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You're all in. Great. Welcome everybody to the lse. Professor Stiglitz, distinguished guests, students, members of the press, friends of the lse. I'm Stephen Jenkins, I'm professor of Economic and Social Policy here. It's a real honour to be able to welcome you all here and to this evening's lecture by Joe Stiglitz. It's a great pleasure to welcome Joe back to the lse. He's spoken here on lots of occasions, including last night. Jo, we thought there'd be so much interest in what you had to say that two events would be needed and it turns out we were right. This event was an immediate sell out, reflecting the eminence of yourself and the widespread interest in the topic of inequality. So thanks very much for giving up your time. Two nights in a row is a lot. Joe needs little introduction. He's currently a university professor at the Columbia University Business School in New York and has associations with Manchester University as well. He's made major contributions to a very large number of subject areas in economics, many more than were cited in the award to him of the Nobel Prize for Economics in 2001. Joe's always been interested in inequality. You may not know that his PhD thesis included innovative analysis of inequality in the context of economic growth, an overlap topics that I suspect he may return to tonight with Tony Atkinson, who's a Centennial professor here at the lse. He's written a really key textbook in public economics and we're all hoping he'll write a revised edition. But Joe is not just an ivory tower academic. Amongst other things, he was a chief economist and Senior Vice President at the World bank between 1997 and 2000. He chaired the Commission on the Measurement of Economic Performance and Social Progress for President Sarkozy of France, producing the widely cited and influential Stiglitzen Fatusi. Joe is also a best selling author with many books including Globalization and Its discontents, the roaring 90s, making globalization work and Free Fall, all published by Penguin. He's going to be speaking about another new book tonight called the Price of Inequality. The ground rules are that the talk will be around 45 minutes and afterwards would be plenty of time for questions. Also around 3/4 of an hour. And after the event, Joe has very kindly agreed to spend some time signing copies of his new book which are on sale outside. So for those of you up with social media and Twitter users, the hashtag for today's event is lsestiglitz. I know we're very much looking forward to your talk, Jo. Ladies and Gentlemen, please join me in welcoming Professor Stiglitz to the lse.
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Well, it's a real pleasure to be back at LSE again after yesterday. This particular book actually rose out of an article in a magazine that may be a little bit unusual venue for normal academic publishing, an article in Vanity Fair. And the article took off from.
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A.
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Key expression in the Gettysburg Address by Abraham Lincoln during the Civil War in the United States. And when President Lincoln talked about fighting, the war was about whether government of the people, by the people and for the people would survive. And so the title of this article was of the 1% by the 1% for the 1%. And that article helped generate one of the slogans of the Occupy Wall street movement, which is we are the 99%. Well, that article did get a lot more larger readership than my original Econometrica article that that was published in, that came out of my thesis. What I wanted to emphasize, and this really relates a little bit to the debate that's going on in the United States, but is, I think, broader. The discussion of inequality is not about the politics of envy. It's a real debate about the justification and consequences of the level of inequality. And much of this book is about inequality in America, which has grown out of bounds, as I'll try to describe. But the UK is there really almost in second place and following, in many ways, American leadership. And so for England, I think there's a real question about whether this is a particular direction in which you want to follow America's leadership. And what I'm going to try to suggest that we ought to be changing in the United States. And I think you ought to be thinking about whether you ought to be changing. In a sense, the simple message of the book is reflected in the title, the Price of Inequality. What I'm arguing is that we are paying a very high price for this inequality. We pay a very high price in terms of economic performance. We also pay a high price in terms of our democracy, in terms of a number of other. Of our other values, like our sense of justice. So that is the main theme and that none of this is inevitable, that there are alternative policies. There is another way. There are alternative policies which could simultaneously lead to a more dynamic economy, a more efficient economy, and less inequality. So what I'm going to do this evening is try first to describe what's happened to inequality. And I'm going to mainly limit myself to the data for the United States. It's what I know best. But in some of you can actually amplify what I talk about for the uk, but the patterns in the UK are very similar in most ways to that of the United States. Not quite as severe, but still a similar pattern. Then I'm going to talk a little bit about the causes and that's really important because I'm going to try to explain to you why the theories of the distribution of income that most of you study here at LSE are wrong. You still have to learn them, you have to pass your exams. But I want to explain why most of the tenets of the standard theory that has been the basis of much of economic justification of inequality for the last 150 years is wrong. And then I'm going to talk about the economic and then the social and political consequences and finally the alternatives. Well, the level of inequality that exists in the United States is really unprecedented and it's grown enormously in the last 30 years. The share of the top 1%, top 1% now gets 20% of all income. The share of that 1% has doubled. The share of the upper 1/10 of 1% has tripled since 1980. That says a couple of things. One of them is that we've not always, we haven't always had this kind of inequality. It's not an inherent feature of, of capitalism. With a market economy, then you might ask, well, maybe market economies are changing and market forces today, inevitably the way demanding supply works, inevitably is going to lead to more inequality. But again, that's wrong. If you look across countries, there are very large differences in the degree of inequality. There are various measures of inequality, but whatever the measure, there are large differences across countries. The United States has the distinction of having the most inequality of any of the advanced industrial countries. At the same time, it did have this distinction a number of years ago and it continued to increase its inequality. It's also the case that not all countries have been increasing their inequality. A few countries in Europe have managed to stabilize the level of inequality. A few countries in the world, like Brazil, have managed actually to bring down the level of inequality. These are countries that have been growing very rapidly, but set out at least one interpretation of what happened in Brazil is that it had a very high level of inequality, one of the highest in the world. And there were severe social, economic, political consequences to that inequality. It was as if the society looked over the brink and saw where they were going and said that's not where they wanted to go. And there developed within the country a broad consensus, and I say a broad consensus, including among the people at the top, that that was not the direction the society wanted to go. And so you had Cardoza, somebody on the center right, deciding to make the focal point of his administration, broadening education opportunity for everybody. And then you had a successor, Lulu, having a set of programs that were supported by everybody in society, programs to make sure that children had access to food, to medicine. And what's so striking about the Brazilian case is while they still have a high level of inequality, their level of inequality is falling. So yes, market forces are global, they're affecting all countries. But the way we shape market forces results in differences in the level of inequality, differences in the changes in inequality. Now the. What is perhaps most disturbing about the aspect of inequality that been manifested in the United States and increasingly in other countries is equality of opportunity. When the discussion of inequality began in the United States and it was pointed out how America had more inequality than other countries, Paul Ryan, who was the head of the Republican Budget Committee and sort of the leader their economic, he's viewed as their intellectual leader, so called, he said, we're not interested in outcomes. So what if there's inequality of opportunity? What America cares about is equality of opportunity. Well, he obviously hadn't looked at the data because equality of opportunity is lower in the United States than in any of the advanced industrial countries for which there's data. Now that seems so opposite of what most people think of as the American dream, you know, the idea of America as a country of opportunity. And to a large extent, those stories were very influential in American history. Many of you may know, probably you don't stories about Horatio Alger. This was somebody who grew up from the, you know, rags to riches. And these were very popular stories 100 years ago. And they were supposed to inspire young people from working lower, poor backgrounds to work hard. And so they became part of the mythology in the United States that anybody can make it up. And people don't know stories about other migrants and others who have been successful. So it's not impossible. But from the point of view of social science, what matters are the statistics, the likelihood, the probabilities, the mobility matrix, however you measure it. Well, a standard way of measuring it is to talk about the correlation. What is the correlation between a child's economic status and that of his parents? When you look at that, the chances of the life prospects of a child in the United States is more dependent on the income and education of its parents than in any other advanced country, which says there is very limited, less mobility in the United States. Last opportunity. Now, as I say, UK is not A stellar. There are other countries, the Scandinavian countries in particular, that do much better. One aspect of mobility, obviously, if people are moving up in the relative position, like the countries in Scandinavia, it also means by definition that you can't have everybody in the top half. I know all of you in the top 5% of your class, but still in general, you can't have everybody in the top half of the population. So if people are moving up, what does that mean about people at the top? Some of them are moving down. And what's true in the United States is not only is there no upward mobility, there's very little downward mobility. If you have the good luck, as many of you, I'm sure, are born at the top, it means that you have a chance of staying there. And the data for the United States are really quite striking. A child of a well off parent who does poorly in school has better prospects than a child of a poor off parent who does well in school. So what it says is that again, reinforcing the view that life prospects are very, very dependent on the luck or you might say the skill of choosing the right parent. Now, the recession has in many ways made things worse. And we keep getting more data as the recession goes on, and as we get more data about the recession comes in about how much worse the recession has been for inequality. And it's manifested as a whole set of numbers which suggests that it's going to get much worse going forward. Let me just share with you a few of these numbers. Numbers that just came out a couple weeks ago show that between 2007 and 2010, the typical American, the median wealth, went down by almost 40%, meaning that the median wealth of America was back to the level of the early 1990s, two decades in which the typical American saw no increase in his wealth, in which the country as a whole saw a 75% increase in wealth. You put those two numbers together and what you realize is that there was tremendous wealth accretion, but it all went to the very top. And which is why the inequality of wealth is an order of magnitude greater than the inequality of income. So this is an answer to another argument that you sometimes hear from the right say, oh yes, it's true that there's some inequality, but one year one person is at the top, another year another person is at the top. But what we really care about is lifetime inequality. Well, a good measure of what is going on, of that kind of inequality is wealth inequality. And just to give another number, the top 1% in the United States has somewhere between 35 and 40% of all the wealth. At the same time, in the year of recovery, 2010, 93% of all the increase in income went to the top 1%. So most Americans did not participate. But as I say, prospects going forward that things will get worse. And the numbers I'm going to talk to you about now are likely to be even worse in the UK because what's happening is that there's been cutbacks in public support spending. The high unemployment not only creates inequality because the unemployed are obviously not doing very well, they're suffering. But because there's a high level of unemployment, wages don't do well. And so the people at the bottom suffer. But public services get cut back. And one aspect of that is a cutback in education. In the United States, the average increase over the three year period between before and after the recession, the average increase across the country in tuition in public schools was 15%. But in some states, some of our best universities, California, the state of California, the increases in college tuition were over 40%. So you then see the conjunction of incomes going down. Median real income in the United States today is lower than it was 15 years ago, tuition costs going way up. And unfortunately a legal framework that I'm going to come to in a second which says if you take on student debt, you'll not only have to pay high interest, but you will never be able to discharge that debt, even in bankruptcy. It's the only kind of debt you cannot discharge in bankruptcy. So it'll be saddled around your neck for the rest of your life. Average student in the United States is graduating now with over $25,000 of debt. But the graduates of the private for profit schools is much higher. And unfortunately, the graduates of the private for profit schools don't get jobs because they don't get much of an education. And the government has not been allowed to regulate them because the for profit private schools, many of which are owned by Wall street, have been very successful in lobbying against regulations that would prevent the schools that don't have any college graduates, don't get any jobs, have no evidence that they're delivering anything from getting access to these student loans. Well, if everybody had benefited from this growing inequality, that would be one thing. But the people on the right defend this inequality by the notion of trickle down economics. Throw enough money at the top and everybody will benefit by a process of trickle down. There was never any evidence in support of that theory, but what's happened in the United States and other countries shows very forcefully that it's not true. I wish it were because we've thrown so much money at the top that if it were true everybody would be well off. But what we've seen in the United States is that while the top has done very well, the median has actually seen its income decrease over the last 15 years. I promised I would make a comment on marginal productivity theory, which is the theory that has been used for 150 years more than that since young Stuart Mill, at least for defending inequality. Marginal productivity theory says that the reason that some people earn more is they make a greater contribution to society, that wages compensation corresponds to your marginal social contribution. So it's both a, you might say a moral justification and it's an argument about why it's actually a good thing. Because it's a moral justification says that those who have high incomes have made a larger contribution and therefore justifies that inequality. And it says it's important to do it because you have to give incentives and incentives are a core to market economy. It's one thing economists agree on. And if you didn't do this, you wouldn't get them to make their marginal contribution and we would all suffer. So it's a little bit like the trickle down theory that it says it's not only a moral justification, it's what you need to make an economy work. Well, belief in the marginal productivity theory got a real hard time with the financial crisis. And I think what happened this week in the news that was revealed this week, many of us knew about this beforehand, about what the banks did in Libor shows that that's not, that a lot of the compensation doesn't reflect social contributions during the crisis, what we saw so clearly was that the bankers were walking off with very large compensation.
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Even.
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In banks that they brought to the brink of ruin, even as they brought the economy, the global economy, to the brink of ruin. So how could you say that these bankers have made huge social contributions? I jokingly say that sometimes in our math class we make a sign error. So a large positive should have been a large negative. So they should have been giving back a lot because they had had such a negative effect. We just made a sign error. But the fact of the matter was there was no justification for those bonuses that could be related to their social contribution. But though people like me who looked at these incentive structures for years had said that the incentive structures showed that they were not designed to provide good incentives. In fact they were designed to encourage excessive risk taking and short sighted behavior. They were designed in order to provide a framework for those for the CEOs to walk off with more money. I saw that very clearly when I was chairman of the Council of Economic Advisers in the Clinton administration. We had a proposal to try to increase the transparency of accounting that would require firms to reveal the value of the stock options that they were giving to the CEOs. We didn't say don't give the stock options. We just said reveal the cost of it to your shareholders. You know, one of the things is there's no such thing as mana for heaven or there's no such thing as a free lunch. I guess you all got in a free ticket. But anyway, the general principle is still true. The. So when you pay stock options, what's going on? You're diluting the shares of all the other shareholders. So there's a cost and you can calculate what that cost is. Maybe not precisely, but you can provide an estimate. And what we said is the point of a whole accounting framework is for people to know what's going on. If they knew what was going on, then maybe they wouldn't be giving these stock options. But at least let's let them know. I can't describe the level of opposition that we got, including from several members of the administration who had been beneficiaries of major stock options. So maybe I'm not surprised, but the net result of it was this initiative failed and the stock options grew. And that caused distorted incentives, not only for excessive risk, taking part of the problem, underlying problem of the crisis. Some of you may know that Alan Greenspan was asked to testify in Congress about the financial collapse. And he said he was surprised that the banks didn't manage their risk better. He said there was a flaw in his reasoning because he thought that they would be able to manage their risk better. But I was surprised that he was surprised because one thing that economists agree on, as I said before, was that incentives matter. And you looked at those incentives and they were designed for perverse behavior. And if they hadn't behaved the way they did, we would have to rewrite our textbooks. But fortunately we don't. But unfortunately for the economy, the cost has been in the trillions of dollars. Well, One of the main theses of this book is that the inequality that's arisen in the United States, the uk, other market economies is not a reflection, as I said, of differences in contributions, that some are making these amazing contributions and others are not. There are some instances of that. Let's be clear. There are some people who do make enormous contributions. Some of them do wind up at the wealthiest list. But many of those who make the most important contributions discover DNA of transistors, lasers, all of these do not wind up in that list. They didn't do that research because they were motivated by money. And if they were taxed, they would still have done that research. So the really important innovations would not be affected by more progressive taxation. So the thesis of the book is that much of the inequality is what many of you have studied in economics and political science. Rank seeking. Used to think of rank seeking as a characteristic of oil countries, of natural resource countries, where everybody sees that pile of money arising from natural resource ranks, not from producing anything, but just by the value of the resources that lie there. But what we don't understand, countries like the United States and the uk, a large fraction the income is a large fraction of what goes on. A large fraction of economic activity is rank seeking. That's what you saw in the financial markets in the Libor case. That was just trying to get a larger share of the pie. The difference between rank seeking and the other activities is rank seeking is an attempt to get a larger share of that pie. And in that process of trying to get that larger share, the size of the pie gets smaller. And those activities are pervasive in our economies. To go back to the point I made earlier in looking across countries, the market forces I said before are pervasive, but they the degree of inequality differs across country. What is the implication of that? That means that we are shaping those market forces and different countries shape them differently. How do we do it? We do it by the laws, the regulations, government spending, tax policy, Every part of the rules of the game that we as a society collectively set. They're buried in virtually everything that is done at the public level. And every market economy is shaped by these rules and regulations. I've already given an example, the bankruptcy law in the United States, where I pointed out that students cannot discharge their debts even in bankruptcy. But at the other extreme, if you go bankrupt, the first in the United States, the first claimant is the bank's most risky products, those derivatives, those risky products that brought down AIG and that required $150 billion bailout from the US government. Those are paid before workers, before anybody else. Well, when you do that, what are you encouraging? You're encouraging that kind of activity. Take the tax law in the United States, speculators are taxed at less than half the rate than people who work for a living. Can you justify that? Is speculation that much more productive than Working. I think that was a rhetorical question. People talk about the importance of low capital gains taxes for encouraging entrepreneurship. But a lot of the income that's benefits from the low capital gains taxation is land speculation, land returns to land. You think there's more land just because you tax land at a lower returns on land at a lower rate? No, this is all rents. These are real rents. And that lower tax on rents encourages what? Rent seeking. So we have a tax structure, if you look at it very carefully, is a tax structure that is designed to encourage rank seeking. Take another example. Some of the wealthiest people in the United States, Mexico and other countries derive their income from monopolies. In some cases the monopolies come from an innovation which they got a patent, but then they leverage that monopoly to make more and more money. So the social contribution of the patent, one can understand leveraging it with a monopoly anti competitive practices actually diminishes the size of the pie. Because how do you get monopoly rents? Restricting output and raising prices. And that makes the economic pie smaller.
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So.
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These are examples of how the legal framework has helped encourage rent seeking, distorted our economy, moved resources in the wrong way. One more example, corporate governance. Everybody talks about governance. I gave one example. In corporate governance, the CEOs, the management did not want to have transparency in the stock option. Another example, I describe the distorted form of the compensation schemes. But it's not only the form. The compensation schemes is the level of compensation. Well, if somebody's working for you, you would have thought you ought to have some say in how they get paid. Almost obvious. Well, the standard theory that we talk about, not quite true, but the standard theory is that the shareholders own the firm. Therefore, as shareholders, you ought to have the right to say what to pay of the people who work for you, the managers. But when this was proposed in the United States, the reaction of the CEOs was it would be the end of capitalism as we know it. Of course it would be the end of capitalism as they know it. But other countries like Australia have had say in pay for a long time and it's worked very well. And now in the UK you're seeing some of the consequences of having that greater transparency. Because there's a rejection of some of the pay proposals and for good reason. And the pay commission in the UK pointed out that there is no connection in many of the corporations between the pay and performance. They call it performance pay. But that's just a language to persuade you to justify. In fact, the United States, just as an aside, it got so Embarrassing to call performance pay when there was no performance, that they changed the name in many companies to retention pay. But then you had to ask why did you want to retain somebody who behaved so, whose performance was so bad? They never gave a good answer to that question. Well, there are many other aspects of the inequality in the United States and the uk. I haven't had time to talk about this inequality. The growth inequality is actually a very pervasive aspect of our society. It's not only the increase of the top, top 1%, top 1/10 of 1%, it's also an increase in poverty and immiseration of those at the bottom. The two are linked. When American banks engaged in predatory lending, abusive credit card practices, discrimination, discriminatory lending, where they targeted African Americans and Hispanics, they were moving money from the bottom of the pyramid to the top. They were making poverty larger and more money going to the top 1%. So these aspects of inequality are actually linked. And finally there's a problem of howling out at the middle class which we call the polarization of the labor market, about which there's a very active debate about the various sources of that. Some focus on skill based technical progress, that technical progress is reducing the need for people, for the demand for people without skills and the laws of economics that's driving down wages. Others focus on the diminishing role of unions, their ability to bargain. Others focus on the way globalization has changed the bargaining power, the asymmetric nature of globalization. Example of another way we write down the rules. We allow free mobility of capital, but not free mobility of unskilled of labor. Think of the following thought experiment. Assume that we have free mobility of capital, I mean free mobility of skilled labor. But you couldn't move capital and in order to have a well functioning economy, you would have to attract labor to your shores. Well, think about the difference that our society would be. We would be fighting to have good schools, a clean environment, high wages, rather than fighting saying let's not have over regulation of environment, let's not have over regulation of working conditions, let's lower wages to make our economy more competitive. But in the end what matters of course is not competition. What matters is the well being of the average citizen. If the way we write our rules results in, the only way for us to compete is for most citizens to have their income go down. Something's wrong with the system.
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Well.
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The bottom line out of all this is that the way we've created inequality in our country and in many of the other advanced industrial countries has not contributed to an increase in productivity and growth, but actually diminished that. And the corollary of that is that if we take actions that reduce that inequality, we can actually have a stronger economy. That the way that's often been presented is that we have a trade off is wrong, that we can have both more equality and more growth. Well, there are many aspects of this issue I haven't had time to talk about. Time is running out. I should spend a little, have to spend a little bit more time on the way government spending increases inequality. The hidden subsidies, selling government assets at below market prices, procurement at above market prices. I should have spent more time on the lack of progressivity in our tax code. But what I want to move on is to talk a little bit more about some of the economic consequences of this inequality. Well, I've already talked about one aspect of that, which is the inefficiency, the distortions in our economy that arise from rank seeking. But there's a second aspect that's related to the current state of the US Global economy, and that is that inequality is associated with a weak economy, weak demand, and instability. This is not just my view. Even the imf, not known as a radical organization, has, a year and a half ago came out with a report that said that in their investigation of the causes of the crisis, came to the view that one of the causes, one of the contributing factors, was the growing inequality. So let me spend a minute trying to show the link between the two. What had been happening in the United States was growing inequality. The problem with inequality, the problem from the macroeconomic point of view, is that people at the top don't spend all of their income. In fact, the savings rate on average is 15 to 25%. People at the bottom have no choice but to spend all of it. And when you redistribute money from the people at the bottom to the top, demand goes down. So we would have faced the problem of a weak macro economy. So how did the Fed in its wisdom respond to this? Well, let's create a bubble. They didn't quite say it this way, but if we create a bubble, people will feel rich. And if they feel rich, they'll spend more. And it worked for a while. The bottom 80% of Americans, 80% of Americans were spending, on average, 110% of their income. And that did fill in the hole created by the growing inequality. Now you don't have to have a Nobel Prize to figure out if you spend 110% of your income, it's not sustainable. And it didn't last even as long as many of us thought, longer than some of us thought. But what happened was inevitable. The bubble had to break. It did break and left in its wake a whole set of consequences that we are now struggling to deal with, but made the problems even worse. But this kind of pattern of a bubble rising in association with with a high inequality, both cause and consequence has happened in other countries and in other periods. Well, that brings me now to the question, what can we do about this? Well, actually, once you go through a careful diagnosis of the causes of the inequality, the prescriptions of what you need to do are pretty straightforward. Some of it, a lot of it is trying to think about the various kinds of rank seeking activity and trying to circumscribe it. The abuses in the financial sector, monopoly power, deficiencies in corporate governance, reform of the bankruptcy law. Just think through every legal, every aspect of the rules of the game and think about how they are affecting efficiency and distribution. Saying is that the way we want things to go? Is this efficient and is it fair and is it creating more inequality? There are some things we have to do beyond that. I mentioned before that the government in the United States, for instance, gives away large amounts of natural resources or sells them at well below competitive prices and buys lots of things at well above competitive prices. Just one example, health care has been very much in the news. As you know, the United States is the last civilized country advanced country to recognize the right to survive. In 2003, the United States said that extended an important benefit, which is a drug benefit to the elderly, only to the elderly. But the one aspect of that Congress's action was to add one sentence to that, which was the US Government could not bargain with the drug companies about the prices. That one sentence, the United States government is the largest purchaser of drugs. By the way, that one sentence had cost the American taxpayer an estimated $500 billion, a half trillion dollars over less than 10 years. So that was a giveaway to the drug companies. That's how you create inequality and create inefficiency. Because if you expend that money on education, for instance, it would have increased opportunity. But spending on it as gift to the drug companies, it didn't lead to anything else. And drug companies, what do they do with it? Do they spend it on research? Yes, some of it goes to research, but more of it is spent on advertising than on research. More of it is spent on research on things like growing your hair or something I feel sensitive about, but more on that than on things that are life Saving. So the fact is that it doesn't lead to things that are research on things that are really important. We also obviously need to fix our tax system to make it again both fairer, more efficient, and the two can work together. One of the questions, as one sees what has happened in the United States is isn't this odd that a democracy has wound up with the kinds of system that we have? You could understand rank seeking in these dictatorships in the Middle East. You know, after all, in those countries, a clique of a few people run the whole show. They get to decide the rules of the game and they're going to decide the rules of the game for themselves. But in a democracy, it's supposed to be the majority that determines the rules of the game. And those of you who studied political science or even economics know that there's a theorem called the median voter theorem that says that in a democracy, the vote, the decisive voter, the outcome is supposed to reflect the preferences of the median voter. That is to say, half the people are supposed to want more public spending and half less. So it's the person in the middle that's supposed to be determinative of where the outcome is. Anybody looking at what's happened in the United States and to a somewhat lesser extent in other countries, is that outcome is better described by $1 one vote than one person one vote. And things have been made much worse in the United States by a Supreme Court decision that said that corporations are people and have the right to unbridled spending for campaign contributions, distorting our political process, revolving doors, lobbying, all of these have distorted our process. But what I try to do and describe in the book, some of the other mechanisms making mechanisms by which. Have resulted in our system of $1 one vote. One of them is a process of disenfranchisement and disillusionment. Throughout our history, at least over the last 150 years, there are systematic efforts to discourage or disallow poor Americans from voting. Those of you who may remember the big controversy over Florida about how it was very difficult for many of the poor Americans to vote, that they were hassled, that there were fewer voting booths and made it more difficult. Well, this is, you know, that brought out what has been a systematic pattern over a long period of time. But most of the failure is a kind of disillusionment. When you have the power of money, it's a self reinforcing cycle because people believe the outcome of the election, whether you vote for Republican or Democrat, the real winner, are the Bankers. And so it doesn't make much difference. It's the real winners of the 1%. But in fact, that attitude leads to giving more power to money. Because what happens, what happened in the last election in the United States in 2010, only 20% of the young people bothered to vote. And that means you spend a lot of money to get the voters out. And of course, you target those who get out to vote to those who support you. So it increases the role of money in the electoral process. And so you get this vicious circle of more money being needed and more disillusionment. But when the banks invest money in politics or the other people, not always. Let me make it clear. This is not all of them. Some of them are, but many of them, many of them are making these as investments. I use that word very carefully. The bank's political investments did a lot better than their financial investments. They got a higher return in the deregulation and the bailouts and the prevention of more regulation. So part of it is this corrupting influence of money. And believe it or not, the majority in our Supreme Court explicitly said just on Monday that money does not corrupt our system, but does not even affect the appearance of corruption. And if you have a majority coming to that view, having seen what has happened in this election, you realize you have a Supreme Court that's out of touch with what is going on.
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Well.
- [51:44]
B
The other aspect of it, though in some ways deeper and more difficult to deal with, is that the 1% has been very successful of convincing many of the 99%, many of the rest, that what is in the interest of the 1% coincides with their interest. And you see that in so many areas where what they. What is striking is if you do a number of studies recently have looked at, for instance, the question of what are people's perception of what are good distributions of income, and what are people's perceptions of what our distribution of income is. So the interesting thing, like you show a pie chart, a chart, a pie chart to a group of people randomly selected. And what you see is that most of them, if you chose the pie chart showing the distribution of income in Sweden versus the United States, almost everybody, Democrat, Republican, young, old, choose Sweden. If you ask them what is the inequality, the distribution of income in the United States, none of them realize how unequal the United States is. They think we are a much more equal society. They think we should be more equal, but they think we're much more equal than we are. And so with that level of misperception, it's not surprising. You get results like a majority, a vast majority of Americans supported the abolition of the estate tax, a tax that affects only people in the United States whose income combined, you know, husband and wife. Complicated detail. Over 10 million doll. Now part of the reason is that they believe the United States is a land of opportunity. If you happen to be poor, you're going to win the jackpot and wind up there. If they knew the probability of that.00001 they might have a different view. But we've sold them. They've been sold on the notion that they can go from that low, whatever they are and be leave an estate of over $10 million and the tax is only on the wealth, the bequest over that. So they don't have to be very worried, but they think it's better not to have the estate tax. Well, This inequality is affecting every aspect of American society and affects every aspect of other countries society. In the United States because we have more inequality than any of the other advanced industrial countries, we see it more dramatically. We see it in our system of justice. A system of justice where to give you one example, we threw people out of their homes who didn't owe any money on the basis of affidavits that the bank signed saying that they did owe money. They perjured themselves to the court. They said that they had examined the record. They hadn't. And not one of these people has ever been held accountable. They had to pay a fine eventually, but as the Attorney General of Massachusetts put it, I think very they thought that they were too big not only to fail, they were too big to be held accountable. And the individual bankers within them have not been held accountable. Well, that leads me to the last question. Is there any hope? And let me end on, as I said for American audiences that you really have to end on a note of hope because they really don't like to be told that things are bleak. I'm told that in Europe people are willing to take a little bit stronger dose of a dour message, especially when it's aimed at the United States. But I remind you that most of what I say is true. Also here in just a slightly lesser there are a couple elements of hope. Let me just describe very quickly. One of them is there are many people at the top who do understand that it's in their enlightened self interest and their self interest rightly understood that we have a society that has shared prosperity. There are a lot of people at the top who are actually fighting for this. So when I characterize the 1%. I want to make sure you understand it's not all of them. It's not a conspiracy. Among the supporters of the kind of reform are those, you know, like Warren Buffett, who said it was wrong for him to pay a lower tax rate than his secretary. And they've been very active and very vocal in this issue. And the question is, can we convince enough of those people that like in Brazil, they join in, in a broader social movement to create a more equal society? The second hope is that we are still a democracy and that the majority will realize that the sex of policies that we've had have not been good for our country, for the west, for our democracy, for our system of justice. From American experience, there have been episodes where we've reached high levels of inequality in which we've looked over the brink and we've decided to pull back. The Gilded Age was one and that led to the Progressive Era. The Roaring Twenties was another and that led to the amazing legislation in the United states in the 30s, the benefits of which we still are recipients. So what I'm hoping, my hope is that. We will once again realize the direction in which we're going, realize the consequence if we don't change and realize that the prospect of shared prosperity is the only way forward. Thank you.
- [58:47]
A
Joe. Thank you very much for a very stimulating speech on topics of critical contemporary interest in not just the US but clearly also the uk. It's really important to hear both the diagnosis right through to prescription so we have time for questions, ladies and gentlemen. So please put your hands up if you'd like to ask a question and I'll have the horrible task of choosing among you. It is very important for you to announce who you are. Name and affiliation, please. And please wait for the roving microphone. First hand I noticed is the gentleman up there in the blue shirt and then secondly the guy down here. Thank you.
- [59:24]
C
Thank you. My name is Andrea Varasi. I study global politics here at lse. I was wondering, in a recent poll I read on economists, 5% of the Americans declared they're convinced of being 1% of the holders of wealth and approximately 25% are convinced to be in the top 10% of the economy. That said, do you think there is clear case of information asymmetry and thus the issue of inequality should be communicated in a more clear way to the American people and not only also in order to counterbalance enormous power of lobbying companies. Thank you.
- [60:06]
B
Yeah, I mean, you're absolutely right. And I try to mention that that One of the problems that we face is that people do not understand the magnitude of the inequality in the country. And in a way they've been so they've been sold a bill of goods and particularly a problem in the United States. Actually the numbers are worse than the United States but actually true in many other countries because Americans want to be optimistic. And part of being optimism is to say well things may be bad but really over the long run I'm going to do well and I'm part of that upper 5%, upper 1% even though the numbers wouldn't put me there. And that's part of this myth of the American dream of everybody making it to the top. Very strongly felt and most people believe those Horatio Alger stories very much part of our culture. Very important for us to try to dispel that myth. And that's one of the reasons I wrote the book.
- [61:15]
C
So my name is Gurnoor. I'm a student of international political economy at lse. In terms of rent seeking activity at the global level, there is some a notion said that regulation is national and risk is global. So the prospects of raking in that activity can be that macro potential. Macro prudential regulation should be the way forward, do you think in the environment which we are, that can be effective and we can have an effective solution based on that?
- [61:47]
B
There's been a very big debate about whether there should be a in a global economy we should wait for global coordination, a globally coordinated regulatory system. I think the answer is no for the most part. This goes back to what I view as one of the major sources of rank seeking which I talked about in the financial sector. They don't want regulation and they think that they by using the argument we need coordination, they know coordination will never happen and that has been a very effective instrument for ensuring that nothing happens, which is what they want. And it's not just about macro prudential regulation, it's about transparency. This is what happened in London is one example, but there are lots of others. What happened? Lack of transparency in the credit derivative markets, lack of transparency and. And one of the reasons why financial markets are at risk of freezing up right now is because everybody knows that they don't know their own balance sheet, let alone that of any other bank that they are dealing with. You talk just to go, you know, European crisis just a little while ago there was a long debate about restructuring the Greek debt. Everybody realized that it could have global implications but nobody knew what they were because the banks were so non transparent. The regulator, the ECB didn't know. So what did the ECB do? And this is a real example of I've been very critical of the central banks. I have a chapter on how bad the central banks have been. But the ECB at that point said we don't. We want, in effect, we want the banks to have insurance, but we want the insurance not to pay off. Now if you have insurance, you want the insurance to pay off. What do I mean? They wanted it to be a major restructuring in which the bonds were written down by 50% but not to be a credit event. Why did they want it not to be a credit event? If it were a credit event, it would trigger the credit default swaps. What would that mean? Some of the banks had actually been engaged in gambling and they would lose. If the banks had only been buying insurance, that would be a good thing. And the ECB came out on the side of the gamblers. It's more important to protect the gamblers than to protect the banks that have bought insurance. And that shows when you have so called independent central banks, what you do is you have central banks that get captured by those who they're supposed to regulate.
- [64:44]
A
Thank you. The woman in the black dress is the first. And the second guy was up here in the third was the gentleman in the front with the white jacket.
- [64:54]
E
I'm Lynne Forrester de Rothschild. I was a student in 1980, graduated from Columbia Law School. And so I graduated in 1980 when I had, you know, 20 years growing up really believing the American dream. And I really did believe coming from nowhere, anywhere was possible as long as I was educated, hard working and all those good things. So the American dream really means something to me. And this inequality issue I think is really the defining issue for our country, for many countries right now. But I'm concerned about something Daniel Patrick Moynihan, the late great senator, said, who was actually at LSC in his youth. He said that you can have your own opinions, but you can't have your own facts. And I'm very worried that this discussion about inequality is splitting down between right and left when it really should be just an American decency issue, that inclusive capitalism has to be the only in capitalism. So my specific question is in your book you rely on the work of Picty and Saez who obviously did a very thorough analysis of income. But the, but the comments on what they did is they took the tax returns over that 30 year period and by doing that they left out things like welfare payments, food stamps, Medicare, Medicaid, all health Insurance benefits. And they also were dealing with pre tax numbers, which skews the inequality numbers. And in fact, an analysis that I saw said that if you take the numbers that you use, the median income during that 30 year period grew by only 3.2%. And if you throw everything else in, the median income grew by 32%. So I worry. Or are you worried that the raw data that we're using.
- [67:15]
B
Wrong number one.
- [67:16]
E
That's my number one question. My second question, if I can have one.
- [67:20]
A
I'm sorry, you can't. There are many people who want a question.
- [67:23]
B
Okay, okay. First, I agree with you that there needs to be a greater understanding of the common facts. And that's why I was so upset. One of the political candidates said that you shouldn't be talking about inequality in public. It should be talked in hushed tones behind closed doors. It really needs to be talked about openly and try to get a consensus about the numbers. And I try in my book both to talk about before tax and transfer and after tax and transfer. And that's why you have to use different sources. I mean, you could talk about this probably better than I could. But let me just say using tax and transfers has one big problem. I mean using tax as a base like piketty and science do, has one problem. It's only reported income. And in some sense it probably underestimates the degree of inequality in the before tax inequality. Because in fact we know that there was some degree of, there was some degree of underreporting tax avoidance tax that. So I think actually the problem probably is worse. Now the second part of the question is how do you know if we start including welfare payments and after and take out taxes? That's where the OECD has actually done some fairly good work looking across countries and trying to look at the before tax and after tax and transfer. And their results still show after tax and transfer. The US is at the top of the league as the most unequal society. In fact, one of the striking things is that we do less to correct the before tax inequality than many countries that have less inequality. Not a surprise. And that was one of the points I wanted to make. There is this nexus between economic inequality and political inequality. If you have more economic inequality, you're going to get inequality of political power in almost any democracy because of the way that money has influence. The result of that is that more political inequality reinforces the economic inequality in a vicious circle and makes it more and more difficult to break out of. One of the things I try to emphasize in the book is, you know, don't get hooked up on particular numbers. That is a, you know, it's important to know the numbers. But the qualitative factors that have been driving what is going on, the fact, the qualitative fact that we have more inequality than we did before and that we have more inequality than other countries are really, and that this is a question of choice because different countries do have markedly different inequality. Scandinavia and the US are markedly different. So different that no matter how you fight about the numbers, you're going to come to the same conclusion.
- [70:36]
A
Thank you, gentleman in the front row here. And then was the guy in the white jacket up front? In the front row of the. No, the guy in the front. Thank you. Hello. Consumption has been taking a beating recently, especially the reputation of it. However, it does at least employ a lot of people in the service sectors, offsetting those that have been made redundant through productivity gains. And I'd like to know your, your judgment, as it were, about using happiness as a unit of output in society. Happiness, subjective measures of happiness rather than income, as far as income.
- [71:25]
B
Well, I had a commission that looked called the Commission on the Measurement of Economic Performance and Social Progress and we emphasized that GDP and income is not a good measure of well being, of economic performance of social progress and that there are other dimensions that have to be taken into account. One example for instance, that's really relevant today is that people actually find meaningful work important. Standard economic model says that work is a negative, but in fact most people, for most people, meaningful work is an important part of their well being. And when they lose their job, they have all kinds of adverse consequences to that. There is some discussion in my book of what are the determinants of well being. One of the concerns that I raise and, and others have raised is that. One's sense of well being is affected by one's relative position and that if you see yourself as having much less income, consumption, whatever than your neighbors, you feel less happy. And there's actually some interesting empirical work that has looked at this that people who live in neighborhoods where they, where their neighbors are much better off tend to get more into debt. And one of the result, they tend to spend more. And the result of that is all kinds of adverse consequences over time.
- [73:18]
A
Thank you gentleman in the front. Mike.
- [73:20]
D
Good evening, Professor Stiglitz, My name is Huang. I'm a first year undergraduate at the rc, I think. Thank you so much for coming. It's a really great lecture and I think most of us are very convinced, except there's one very important argument from the American right that I haven't heard the answer to tonight and I just like to hear it clarified, which is that, as you have said, it is actually the rich that really save because they can about 15 to 20%. And this savings, of course, comes back in terms of investment into the economy. They are the big investors in the economy. And although the US has fallen behind in certain aspects, its dynamic efficiency and especially its technology in Silicon Valley remains the leader of the world. China's very, very far behind. And of course, even though you said that these young, talented people will invent and do all these anyways because they want to, the fact is that they still need the funding. Facebook, for example. Mark Zuckerberg, he had to find the funding to get it off the ground. So where does this leave us if America becomes an economy where it's, you know, more equal but less investment?
- [74:46]
B
Well, one needs to look at some of these issues from a global point of view. And it's interesting that you talked about savings because Bernanke, shortly before the crisis, was complaining about a savings glut, that there was too much savings in the world. I think he was wrong. Where he went wrong was that the financial system, the saving among the wealthy or among any group around the world didn't do what it was supposed to do. There are vast needs around the world. Some of you come from developing countries. You know how much is needed for infrastructure, for investments in human capital. The world needs to be retrofitted for global warming, which will require huge investments. But the financial market didn't address these needs of our global society. It went into trying to exploit the poorest Americans and to provide houses beyond their capacity to pay. So very little of it went to the venture capital, to the Googles. Now, the great strength of America's financial market is that at least a little of it went there. But as a fraction of the financial market, it's very small. And that's because most of us engaged in a very disproportionate part of us engaged in rent seeking. And that's where the theme of my what I'm talking about is if we got rid of that rent seeking, more of the capital would go into innovation. Now, one more point. From the narrow perspective of a single country like the US that has argued for globalization, the argument for saving and that that saving is linked to investment in the US is totally destroyed because Americans, when they save, have the opportunity investing anywhere in the world. When the Fed engaged in QE2, what happened increased the Liquidity, it provided more money. But did the money go where it was needed to rejuvenate the American economy? To provide money for small businesses that were struggling and going bankrupt because they couldn't get access to credit? No, it went where it wasn't needed. It went to China, it went to India, it went to Brazil. That had to create walls to stop the inflow of money in economies that were already overheated. So the point is that, yes, you do have to have savings, but you also have to have financial markets that redirect the savings where it's needed. And that's not true in today's global marketplace.
- [77:31]
A
Thank you. The gentleman there with his hand up there with the suit jacket, and then the guy at the back.
- [77:39]
B
Thank you. Professor Ticklus, I think you're preaching to the converted.
- [77:44]
A
You're all egalitarians here, but you said that democracy is a hope and democracy is the means of reducing inequality. But, you know, we had democracy, and yet our inequalities are increasing.
- [77:57]
B
So what I would like to ask.
- [77:59]
A
You, what is so robust about inequality and capitalism that it survives the democracy? What is it about capitalism, democracy, that is still robust in front of all this? Hasn't it done its job?
- [78:15]
B
Well, you know, I tried to explain in my book some of the reasons that our democracy has not been able to curb these excesses that have actually undermined the efficiency of our economy and which have contributed so much to inequality. You know, I talked about this process of disillusionment, disenfranchisement, and this notion that one of the great achievements of the market economy has been to learn how to sell, market anything. You know, take the cigarette companies. They persuaded very large fractions of Americans that cigarettes did not have any adverse health effects, didn't cause cancer, even though they had in their own files the evidence that it did. It was a very successful campaign. They said there was no credible evidence. They knew that there was. Well, if you can persuade so many people to buy a toxic product like cigarettes, you can get them to buy a toxic idea as well. And you can learn how to market ideas just like you can and market products. And many of the people at the top had the resources. They now have the tools from behavioral economics, from psychology, from marketing in which to sell ideas. They know how to do it. They precisely. I can't tell you how precise they try to target. They think about which words are going to get, what emotional response. That's what a lot of the political consultants work on. And they have the resources. So the fact is that we have a system that actually is resulted in selling ideas that often are not consistent with reality.
- [80:17]
A
There's a gentleman at the back who's been waiting. We're into the last five minutes, ladies and gentlemen.
- [80:25]
F
Hi, Professor Krugman, Thanks a lot again. Misha Clemech from GG Press, the Japanese news agency. Here again, I've got a question about Japan because I think Japan's quite interesting economically over the past 30 years. And I think perhaps maybe you could say that among economists it's sort of regarded as maybe a bit of a philosopher's stone, that if you can look at Japan as a case study and you can understand what happened Japan, you can maybe unlock what's happened to the uk, Europe and the US in the past four to five years. And I just wanted in reference to Professor Krugman, Professor Krugman has talked about this issue of liquidity traps, and he wrote a very interesting paper in 1998, which I read about liquidity traps. So he talked about the Ishm, I think, by Fisher in the 30s, and he was talking about the special nature of the Japanese slump and how they tried a fiscal stimulus, I believe, and they built loads of bridges to now, but it didn't work. And then they tried monetary policy where they had very low interest rates and they're trying to get Japanese people to spend, but they were just saving their money so they couldn't get any money into the economy. And Professor Krugman said that you have to the central bank has to set a negative interest rate and also try and increase inflation to try and get Japanese people to spend, if that's my understanding. So my question is, is the US Economy, is it in a liquidity trap or does it go, does it risk going to a liquidity trap? And also I understand that. I think as a Ken Ragoff in his book Eight Centuries of Folly, he talked about that they solved this question of a GDP to debt ratio that once it's at 90% that the Keynesian stimulus becomes basically doesn't work, it's killed because then the debt becomes too large. And I think Krugman and Ragoff have had running battles about this. So what's your view there?
- [82:16]
B
I mean, okay, let me. Those are big questions, which are another lecture I've been told I have one minute, but let me try to answer. And it's a macro issue rather than inequality. But I'm going to end with one comment about inequality. First, the concept of liquidity draft was very central to Keynes discussion. He was concerned about the inability to lower real interest rates. What was going on in the Great Depression is interest prices were falling about 10% a year in the United States. Even if you could get interest rates down to 1% that meant or 0%, you still had a real interest rate of 10%. And that high real interest rate was going to discourage investment. That was the idea. We are in a totally different situation today. And this is where, you know, Paul and I don't agree, don't disagree about very much, but this is one where he's wrong. Right now the T Bill raid in the United states is basically zero. The inflation rate is around 2%. It depends on your 2, 3%. And so the real interest rate is really minus 2 or 3%. And what has been the effect on investment? Not very significant. Not gotten us out of our.
- [83:45]
C
No.
- [83:45]
B
Does he believe if we can go from minus 3% to minus 13%, would it be better? Well, if you just gave a billion dollars, you know, trillions and trillions of dollars away, maybe that would happen. There is a problem. There is a different kind of liquidity trap than Paul talked about. And it illustrates what's wrong with a lot of macroeconomics. The problem is that the way the Fed gives money is through the banking system. And the problem is the banking system isn't lending. It's not the old style ISLM curve that is through. The fact is that particularly the banking system isn't lending to small and medium sized enterprises. And that's because the banks that focus on that, the small and regional banks are not in good health and the borrowers don't have the collateral that will satisfy the lenders. So it's a kind of liquidity trap, but it's very different. Another reason I already mentioned in response to one of the other questions, which is in the world of globalization, which is not the world the Keynes wrote about in the 30s. In the world of globalization you put out more liquidity. It looks around the world for the best place to invest that money. And the answer is not in the United States. So the Fed is living pretending it lives in a closed economy. The fact is we're in an open economy and its policies are not working. The notion that Rogov put forward that you reach the end of the world when you reach a critical debt GDP ratio of 90%, 80% total nonsense. And I think it's an embarrassment. If any of you had written that, I hope your teacher would give you a date. D minus. Why do I say that? I don't mean any insult to Anybody when I say that, but maybe I should call on somebody to say what they should have done in doing that study. You want to talk about the conditions? It depends on the circumstances. The United States left World War II with a debt GDP ratio of 130%. And we had over the next 35 years, the most successful, highest rate of growth and a growth that was shared prosperity. We grew together, no problem in terms of economic growth. There was not a crisis. We managed it well. I don't want to say that we could have done anything, but we built a rogue system. We had our Spooknick program, we had our education programs. We did a lot of public investment. We didn't hold back on that public investment because we grew the debt GDP ratio fell down. But remember, the way we got that debt was not the best way of getting debt. It was the way we got that debt by having to fight a war. And when you fight a war, you're not spending money on investments, you're spending money on munitions. So in some sense, we were starting that with that debt GDP ratio without the investment that you would have hoped that today you're getting. When you get debt, you're investing it in people and technology and infrastructure. That's different from the way we got the debt back during World War II. So it all depends on how you get your debt and how you manage the debt. So there's no magic number about that. Some people have looked at this much more analytically and have actually shown that there is nothing to that kind of hypothesis. That is an example of how people use data for a political purpose. You know, there have been a lot of countries with high debt to GDP ratios that have run into problems. You know, that's absolutely true. But that doesn't say that will happen in the United States. It doesn't say it will happen in the uk it really depends on what you spend your money on. If you were a firm and you took your money, and right now in the United States, we can borrow zero interest rate. We have a backlog of projects with returns of 20, 30, 40%. If we borrow money at zero interest rate and invest it at 2030, 40%, our country's balance sheet is being improved, and we could address some of the problems of inequality that we face. We can address some of the problems of global warming and environment, some of the problems of infrastructure. So the answer is it would make our economy stronger and it would lower our debt GDP ratio over the long run. So this notion that we shouldn't borrow anymore just because, just because we have a high debt GDP ratio is nonsense. And finally, let me say one other thing about Japan. It's very hard. You know, different countries are in different circumstances. Japan has close to a zero population growth rate. And obviously if you have a zero population growth rate, your growth dynamics are different than a country in the United States where the labor force is growing at 1% or, or would grow normally at 1%. If we had a normal economy, we were back to recovery. One of the remarkable things about Japan so far is that while they've had a long period of not very strong growth, and I think you have to say it's not been very strong.
- [89:40]
C
In.
- [89:40]
B
Terms of well being is one of the questions. Well being, there's many ways in which the suffering from that slow growth is markedly different than in the United States, which is even now growing a little bit faster. In Japan. The unemployment rate has remained relatively low in the United States. Close to one out of six Americans who would like a full time job can't get one. In Japan. There are relatively good safety net in the United States. There are millions of people for whom there are no longer any unemployment benefits. There are no welfare payments, there's no support system at all. There's no social protection. And as you all know, we still don't have an adequate public health care. So the fact of the matter is that the consequences of the economic recession differ across countries. And the way you manage your economy or the way you structure your economy can have very, very, very big differences, even though the same market forces are at play. And so when we talk, I talked about how the recession was having such a negative effect on the poor and even the middle class in the United States. That's a result of the way we structured our economy. And there are other economies that have managed economic fluctuations far better. And I think that's one of the things the United States should learn. One of the worries that I have of some of the other countries is this country in particular is that it may be going in the wrong direction.
- [91:38]
A
Thank you very much, Joe.