Monday, March 7, 2016

Changing the rules or changing the game?

by Michael Roberts

I’ve just been to a lecture by Professor Joseph Stiglitz as part of a series organised by the British Labour Party on ‘new economics’.  The lecture series is designed to raise the level of economic debate and for the new range of economic advisors to the Labour Party to come up with ideas.  Joseph Stiglitz is one of the advisors.  He is a Nobel prize winner in economics and former chief economist at the World Bank.  And he is author of several books, particularly on the rise of inequality of incomes and wealth in the major economies over the last 40 years.  His latest book is called, Rewriting the rules of the American economy to achieve shared prosperity.

Stiglitz is deeply concerned with the rise in inequality exhibited across the major economies and elsewhere globally.  He obviously sees it as the major issue before the people and politicians at the moment.  He started by saying that his original PhD thesis was on the subject of the distribution of income and wealth, in 1969 (published in Econometrica).  Back then, mainstream economics was clear that the distribution of income or the wage-profit share hardly moves.  And as they taught this fact, the facts started to change and inequality rose sharply from then on!

Stiglitz showed, using the work of Saez, Piketty, Atkinson and others (often mentioned in this blog) to show the sharp rise in inequality of income since the 1980s, led by the US and closely followed by the UK, especially the rise in the share of income and wealth going to the top 1%, or even worse to the top 0.1%.  Now eight families have as much wealth as 150 million Americans.

This has all been well documented and so has the impact of extreme inequality on social mobility, life expectancy and poverty.  Right now, poor white males of working age are suffering a significant decline in life expectancy, a fall similar to that suffered by Russian males after the collapse of the Soviet Union in the 1990s.

While the top 1% has been doing great, the real incomes of average (median) households has been stagnant since 1995 and for full-time male workers since 1970!  And the minimum wage in real terms (after inflation) is now lower than it was 60 years ago!  Global inequality has also been rising, with the top 1% of income earners in the world (obviously mostly in rich countries) increasing their share the most, along with the Chinese middle-class, while the working class in rich countries have lost ground, as have the very poorest in the world.  All this has been documented before on this blog and in my Essays on Inequality.

There are two questions that really matter.  What has caused the rise in inequality? And what can we do about it?  Stiglitz attempted to answer these questions.  He did not think inequality had risen because of what he called normal market forces in capitalism, as Piketty has argued.  If you exclude housing wealth, then the income on productive capital has been falling, so labour income should have risen, but it hasn’t.

No, he thought the main reason was ‘structural’.  What happened was that in the early 1980s, under Reagan and Thatcher, neoliberal policies were introduced to cut taxes for the rich and relax regulations on finance and monopolies.  This was supposed to boost growth and incomes for the rich and this would ‘trickle down’ to the rest.  Stiglitz said this policy approach had miserably failed: growth was slower, inequality worse and average household income stagnated.  The financial sector did not lend funds to invest productively, but to speculate.  So the problem is not capitalism or the market generating inequality, but the changing of the rules of the market: namely ending regulation, progressive taxation and public services in a ‘mixed economy’.

But Stiglitz did not say why the rules of the game were changed in the 1980s – it just happened because of ideology, greed, errors…?  He did not say.  Marxists like me would say the policies were changed because the Golden Age of capitalism with its decent pensions, public services and benefits and full employment could no longer be afforded by market capitalism as profitability of capital plunged.  The change of rules was necessary for the saving of the capitalist market system.  Extreme inequality of wealth and income is the norm for capitalism: it was the short Golden Age after 1945 that was special, not the neoliberal period since the 1970s, as Piketty has shown.
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Stiglitz wants to change the ‘rules’ back.  As he said, “I am no left-winger, I’m a middle of the road economist”.  He just wants to reduce ‘extreme’ inequality and get growth up.  He is sure that this can be done in the US by getting the Federal Reserve to set interest rates to promote jobs not reduce inflation; to cut the student debt burden; increase the minimum wage and introduce anti-trust laws to break up the banks and big monopolies etc.

Stiglitz admitted that even these mild rule changes were unlikely to see the light of day in the US, given the present balance of forces in Congress or for that matter in the UK.  I’m tempted to repeat the comment of left Keynesian Joan Robinson: “Any government which had both the power and will to remedy the major defects of the capitalist system would have the will and power to abolish it altogether”.
“We can’t leave to market forces to solve the problems by themselves”, concluded Stiglitz, so we must rewrite the rules of the game. 

This is like saying bear baiting should be moderated by rewriting the rules.  Why not stop the game altogether.

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