On June 22, 2012, Joseph E. Stiglitz wrote an opinion piece in the Washington Post. Joseph E. Stiglitz, winner of the 2001 Nobel Prize in economics, was chairman of President Bill Clinton’s Council of Economic Advisers and chief economist of the World Bank. He is most recently the author of The Price Of Inequality: How Today’s Divided Society Endangers Our Future.
“The United States is in the midst of a vicious cycle of inequality and recession: Inequality prolongs the downturn, and the downturn exacerbates inequality. Unfortunately, the austerity agenda advocated by conservatives will make matters worse on both counts.
‘The seriousness of America’s growing problem of inequality was highlighted by Federal Reserve data released this month showing the recession’s devastating effect on the wealth and income of those at the bottom and in the middle. The decline in median wealth, down almost 40 percent in just three years, wiped out two decades of wealth accumulation for most Americans. If the average American had actually shared in the country’s seeming prosperity the past two decades, his wealth, instead of stagnating, would have increased by some three-fourths.
“The Great Recession has made this inequality worse, which is likely to prolong the downturn. Those at the top spend a smaller fraction of their income than do those in the bottom and middle — who have to spend everything today just to get by. Redistribution from the bottom to the top of the kind that has been going on in the United States lowers total demand. And the weakness in the U.S. economy arises out of deficient aggregate demand. The tax cuts passed under President George W. Bush in 2001 and 2003, aimed especially at the rich, were a particularly ineffective way of filling the gap; they put the burden of attaining full employment on the Fed, which filled the gap by creating a bubble, through lax regulations and loose monetary policy. And the bubble induced the bottom 80 percent of Americans to consume beyond their means. The policy worked, but it was a temporary and unsustainable palliative.
“Matters may get worse. The austerity advocated by some Republicans will lead to higher unemployment, which will lead to lower wages as workers compete for jobs. Less growth will mean lower state and local tax revenue, leading to cutbacks in services important to most Americans (including the jobs of teachers, police officers and firefighters). It will force further increases in tuition — data published this month show that the average tuition for a four-year public university climbed 15 percent between 2008 and 2010, while most Americans’ incomes and wealth were falling. This will lead to more student debt, more profits for bankers — but more pain at the bottom and middle. Some, seeing the consequences of their parents’ debts, won’t be willing to take on the levels of debt necessary to get a college education, condemning them to a life of lower wages. Even in the middle, incomes have been doing miserably; for male workers, inflation-adjusted median incomes are lower today than they were in 1968. Opportunity in America — already the country with the least equality of opportunity among the world’s advanced nations, where a child’s prospects depend more on the income and education of his parents then even in ossified Europe — will decline still further.”
If we want recovery, there is no choice but to rely on fiscal policy. Fortunately, well-designed spending can lead simultaneously to more employment, growth and equality. Further investments in education, especially aimed at the poor and middle, from preschool to Pell Grants, would stimulate the economy, improve opportunity and increase growth. Spending a fraction of the money the federal government gave to the banks to help underwater homeowners — or extending unemployment benefits for those who have long searched but failed to find a job — would simultaneously ease the burden of those suffering from the recession and help bring the recession to an end. This higher growth would, in turn, lead to higher tax revenue, improving our fiscal position. Plenty of investments would pay for themselves.
