RewritingtheRulesoftheMarketEconomytoAchieveSharedProsperity

JosephE.StiglitzNewYorkJune2016

Enormousgrowthininequality• Especially inUS,andcountries thathavefollowedUSmodel

• Multipledimensions ofinequality• Moremoneyatthetop• Morepeople inpoverty• Eviscerationofthemiddle• Inequalities inwealthexceed those inincome• Inequality inhealth—especially largeinUS• Inequality inaccesstojustice

Source:TheWorldWealthandIncomeDatabase(latestdataavailableathttp://www.wid.world/).

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

180000019

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

13

Real201

4US

Dollars

Year

Top1%AverageIncome(incl.capitalgains)

Bottom90%averageincome(incl.capitalgains)

Top1%vsBottom90%AverageIncome

Source:TheWorldWealthandIncomeDatabase(latestdataavailableathttp://www.wid.world/).

Incomeshareoftherichest1%

4

6

8

10

12

14

16

18

2019

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

13

Percen

tage

Year

UnitedStates

UnitedKingdom

Canada

Australia

Stagnation:U.S.medianhouseholdincome(constant2014US$)

Source:U.S.CensusBureau

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1975 1980 1985 1990 1995 2000 2005 2010

2014:$53,657

Declineinmedianincomeoffull-timemaleworker

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

RealMedianIncomeofFull-TimeMaleWorker,1965-2014

U.S.minimumwage,1938-2012

Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm

Mostinvidiousaspect:inequalityinopportunity

• Notasurprise:systematicrelationshipbetweeninequalityinincomes(outcomes)andinequalityofopportunity

Incomeinequalityandearningsmobility

Source:“UnitedStates,TacklingHighInequalitiesCreatingOpportunitiesforAll”,June2014,OECD.

Globalinequality

• AlmostallOECDcountrieshaveseenincreased inequality inlast30years

• Thetrendaroundtheworld issomewhatmixed,butremains aconcernalmosteverywhere

GinichangesinOECD

Source:OECD2015,InItTogether:WhyLessInequalityBenefitsAll,http://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf

Globalinequality:Ginisworseinmanycountries,late2000svs.1980s

Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html

Globalinequality:incomegrowthbypercentile,1988-2008

Source:BrankoMilanovic,http://glineq.blogspot.co.ke/2015/02/trends-in-global-income-inequality-and.html

Globalinequality:incomegrowthbypercentile• Whatprevious chartmeans isthat,globally:• Veryrich—those atfarrightofgraph—haveseen theirincomesgrowatahighrate

• DevelopingAsianmiddleclass(especially China)hasalsogrownatafastrate.Thisisrepresented bythose inmiddle-left ofthegraph.

• Theincomesoftheworld’sverypoor—those onthefarleftofthechart—have notkeptpace.

• Advancedcountrymiddleclassincomes—those around the80thpercentile—have stagnatedcompletely

• (ThisistheanalysisthatBranko Milanovic hasputforward)

Majorchangesinunderstandingsofinequality• Trickledowneconomicsdoesn’twork• Thereneverwasgoodtheoryorempiricalevidenceinsupport• Inaway,ObamaadministrationandFedtrieditagain:bail-outtobankswassupposedtobenefitall;QEwouldworkbyincreasingstockmarketprices,benefittingmostlythoseattop

• “Repeal”ofKuznets law• WasperiodafterWWII,the“goldenageofcapitalism,”anaberration,theresultofthesocialcohesionbroughtonbythewar?• Withtheeconomynowreturning tothenaturalstateofcapitalism?

• Oristheincreaseininequalityafter1980aresultofachangeinpolicies?

• Largedifferences inoutcomes/opportunities amongadvancedcountries• Suggestingthatitispolicies,notinexorable economicforces thatareatplay

• Inequality isachoice• Aresultofhowwestructure theeconomythroughtaxandexpenditure policies, throughourlegalframework,ourinstitutions,even theconductofmonetarypolicy• Allofthese affectmarketpower,bargainingpowerofdifferent

groups• Evenaccesstojobsandabletoparticipate inlabormarket• Resulting indifferentdistributions ofincomeandwealthbeforetaxes

andtransfers

Majorchangesinunderstandingsofinequality

• Beginningaboutathirdofacentury ago,webeganaprocessofrewriting therules• Loweringtaxesandderegulationwassupposed toincreasegrowthandmakeeveryone betteroff

• Infact,onlytheverytopwasbetteroff—incomes ofthereststagnated,performance oftheeconomyasawholeslowed

• Resulting inbasicnecessities ofamiddle classsocietybeingincreasingly outofreachoflargeproportionofpopulation

• Retirement security,educationofone’schildren,abilitytoownahome

• “Repeal”ofOkun’s Law• Economieswithlessinequalityandless inequalityofopportunityperformbetter

• Equalityandeconomicperformance arecomplements• Manyreasons forthis

• Lackofopportunitymeansthatwearewastingmostvaluableresource• Macro-economic• Instability:Linkbetweeninequalityandfrequencyofcriseshasbeenshown

byIMFaswellasothers.

Cont’d

Majorchangesinunderstandingsofinequality

• Weakergrowth• Richestconsumeasmallerproportionoftheirincomes thanthepoorormiddle

• Greater equalitywouldstrengthenaggregatedemand

• Smallandmedium-sizedbusinesses, buoyedbystrongmiddleclass,aredriversofeconomicgrowth

• Politicaleconomy• Harderfordividedsociety tomakeneeded public investments in

infrastructure,technology,education,etc.• Asdemocraticprocesses areskewed(e.g.inU.S.),policies that

protect interestsandrentsofwealthiest replacethosethatsupportbroad-basedgrowth

• Erosionoftrust

• Wecanaffordtohavemoreequality• Infact,itwouldhelpoureconomy• Somemuchpoorereconomieshavechosenmoreequalitarianpolicies

• Becauseinequality istheresultofpolicies, itisshapedbypolitics• Economicinequalitygetstranslated intopoliticalinequality• Politicalinequalityleadstoeconomicinequality• Viciouscircle

Majorchangesinunderstandingsofinequality

Broaderconsequences

• Undermining democracy

• Dividing society

• Especiallywhen inequalitiesareonracialandethniclines

Alternativeinterpretationsofgrowthininequality

Marketforces—based oncompetitivemarkets(a) Changes insupplyanddemand fordifferent factors justturned

outbadlyforpoor—decreasing wagesofunskilledworkersandincreasing returns tocapitalandskilledworkers

(b) Increased inequalityintheintergenerational transmission ofadvantages leadingtoincreased inequalityinownershipofproductiveassets (humanandfinancial capital)

Changesinfactorreturns

(a)Skillbiased technological changeUnpersuasive• Skilledworkers’wagesgoingdown• Doesn’texplain gapbetween averageproductivityandaveragewages

(b)Globalization• Predictedbystandardtheory• Evidence thatithasplayedanespecially importantrolesince2000

Intergenerationaltransmissionofadvantage

• Richleavetheirchildrenwithmorehumanandfinancialcapital

• Equilibriumwealthdistribution reflectsbalancebetweencentrifugalandcentripetal forces

• Increased inequality reflects anupsettingofpreviousbalance

• Contrarytoprincipleofequalopportunity

Alloftheseareaffectedbypolicy,byrulesofgame• Incentives forskilledbiased technological changevs.resourcesavingtechnological change• Fedpolicy—lowinterestrates—encouragecapitalintensivetechnologies

• Absenceofclimatechangeunderminesincentivesforresourcesavingtechnologicalchange

• Thewaywestructured globalizationencouragedoutsourcingofjobs• Especiallyinabsenceof industrialpolicies

• Andweakenedbargainingpowerofworkers• Justaswewereweakeningunions

• Regressive taxationandweakeningpublicschools leadstoincreasedintergenerational transmission ofadvantage

Alternativeexplanation:increaseinrents• Increasedmonopoly, monopsony powershiftsdistributionofincomeandwealthtothosewiththesepowers

• Butalsootherreasonsforanincreaseofrent—with increasedincomeandwealthtothosewhocontrolassetsgeneratingrents• Landrents• Intellectualproperty rents• Rentextraction fromgovernment• Rentextraction fromconsumers

Oureconomyismarkedbyincreasingrents• Somearesultoftechnology• Networkeffects• Localizedservices

• Somearesultofchangesineconomy• Urban landrents

• Somearesultofpolicies• ChangeinIPRlaws• Deregulation—allowing extractionofmorerentsfromgovernmentandconsumers

• Somearesultofmarket “innovation”• Betterwaysofexploitingconsumers

Piketty’sexplanationisavariantofintergenerationaltransmissionhypothesis

• Twoclasses,capitalistssaveeverything, wealth growsatr,returnoncapital• Workers savelittle

• Withr>g,growthofeconomy, ifrdoesnotfall,shareofincomeofcapitalistsgrows

CritiqueofPiketty• Savingsrateofcapitalistsfarlessthan1• Returnoncapitalendogenous, andshouldbedecliningascapitalistsaccumulate• Modelsneedtohavemacro-/micro- consistency• IfWwereK(wealthandKweresame), thenlawofdiminishingreturnswouldimplyrwouldfall

• Andwageswouldrise• Theassumption thatr>gisnotconsistentwithlongrunequilibrium: Virtually allmodels showthatinlongrunsr <g:Piketty’sresultcannothold• Infact,Piketty’smodelhadbeenwell-studied inoldergrowthliterature

WhatPiketty’smodelcannotexplain• Ignoresgrowthinlife-cyclewealth• Cannotexplaingapbetween averagewagesandproductivity

• Eveniftechnicalchangeisskill-biased• Cannotexplaingrowthinoverallwealth/incomeratio• Canonlyexplain½to¾ofgrowthinwealthincomeratiobynationalsavings

• Wealth“residual”explainedbestbygrowthofrents• Landrents• Exploitation rents(monopoly power, politicalpower)• Intellectualproperty rents

• Wealthcangoupevenif“K”isgoingdown• Andmanyincreasesinwealthassociatedwithrentsleadtodecreased

productivity

WhatPiketty’smodelcannotexplain

• DistributiveeffectsofQE• Inmoderneconomy,keydistinctionisnotsomuchbetweendebtorsandcreditors,butbetween lifecyclesaversandinheritedwealth

• Differences inportfoliocomposition

• QEhasbenefits inheritedwealthatexpense oflifecyclesavers,contributingtoinequality

Consequencesofinequalityfortheglobaleconomy• Growthin2015weakest sinceGlobalFinancialCrisisandoneofpoorestperformances inrecentdecades; 2016ontrackforbeingequallyweak

• Underlying problem: lackofglobalaggregatedemand

• Oneofthereasons: highlevel ofinequality

• Inequality alsoaffectsaggregatedemand indirectly

• Increases instability

• Realizationofthiscreatesuncertainty

• Uncertainty leads tolowerinvestment

Concludingcomments• Inequality isnotjustamoral issue;ithaseconomic andpoliticalconsequences, especially when itreachesthelevel thatithasintheUSandespecially when itarisesinthewaythatitdoesintheUS

• Incremental changeswillnotsuffice• There isacomprehensive agendawhichwillsignificantlyreduceinequalityandincreaseequalityofopportunityentailing“rewritingtherules”

• Urgency—decisions todaywillaffectinequality decades later• Keyisrewriting therulesonceagain

• Realquestion isnoteconomics: itispolitics