The Price of Inequality

LSE Public Lectures and Events
Speaker: Joseph Stiglitz | Date: June 29, 2012

Episode Overview

This episode features Nobel laureate economist Joseph Stiglitz discussing core arguments from his then-new book, The Price of Inequality. Addressing a full audience at the LSE, Stiglitz outlines the causes, consequences, and possible solutions to the surging inequality in the United States—with direct parallels to the UK and other advanced countries. The talk is both diagnosis and prescription, with a particular focus on how inequality damages economic performance, democracy, and social justice, and why prevailing economic theories fall short in explaining or justifying current inequality.

Key Discussion Points and Insights

1. Background & Framing the Debate (02:56)

• The book was inspired by Stiglitz's influential article "Of the 1%, by the 1%, for the 1%" which became a rallying point for Occupy Wall Street:

  "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%.'" (03:24, Stiglitz)

• Stiglitz emphasizes that inequality is not about the politics of envy but real questions of justification and consequence.
• He intends to discuss: (1) What has happened to inequality, (2) causes, (3) consequences—economic, social, political, and (4) alternatives.

2. Current State and Trends in Inequality (07:30)

• US inequality is historically and internationally extreme:
  • Top 1% receives ~20% of income; its share has doubled since 1980; top 0.1% tripled.
  • Patterns in the UK are "very similar… not quite as severe, but a similar pattern."
• Inequality is not inevitable or intrinsic to capitalism or market forces:

  "It's not an inherent feature of capitalism… If you look across countries, there are very large differences in the degree of inequality." (06:53)

• Countries like Brazil reduced inequality after "looking over the brink" and finding broad consensus—including among elites—that the status quo was unsustainable.

3. Equality of Opportunity Myth (13:15)

• The US claims to care about opportunity, not outcomes—yet evidence contradicts this:

  "Equality of opportunity is lower in the United States than in any of the advanced industrial countries for which there's data… 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." (14:56)

• Mobility is limited: Upward mobility for the poor is less; downward mobility for the rich is also restricted.
• Example:

  "A child of a well-off parent who does poorly in school has better prospects than a child of a poor parent who does well in school." (16:43)

4. Consequences of the Great Recession (18:10)

• The recession amplified inequality:
  • Median wealth fell nearly 40% (2007–2010), erasing two decades of progress for the "typical" American.
  • Wealth gains accrued almost entirely at the top—in 2010, 93% of all income gains went to the top 1%.
• Student loan crisis exacerbates inequality:

  "Average student in the United States is graduating now with over $25,000 of debt… The government has not been allowed to regulate [for-profit schools] because… they have been very successful in lobbying." (20:41–21:40)

5. Discrediting the Standard Economic Justification for Inequality (22:52)

• The marginal productivity theory (rewards reflect contribution) fails in practice, especially exposed by the financial crisis:

  "During the crisis, what we saw so clearly was that the bankers were walking off with very large compensation even in banks that they brought to the brink of ruin…" (23:45)

• Stiglitz jokes about "making a sign error" in math:

  "So they should have been giving back a lot because they had such a negative effect." (24:12)

• Salaries and bonuses often result from perverse incentives, rent-seeking, and lack of transparency, not social value creation.

6. Role of Rent-Seeking and Shaped Markets (28:50)

• Much modern inequality arises from rent-seeking—deriving income from manipulation of the system, not productive contribution.

  "A large fraction of… economic activity is rent seeking. That's what you saw in the financial markets in the LIBOR case." (30:09)

• The structure of laws, taxes, bankruptcy, and corporate governance actively shapes inequality:

  "We are shaping those market forces and different countries shape them differently—by laws, regulations, government spending, tax policy… every part of the rules of the game." (31:15)

7. Inequality’s Impact: Poverty, Polarization, and Social Cohesion (33:03)

• Inequality at the top links to increasing poverty at the bottom via mechanisms like predatory lending.
• The middle class is being hollowed out:
  • Causes include technology, weakened unions, asymmetric globalization, and policies prioritizing capital over labor.

8. Why Inequality is Bad for Growth and Democracy (38:42)

• Contradicting the usual "tradeoff":

  "The way we've created inequality… has not contributed to an increase in productivity and growth, but actually diminished that." (38:42)

• The IMF (not a radical body) now recognizes inequality as a cause of economic crisis.
• Redistributing from bottom to top weakens aggregate demand; attempts to mask this with asset bubbles are unsustainable.

9. Prescriptions: What Can Be Done? (44:43)

• Restrict rent-seeking: Tighter regulation, corporate governance reform, fairer bankruptcy laws.
• End hidden subsidies to business (e.g., US government banned from negotiating drug prices—a "gift" of $500B+ to Big Pharma).
• Institute progressive, fairer taxation: Reduce incentives for speculation, curb loopholes, and strengthen progressive features.
• Stiglitz notes the paradox of democracy:

  "Anybody looking at what's happened in the United States… the outcome is better described by $1 one vote than one person one vote." (48:54)

• Corruption is made worse by money in politics, judicial decisions (e.g., Citizens United), and systemic disenfranchisement/disillusionment.

10. Information Gaps and Public Perceptions (51:43, 60:06)

• The wealthy promote policies benefiting themselves by convincing others their interests coincide.

  "Most… think we should be more equal, but they think we're much more equal than we are." (51:53)

• Example: More people support abolishing the estate tax than are remotely affected by it, due both to misconceptions and the myth of universal mobility.

11. Justice, Accountability, and Hope (54:12 & 56:27)

• Inequality damages faith in the justice system; the powerful often evade accountability.
• Is there hope? Stiglitz offers two avenues:
  1. Some elites recognize enlightened self-interest and fight for shared prosperity (e.g., Warren Buffett).
  2. As a democracy, the US and others can still change course—historically periods of high inequality (Gilded Age, 1920s) led to major reforms.
• Final note:

  "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." (58:25)

Notable Quotes with Timestamps

• "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%'." — Stiglitz (03:24)
• "Equality of opportunity is lower in the United States than in any of the advanced industrial countries for which there's data." — Stiglitz (14:56)
• "The way we've created inequality in our country… has not contributed to an increase in productivity and growth, but actually diminished that." — Stiglitz (38:42)
• "Anybody looking at what's happened in the United States… the outcome is better described by $1 one vote than one person one vote." — Stiglitz (48:54)
• "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." — Stiglitz (58:25)

Audience Q&A Highlights

1. Misperception and Persuasion (59:24, 60:06)

• Many Americans (wrongly) imagine themselves in the top percentiles; the belief in "making it to the top" distorts political choices.

  "They've been sold a bill of goods… very important for us to try to dispel that myth. And that's one of the reasons I wrote the book." (60:16, Stiglitz)

2. Rent-Seeking Regulation Feasibility (61:14–64:43)

• Stiglitz is skeptical of waiting for international coordination on financial regulation; this argument is often deployed (disingenuously) to delay needed action.

3. Data Integrity in Inequality Studies (64:53–70:36) — Q from a former US lawyer:

• Stiglitz responds: True, various measures matter, but the broad conclusion remains—after taxes and transfers, the US is still the most unequal among rich countries:

  "The qualitative fact that we have more inequality than we did before and that we have more inequality than other countries… is a question of choice." (69:39)

4. Well-being Beyond Income (71:14)

• Happiness/subjective well-being metrics matter; inequality erodes well-being by increasing relative deprivation and social stress.

5. Savings of the Rich as Investment (73:20–77:31)

• Savings do not automatically translate into productive investment; much financial activity supports speculation and bubbles, not real economy innovation.

  "The financial market didn't address these needs of our global society. It went into trying to exploit the poorest Americans… So very little of it went to the venture capital, to the Googles." (75:15)

6. Democracy’s Weakness in Addressing Inequality (77:38–80:17)

• Why doesn't democracy check inequality? Stiglitz:
  • Through disillusionment, disenfranchisement, and marketing ("selling ideas" like products), public support for policies that entrench inequality is manufactured.

7. Japan, Liquidity Traps, and Public Debt (80:25–89:39)

• On macroeconomic debates: US is not in a "classical" liquidity trap but suffers from dysfunctional monetary transmission and global capital flows.
• High debt/GDP is not inherently disastrous; what matters is the use of borrowed funds (e.g., productive investment vs. war).

Most Memorable Moments

• The debunking of "trickle down" economics and marginal productivity theory as inadequate moral and practical justifications for rising inequality.
• Stiglitz's explanation that markets are not neutral or natural, but "rules of the game" policies that create and shape inequality.

  "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." (30:45)

• The insistence that democracy, though flawed and vulnerable to manipulation, remains a possible route to reform.

Important Timestamps

• 02:56 – Stiglitz begins: background and introduction to the topic
• 07:30 – Data on US & UK inequality
• 13:15 – Critique of "equality of opportunity"
• 18:10 – Impact of the Great Recession on wealth and inequality
• 22:52 – Marginal productivity theory and its failure
• 28:50 – Rent seeking vs. productive economic activity
• 33:03 – Structural mechanisms reinforcing inequality
• 38:42 – Inequality undermining growth and social wellbeing
• 44:43 – Policy prescriptions and hope for reform
• 51:43 – The problem of public misperception
• 54:12 & 56:27 – Inequality and justice; potential for change
• Entire Q&A – 59:24 onward

Conclusion

Stiglitz forcefully argues that current levels of inequality are neither necessary nor healthy, but the result of choices—in taxation, regulation, governance, and culture—that can be changed. Throughout, he offers evidence, anecdotes, and humor to puncture economic myths and illuminate the stakes: a fairer, more prosperous, and democratic society is possible, but only if we recognize the high "price of inequality" and act collectively to change course.