul Krugman’s NYT commentary on Joseph Stiglitz’s op-ed. Here’s an interesting point:
Acceptance of Friedman’s idea has strong implications for Keynesian fiscal policy. It implies that if the government temporarily boosts people’s incomes, either with a temporary tax cut or an increase in transfer payments, people will not spend anywhere near a dollar per dollar of tax cut or transfer payment, but will spend more like 20 to 30 cents per dollar. That strongly undercuts the multiplier part of Keynesian fiscal policy. Does anyone know if Krugman has used this reasoning in his discussion and advocacy of Keynesian fiscal policy?