Joe Stiglitz On The Price Of Inequality

Joe Stiglitz describes the price that we pay for growing inequality in this interview. His argument is not that inequality is unfair. He explains how our society has been engineered to increase inequality, and that our nation pays a big price for growing inequality.  He goes right to the heart of the matter in this interview.  Conservatives defend inequality by arguing that financial rewards are distributed in accordance with the contribution that individuals make to society. Stiglitz argues that growing inequality is the result of successful rent seeking by wealthy individuals.  Rent seeking is a term that economists use to describe income that is not derived from productive activity.  For example, owners of a natural resource, such as land, may rent the land to a farmer.  They receive income from the farmer who may add value to the land by growing crops.  The owner rent paid to the owner of the land is unrelated to the value added by the farmer. That is, it was not required to make a contribution to society.

  He gives many examples of rent seeking behavior, especially in the financial industry.  Bankers should be rewarded for managing risk, and for allocating capital to its most productive uses.  Society benefits from those activities.  Bankers have successfully enlisted government to support activities that encourage risk and speculation.  They are rewarded by extracting income that is unrelated to their value added.  In fact, they have been able to do so because they have used their income from rents to distort the democratic process.  Moreover, they have engineered the tax system to encourage speculation and rent seeking.  Their gains from speculating on asset prices are taxed at a lower rate than wages that are earned from productive activity.  The concentration of income is also bad for the economy.  Those with very high incomes do not spend a large share of their incomer.  They use it to engage in speculation that might enable them to accumulate more wealth. Betting on the direction that interest rates might take, or purchasing stocks that are held for short periods of time, do not necessarily contribute to the economy.  On the other, shifting income from lower income households, that spend most of their income, slows down economic growth.