8/20/2019 Why the Rich Are So Much Richer by James Surowiecki _ the New York Review of Books http://slidepdf.com/reader/full/why-the-rich-are-so-much-richer-by-james-surowiecki-the-new-york-review-of 1/12 9/26/2015 Why the Rich Are So Much Richer by James Surowiecki | The New York Review of Books http://www.nybooks.com/articles/ar chives/2015/sep/24/stiglitz-why- rich- ar e- so-much- ri cher / 1/12 Why the Rich Are So Much Richer Ludovic/REA/Redux Joseph Stiglitz with Christine Lagarde,Paris, Se tember 2009 James Surowiecki SEPTEMBER 24, 2015 ISSUE The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz Norton, 428 pp., $28.95 Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz The Roosevelt Institute, 114 pp., available at www.rewritetherules.org Creating a Learning Society: A New Approach to Growth, Development, and Social Progress by Joseph E. Stiglitz and Bruce C. Greenwald Columbia University Press, 660 pp., $34.95; $24.95 (paper) The fundamental truth about American economic growth today is that while the work is done by many, the real rewards largely go to the few. The numbers are, at this point, woefully familiar: the top one percent of earners take home more than 20 percent of the income, and their share has more than doubled in the last thirty-five years. The gains for people in the top 0.1 percent, meanwhile, have been even greater. Yet over that same period, average wages and household incomes in the US have risen only slightly, and a number of demographic groups (like men with only a high school education) have actually seen their average wages decline. Income inequality has become such an undeniable problem, in fact, that even Republican politicians have taken to decrying its effects. It’s not surprising that a Democrat like Barack Obama would call dealing with inequality “the defining
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8/20/2019 Why the Rich Are So Much Richer by James Surowiecki _ the New York Review of Books
9/26/2015 Why the Rich Are So Much Richer by James Surowiecki | The New York Review of Books
http://www.nybooks.com/articles/ar chives/2015/sep/24/stiglitz-why- rich- ar e- so-much- ri cher / 3/12
- ro ec yn ca e, an y a r , e ew or mes,
have now been collected in The Great Divide, Stiglitz has made the case that
the rise in inequality in the US, far from being the natural outcome of market
forces, has been profoundly shaped by “our policies and our politics,” with
disastrous effects on society and the economy as a whole. In a recent report for
the Roosevelt Institute called Rewriting the Rules, Stiglitz has laid out a
detailed list of reforms that he argues will make it possible to create “an
economy that works for everyone.”
Stiglitz’s emergence as a prominent critic of the current economic order was no
surprise. His original Ph.D. thesis was on inequality. And his entire career in
academia has been devoted to showing how markets cannot always be counted
on to produce ideal results. In a series of enormously important papers, for
which he would eventually win the Nobel Prize, Stiglitz showed how
imperfections and asymmetries of information regularly lead markets to results
that do not maximize welfare. He also argued that this meant, at least in theory,that well-placed government interventions could help correct these market
failures. Stiglitz’s work in this field has continued: he has just written (with
Bruce Greenwald) Creating a Learning Society, a dense academic work on
how government policy can help drive innovation in the age of the knowledge
economy.
Stiglitz served as chairman of the Council of Economic Advisers in the Clinton
administration, and then was the chief economist at the World Bank during the
Asian financial crisis of the late 1990s. His experience there convinced him of
the folly of much of the advice that Western economists had given developing
countries, and in books like Globalization and Its Discontents (2002) he
offered up a stinging critique of the way the US has tried to manage
globalization, a critique that made him a cult hero in much of the developing
world. In a similar vein, Stiglitz has been one of the fiercest critics of the way
the Eurozone has handled the Greek debt crisis, arguing that the so-called
troika’s ideological commitment to austerity and its opposition to serious debt
relief have deepened Greece’s economic woes and raised the prospect that thatcountry could face “depression without end.” For Stiglitz, the fight over
Greece’s future isn’t just about the right policy. It’s also about “ideology and
power.” That perspective has also been crucial to his work on inequality.
The Great Divide presents that work in Stiglitz’s most popular—and most
populist—voice. While Piketty’s Capital is written in a cool, dispassionate
tone, The Great Divide is clearly intended as a political intervention, and its
tone is often impassioned and angry. As a collection of columns, The Great
Divide is somewhat fragmented and repetitive, but it has a clear thesis, namely
that inequality in the US is not an unfortunate by-product of a well-functioning
economy. Instead, the enormous riches at the top of the income ladder are
8/20/2019 Why the Rich Are So Much Richer by James Surowiecki _ the New York Review of Books
9/26/2015 Why the Rich Are So Much Richer by James Surowiecki | The New York Review of Books
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I
political process to their own benefit. (Thus, the title of his best-known Vanity
Fair piece: “Of the 1 percent, by the 1 percent, for the 1 percent.”) Soaring
inequality is a sign that American capitalism itself has gone woefully wrong.
Indeed, Stiglitz argues, what we’re stuck with isn’t really capitalism at all, but
rather an “ersatz” version of the system.
nequality obviously has no single definition. As Stiglitz writes:
There are so many different parts to America’s inequality: the extremes of
income and wealth at the top, the hollowing out of the middle, the
increase of poverty at the bottom. Each has its own causes, and needs its
own remedies.
But in The Great Divide, Stiglitz is mostly interested in one dimension of
inequality: the gap between the people at the very top and everyone else. Andhis analysis of that gap concentrates on the question of why incomes at the top
have risen so sharply, rather than why the incomes of everyone else have
stagnated. While Stiglitz obviously recognizes the importance of the decline in
union power, the impact of globalization on American workers, and the
shrinking value of the minimum wage, his preoccupation here is primarily with
why the rich today are so much richer than they used to be.
To answer that question, you have to start by recognizing that the rise of high-
end incomes in the US is still largely about labor income rather than capitalincome. Piketty’s book is, as the title suggests, largely about capital: about the
way the concentration of wealth tends to reproduce itself, leading to greater and
greater inequality. And this is an increasing problem in the US, particularly at
the highest reaches of the income spectrum. But the main reason people at the
top are so much richer these days than they once were (and so much richer than
everyone else) is not that they own so much more capital: it’s that they get paid
much more for their work than they once did, while everyone else gets paid
about the same, or less. Corporate CEOs, for instance, are paid far more todaythan they were in the 1970s, while assembly line workers aren’t. And while
incomes at the top have risen in countries around the world, nowhere have they
risen faster than in the US.
One oft-heard justification of this phenomenon is that the rich get paid so much
more because they are creating so much more value than they once did.
Globalization and technology have increased the size of the markets that
successful companies and individuals (like pop singers or athletes) can reach,
so that being a superstar is more valuable than ever. And as companies have
gotten bigger, the potential value that CEOs can add has increased as well,
driving their pay higher.
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Stiglitz will have none of this. He sees the boom in the incomes of the one
percent as largely the result of what economists call “rent-seeking.” Most of us
think of rent as the payment a landlord gets in exchange for the use of his
property. But economists use the word in a broader sense: it’s any excess
payment a company or an individual receives because something is keeping
competitive forces from driving returns down. So the extra profit a monopolist
earns because he faces no competition is a rent. The extra profits that big banksearn because they have the implicit backing of the government, which will bail
them out if things go wrong, are a rent. And the extra profits that
pharmaceutical companies make because their products are protected by
patents are rents as well.
Not all rents are terrible for the economy—in some cases they’re necessary
evils. We have patents, for instance, because we think that the costs of granting
a temporary monopoly are outweighed by the benefits of the increased
innovation that patent protection is supposed to encourage. But rents make theeconomy less efficient, because they move it away from the ideal of perfect
competition, and they make consumers worse off. So from the perspective of
the economy as a whole, rent-seeking is a waste of time and energy. As Stiglitz
puts it, the economy suffers when “more efforts go into ‘rent seeking’—getting
a larger slice of the country’s economic pie—than into enlarging the size of the
pie.”
Rents are nothing new—if you go back to the 1950s, many big American
corporations faced little competition and enjoyed what amounted to
oligopolies. But there’s a good case to be made that the sheer amount of rent-
seeking in the US economy has expanded over the years. The number of
patents is vastly greater than it once was. Copyright terms have gotten longer.
Occupational licensing rules (which protect professionals from competition)
are far more common. Tepid antitrust enforcement has led to reduced
competition in many industries. Most importantly, the financial industry is now
a much bigger part of the US economy than it was in the 1970s, and for
Stiglitz, finance profits are, in large part, the result of what he calls “predatory
rent-seeking activities,” including the exploitation of uninformed borrowers
and investors, the gaming of regulatory schemes, and the taking of risks for
which financial institutions don’t bear the full cost (because the government
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I
governance was, by any measure, considerably worse than it is today, not
better. As one recent study put it:
Corporate boards were predominately made up of insiders…or friends of
the CEO from the “old boys’ network.” These directors had a largely
advisory role, and would rarely overturn or even mount major challenges
to CEO decisions.
Shareholders, meanwhile, had fewer rights and were less active. Since then,
we’ve seen a host of reforms that have given shareholders more power and
made boards more diverse and independent. If CEO compensation were
primarily the result of bad corporate governance, these changes should have
had at least some effect. They haven’t. In fact, CEO pay has continued to rise
at a brisk rate.
t’s possible, of course, that further reform of corporate governance (like
giving shareholders the ability to cast a binding vote on CEO pay packages)
will change this dynamic, but it seems unlikely. After all, companies with
private owners—who have total control over how much to pay their executives
—pay their CEOs absurd salaries, too. And CEOs who come into a company
from outside—meaning that they have no sway at all over the board—actually
get paid more than inside candidates, not less. Since 2010, shareholders have
been able to show their approval or disapproval of CEO pay packages by
casting nonbinding “say on pay” votes. Almost all of those packages have been
approved by large margins. (This year, for instance, these packages were
supported, on average, by 95 percent of the votes cast.)
Similarly, while money managers do reap the benefits of opaque and
overpriced fees for their advice and management of portfolios, particularly
when dealing with ordinary investors (who sometimes don’t understand what
they’re paying for), it’s hard to make the case that this is why they’re so much
richer than they used to be. In the first place, opaque as they are, fees areactually easier to understand than they once were, and money managers face
considerably more competition than before, particularly from low-cost index
funds. And when it comes to hedge fund managers, their fee structure hasn’t
changed much over the years, and their clients are typically reasonably
sophisticated investors. It seems improbable that hedge fund managers have
somehow gotten better at fooling their clients with “uncompetitive and often
undisclosed fees.”
So what’s really going on? Something much simpler: asset managers are just
managing much more money than they used to, because there’s much more
capital in the markets than there once was. As recently as 1990, hedge funds
managed a total of $38.9 billion. Today, it’s closer to $3 trillion. Mutual funds
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.
Of course, the political challenge in doing any of this (let alone all of it) is
immense, in part because inequality makes it harder to fix inequality. And even
for progressives, the very familiarity of the tax-and-transfer agenda may make
it seem less appealing. After all, the policies that Stiglitz is calling for are, in
their essence, not much different from the policies that shaped the US in the
postwar era: high marginal tax rates on the rich and meaningful investment in public infrastructure, education, and technology. Yet there’s a reason people
have never stopped pushing for those policies: they worked. And as Stiglitz
writes, “Just because you’ve heard it before doesn’t mean we shouldn’t try it