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NEW YORK – What’s wrong with the U.S. economy?
Growth comes in fits and starts. Unemployment has been over 8 percent for 3½ years. Cutting taxes and interest rates hasn’t worked, at least not enough.
To Joseph Stiglitz, a Nobel Prize-winning economist, the economy’s strange behavior can be traced to the growing gap between wealthy Americans and everyone else.
In his new book, “The Price of Inequality,” he connects surging student loan debt, the real-estate bubble and many of the country’s other problems to greater inequality.
When the rich keep getting richer, he says, the costs pile up. For instance, it’s easier to climb up from poverty in Britain and Canada than in the United States.
“People at the bottom are less likely to live up to their potential,” he says.
Stiglitz has taught at Yale, Oxford and MIT. He served on President Bill Clinton’s council of economic advisers, then became chief economist at the World Bank. He’s now a professor at Columbia University.
In an interview with the Associated Press, Stiglitz singled out the investment bank Goldman Sachs, warned about worrying over government debt and argued that a wider income gap leads to a weaker economy.
Below are excerpts, edited for clarity.
Q: The Occupy Wall Street demonstrations are no longer in the news, but you make the case that income inequality is more important than ever. How so?
A: Because it’s getting worse. Look at the recent Federal Reserve numbers. Median wealth fell 40 percent from 2007 to 2010, bringing it back to where it was in the early ’90s. For two decades, all the increase in the country’s wealth, which was enormous, went to the people at the very top.
... The financial crisis really made this easy to understand. Inequality has always been justified on the grounds that those at the top contributed more to the economy – “the job creators.”
Then came 2008 and 2009, and you saw these guys who brought the economy to the brink of ruin walking off with hundreds of millions of dollars. And you couldn’t justify that in terms of contribution to society.
The myth had been sold to people, and all of a sudden it was apparent to everybody that it was a lie.
Q: Markets aren’t meant to be fair. As long as we have markets, there are going to be winners and losers. What’s wrong with that?
A: I’m not arguing for the elimination of inequality. But the extreme that we’ve reached is really bad. ... We could have a more equal society and a more efficient, stable, higher-growing economy. That’s really the “so what.”
Q: You argue that it’s making our economy grow more slowly and connect it to “rent-seeking.” That’s an economist’s term. Can you explain it in layman’s terms?
A: Some people get an income from working, and some people get an income just because they own a resource. Their income isn’t the result of effort. They’re getting a larger share of the pie instead of making the pie bigger. In fact, they’re making it smaller.
Q: Where do you see this in the U.S.? Can you point to some specific examples?
A: You see it with oil and natural resources companies and their mineral leases and timber leases. Banks engaged in predatory lending. Visa and MasterCard just settled for $7 billion for anti-competitive behavior. They were charging merchants more money because they have monopoly power.
One good example was Goldman Sachs creating a security that’s designed to fail. That’s just taking money from some fool who trusted them. Our society functions well when people trust each other. It’s particularly important for people to trust their banks. Goldman basically said, “You can’t trust us.”
Q: What’s the answer, then? Raising taxes on wealthy people can’t possibly solve all the problems you mention.
A: No, there’s no magic bullet. But there are other ways of doing things. Just to pick one, look at how we finance higher education. Right now, we have this predatory lending system by our banks with no relief from bankruptcy. In some fundamental ways, it’s really evil and oppressive. Parents that co-sign student loans now find out they can’t discharge those loans, even in bankruptcy.