We Need To Listen To Joseph Stiglitz

Joseph Stiglitz and Paul Krugman are my two favorite economists–probably because, despite both being Nobel Prize winners– both of them are able to explain their conclusions in language I can (mostly) understand, and because those conclusions usually strike me as eminently reasonable.

Stiglitz recently took on the neoliberalism that has characterized American governance since Reagan. Neoliberalism has been described as an economic system generally opposed to the provision or expansion of government safety nets, and highly skeptical of regulation, extensive government spending, and government-led countercyclical policy.

As Stiglitz notes,

On one side of the economic debate are those who believe in largely unfettered markets, in which companies are allowed to agglomerate market power or pollute or exploit. They believe firms should maximize shareholder value, doing whatever they can get away with, because bigger profits serve the common good.

The most famous 20th-century proponents of this low-tax/low-regulation shareholder-centric economy, often referred to as neoliberalism, are Milton Friedman and Friedrich Hayek. These Nobel Prize-winning economists took the idea beyond the economy, claiming this kind of economic system was necessary to achieve political freedom.
The strongest argument advanced by neoliberals is that economic freedom translates into political freedom. As Stiglitz points out, however, “not quite.”
We’ve now had four decades of the neoliberal “experiment,” beginning with Ronald Reagan and Margaret Thatcher. The results are clear. Neoliberalism expanded the freedom of corporations and billionaires to do as they will and amass huge fortunes, but it also exacted a steep price: the well-being and freedom of the rest of society…
Friedman and his acolytes failed to understand an essential feature of freedom: that there are two kinds, positive and negative; freedom to do and freedom from harm. “Free markets” alone fail to provide economic stability or security against the economic vagaries they create, let alone allow large fractions of the population to live up to their potential. Government is needed to deliver both. In doing so, government expands freedom in multiple ways.
Stiglitz’ basic argument is that the “Road to Serfdom” isn’t paved by governments that do too much; loss of freedom–serfdom– is a consequence of governing that does too little. He points out that populist nationalism poses a greater threat in countries like Israel, the Philippines and the United States than it does in in Sweden, Norway and Denmark. In those Scandinavian countries, high-quality public education, strong unemployment benefits and robust public health provide an economic floor that shields citizens from what he calls the “common American anxieties over how to pay for their children’s education or their medical bills.”
Discontent festers in places facing unaddressed economic stresses, where people feel a loss of control over their destinies; where too little is done to address unemployment, economic insecurity and inequality. This provides a fertile field for populist demagogues — who are in ample supply everywhere. In the United States, this has given us Donald Trump.
We care about freedom from hunger, unemployment and poverty — and, as FDR emphasized, freedom from fear. People with just enough to get by don’t have freedom — they do what they must to survive. And we need to focus on giving more people the freedom to live up to their potential, to flourish and to be creative. An agenda that would increase the number of children growing up in poverty or parents worrying about how they are going to pay for health care — necessary for the most basic freedom, the freedom to live — is not a freedom agenda.
Champions of the neoliberal order, moreover, too often fail to recognize that one person’s freedom is another’s unfreedom — or, as Isaiah Berlin put it, freedom for the wolves has often meant death to the sheep. Freedom to carry a gun might mean death to those who are gunned down in the mass killings that have become an almost daily occurrence in the United States. Freedom not to be vaccinated or wear masks might mean others lose the freedom to live.
Stiglitz provides examples of the various ways government regulation can enhance, rather than impede, individual freedom, and he ends by defining what he calls “progressive capitalism” (what I would call the “mixed economy.”) The goal of any economic system ought to be the creation of a broadly shared prosperity. The Isaiah Berlin quote captures the essential problem we face in today’s crony capitalist economy: we have a government that has been solicitous of the freedom and well-being of the wolves, and we’ve ignored the negative effects on the sheep.
Only government can (1) provide a social and political infrastructure accessible to all, and (2) prevent the wealthy and powerful from dominating and harming others. Neoliberalism fails on both counts.
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Deconstructing Liberty

There are so many words we Americans throw around, assuming we are communicating–assuming that my understanding of term X is the same as your understanding of term X. Often, the similarities in understanding are sufficient to allow us to communicate, at least superficially–but sometimes, it’s worth delving into the nuances of words the meanings of which we take for granted.

Like “liberty.” 

An article from Civic Ventures pointed to a reality that many economists have noted (a reality of which most of our politicians seem unaware): genuine liberty requires a measure of economic security. The expression of even the most basic civil and democratic liberties depend upon a basic floor of economic security–you are unlikely to indulge your right to free speech or participate in democratic deliberation if your entire life is spent scrabbling for food and trying to keep a roof over your head.

The article begins by quoting Nobel prizewinning economist Joseph Stiglitz on the effect of income inequality on democracy:

“As income inequalities grow, people wind up living in different worlds. They don’t interact. A large body of evidence shows that economic segregation is widening and has consequences, for instance, with regard to how each side thinks and feels about the other,” Stiglitz writes. “The poorest members of society see the world as stacked against them and give up on their aspirations; the wealthiest develop a sense of entitlement, and their wealth helps ensure that the system stays as it is.”

And because that gap between the haves and have nots has become so vast, he writes, something much more significant than personal wealth is at stake: Our very democracy is imperiled.  “Democracy requires compromise if it is to remain functional, but compromise is difficult when there is so much at stake in terms of both economic and political power,” Stiglitz concludes. 

Stiglitz also points out that economic security is an essential component of freedom. It doesn’t matter how “free” you are from government intrusion “if you’re one $500 expense away from total economic ruin and your rent goes up by hundreds of dollars every year. “

The article goes into a lengthy discussion of America’s economy, explains the successful performance of a variety of measures initiated by the Biden administration, and ends with a very important point:

After the success of the Child Tax Credit, it’s become clear that direct cash payments with no strings attached are a much more successful poverty reduction program than vouchers or other kinds of means-tested relief programs. There’s still a lot to debate about guaranteed income programs—I’m particularly concerned about them being misused as subsidies for low-wage employers—but it’s clear we’re entering a new phase of the public guaranteed income discussion. 

The question is no longer about whether it makes good sense to make direct investments in people. Now, the conversation is turning to how and when we make those investments happen.

That conversation should include a recent, fascinating interview of philosopher Elizabeth Anderson in Persuasion. Anderson has long been focused on the workplace, and the relative absence of workers’ rights enjoyed by non-union employees. She  echoes Stiglitz’ concerns about the effects of economic deprivation on democracy, and the individual’s ability to participate in political activity on anything remotely like an equal basis:

One of my agendas is to get us thinking more systematically about class inequality, because recent political discourse has been mostly focused on race, gender, sexual identity and sexual orientation issues. And one of the things I want to do is bring class back in. Looking at class, I think, provides us a better basis for building cross-cutting coalitions along the other identities. But also because we’re in a state now where our class inequality is quite extreme and it’s getting worse. And that’s not just a matter of how much money people have, but about their political power. In practice, a society which has lots and lots of billionaires is never going to be able to insulate politics from the overwhelming power that money supplies—political power, political influence. And so we have a threat to democracy here.

Read together, these articles–and really, hundreds like them–focus on a very troubling aspect of America’s current reality. We have millions of people who are effectively disenfranchised by poverty. They may have rights “on paper,” but the constant struggle to put food on the table precludes any enjoyment of those rights, and similarly precludes any meaningful participation in the democratic process. 

Do the working poor really enjoy “liberty” in any meaningful sense?

Think about that–and re-read my arguments for a UBI…

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Measuring Up

I’ve become increasingly fascinated by our human obsession with measurement, and the ways in which measuring something affects–and often distorts–our ability to understand it.

There’s polling, of course, for the political among us. Despite the admonitions of the pollsters themselves, we far too often see the “snapshots” they provide– not to mention the selected populations they quiz and the often-ambiguous questions they ask–as descriptive of the whole of America’s electorate and thus predictive of the future.

In education, legislators have embraced subject-matter testing without considering the way it distorts what happens in the classroom. Subjects that will be tested get extra time and attention; subjects that are of equal (or often superior) importance, like civics, get short shrift because they aren’t tested. (And don’t get me started on the mistaken belief that students’ test rresults measure teacher competence…)

Scientists know that the very act of testing something  can change the results. Scholars also remind us that drawing unwarranted conclusions from what we have chosen to test can lead us astray. Which brings me to a Guardian column by Joseph Stiglitz, one of my favorite economists.

The world is facing three existential crises: a climate crisis, an inequality crisis and a crisis in democracy. Will we be able to prosper within our planetary boundaries? Can a modern economy deliver shared prosperity? And can democracies thrive if our economies fail to deliver shared prosperity? These are critical questions, yet the accepted ways by which we measure economic performance give absolutely no hint that we might be facing a problem. Each of these crises has reinforced the fact that we need better tools to assess economic performance and social progress.

Stiglitz proceeds to point out problems with relying on GDP–long the standard measure of economic performance–to measure a country’s economic performance. (GDP is the sum of the value of goods and services produced within a country over a given period.)

As Stiglitz notes, GDP metrics don’t fully reflect impacts of things like Europe’s austerity measures on long-term standards of living.

Nor do our standard GDP measures provide us with the guidance we need to address the inequality crisis. So what if GDP goes up, if most citizens are worse off? In the first three years of the so-called recovery from the financial crisis, about 91% of the gains went to the top 1%. No wonder that many people doubted the claims of politicians who were then saying the economy was well on the way to a robust recovery.

For a long time I have been concerned with this problem – the gap between what our metrics show and what they need to show. During the Clinton administration, when I served as a member and then chairman of the Council of Economic Advisers, I grew increasingly worried about how our main economic measures failed to take into account environmental degradation and resource depletion. If our economy seems to be growing but that growth is not sustainable because we are destroying the environment and using up scarce natural resources, our statistics should warn us. But because GDP didn’t include resource depletion and environmental degradation, we typically get an excessively rosy picture.

In other words, Stiglitz is telling us that there is something fundamentally wrong with how we measure economic performance and social progress.

Getting the measure right – or at least a lot better – is crucially important, especially in our metrics- and performance-oriented society. If we measure the wrong thing, we will do the wrong thing. If our measures tell us everything is fine when it really isn’t, we will be complacent.

A recent article in Time suggests that other nations are coming around to Stiglitz’ view.

New Zealand became the first nation to formally drop gross domestic product (GDP) as its main measure of economic success. The government of Prime Minister Jacinda Ardern said the budget would aim not at maximizing GDP but instead at maximizing well-being.

Apart from schools, hospitals and roads, whose budgets would be allocated in the normal way, resources would be distributed according to their impact on five government priorities: mental health, child well-being, the inequalities of indigenous people, building a nation adapted to the digital age and fashioning a low-emission economy.

Shades of Bhutan’s “Gross National Happiness” index!

Stiglitz says it is now possible to construct much more accurate measures of an economy’s health.. I think it is fair to say that we should adopt those measures–but only after we subject them to a rigorous analysis to assure ourselves that the elements being measured are the ones that should be measured, the ones that will give us a more accurate understanding of ecological and economic (and inevitably social and political) reality.

What we choose to measure will tell us what we really value.

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What Teddy Roosevelt Understood That We Don’t

Back when Republicans were responsible stewards of the public good, Teddy Roosevelt waged war on monopolies. He understood that the virtues of capitalism–and they are many–required government protection. American commerce was no longer characterized by small merchants and farmers competing on a more-or-less equal playing field, and that made it imperative to constrain the powerful from dominating the marketplace and squeezing out the little guys.

In a recent column, Nobel prize winning economist Joseph Stiglitz points out that the problem of monopoly power is still with us, and still an enormous impediment to the proper working of a market economy:

In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks….

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.

Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. Some is because firms – Microsoft and drug companies are good examples – have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are “naturally” competitive. And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance.

Bottom line lesson: government should be an “umpire,” ensuring a level playing field, rather than a member of the “team” that has most effectively used its greater resources to game the system and co-opt the process.

As Stiglitz notes, unequal distribution of power in the marketplace drives inequality and undermines democratic institutions. It’s hard to disagree with his conclusion:

If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters. But if markets are based on exploitation, the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.

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