Joseph Stiglitz: The Price of Inequality

A critical assessment of the author's argument in the debate on the relationship

Chantal
27-11-2013
 Joseph Stiglitz: The Price of Inequality
A critical assessment of the author's argument in the debate on the relationship between
inequality and economic growth

In his book, 'The Price of Inequality', Nobel Prize winning economist Joseph Stiglitz,
joins in the long-standing debate on the relationship between income inequality and economic
growth. Multiple scholars and economists have written on the subject, which has led to a wide range
of views and opinions within the debate. These views could roughly be divided into three
categories. The first category exists of scholars who conclude that inequality has a negative effect
on economic growth (Persson and Tabellini; Perotti ; Kremer and Chen; Reich; Thompson and
Leigh; Acemoglu and Robinson). The second category covers scholars who claim that inequality
has a positive effect on economic growth (Partridge; Li and Zhou; Forbes; Frank. Finally, the third
category concerns a group of academics that does not necessarily see a direct causal link between
inequality and economic growth (Barro; Lopez). Throughout this essay, we will see that Stiglitz can
be placed in this first category.
The following section from the introductory chapter, in my opinion, perfectly summarizes
the main thesis of this book: "We have a system that has been working overtime to move money
from the bottom and the middle to the top, but the system is so inefficient that the gains to the top
are far less than the losses to the middle and bottom. We are, in fact, paying a high price for our
growing and outsize inequality: not only slower growth and lower GDP but even more instability
(42)." Stiglitz argues that the rising inequality in America hurts economic growth, because the top 1
percent of the population gets about one-fifth of total national income (52). This robs lower and
middle class households of opportunities to grow economically. As Stiglitz states: "Over the last
three decades those with low wages (in the bottom 90 percent) have seen a growth of only 15
percent in their wages, while those in the top 1 percent have seen an increase of almost 150 percent
and the top 0.1 percent of more than 300 percent (53)."
This thesis lays the foundation for the ten subsequent chapters, which, all together, discuss
"why our economic system is failing for most Americans, why inequality is growing to the extent it
is, and what the consequences are (33)." However, in this essay we will focus on chapter two, 'Rent
Seeking and the Making of an Unequal Society' in which Stiglitz discusses one main factor, or

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actually two, that he thinks has contributed the most to America's inequality, namely, rent seeking
and the lack of governmental action to halt this.
The term rent seeking, according to Stiglitz and many other economists, refers to activities
that are carried out with the goal of "getting income not as a reward to creating wealth but by
grabbing a larger share of the wealth that would otherwise have been produced without their effort"
(76). And in this case, 'their' applies to the people at the top of society (76). According to Stiglitz,
people at the top are making money by "taking advantage of their market and political power to
favor themselves, to increase their own income, at the expense of the rest" (80). He adds to this that
the "government has the power to move money from the top to the bottom and the middle, or vice
versa"(73), but that the American political system has, instead, worked towards more inequality of
outcomes and opportunity (76).
However, how did he come to this argument? In the section 'Acknowledgements', Stiglitz
devotes four pages to describing his research methods and the processes he has passed through
while investigating the issue delineated in his book. Stiglitz explains here that he has been working
"on the origins and consequences of inequality" ever since he was a graduate student (376). Among
the persons who have greatly influenced his way of thinking, and whom he has worked with during
the fifty years since the beginning of his studies, we find names such as, Robert Solow, Paul
Samuelson, George Akerlof, and Tony Atkinson, whom are all household names in the field of
economics.
In the 'Preface' of the book, Stiglitz explains that he has traveled through the United States
and Europe to discuss "inequality, its causes and consequences and what could be done about it
(9)." However, important to note is that this did not (always) happen in an academic setting. This
becomes evident from expressions such as "Many people shared with me their personal stories of
how what was going on was affecting them, their families, and their friends", and "They didn't want
to take on even more loans, and their sense of disillusionment, of hopelessness, was sobering and
sad (9)." There is a high probability, in my opinion, that these real-life stories and emotions have
influenced Stiglitz's thinking and, therefore, his writing. Even though he explains that behind these
stories, there "was a raft of new data that also has a bearing on the arguments of the book (9)."
Much of the data that Stiglitz uses, stems from recent empirical research that has also been
used in other books about inequality. One example is when Stiglitz states that "financiers make up a
significant portion of the top 1 or 0.1 percent (86)", and, therefore, are guilty of rent seeking. To
back up this statement, he refers to an article by Bakija, Cole and Heim, who have concluded that
"executives, managers, supervisors, and financial professionals account for about 60 percent of the
top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in

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the share of national income going to the top 0.1 percent of the income distribution between 1979
and 2005 (Bakija, Cole and Heim 41)."
These authors have come at this conclusion by using "statistics on the occupations of
taxpayers in the top percentile of the national income distribution and fractiles thereof, as well as
the patterns of real income growth between 1979 and 2005 for top earners in each occupation, based
on information reported on U.S. individual income tax returns" which makes Stiglitz's argument
quite reliable. This is reinforced by the fact that this exact same data is also used by Piketty and
Saez, who, in their article 'Top Incomes and the Great Recession: Recent Evolutions and Policy
Implications', present new findings on the rising shares of top income. However, even recent
empirical data may not be sufficient to make certain conclusions, as we will find out later.
Furthermore, at some points, it seems as if Stiglitz writes about certain aspects as if they
were a given fact, whereas it is merely a reflection of the author's own view. An example of this is
when Stiglitz argues that the financial sector has "powerfully" contributed to the current level of
inequality (81). As to why this is so, he refers to his previous book,'Freefall', in which he explained
several reasons as to why the financial sector did "not perform its functions well in the run-up to the
2008-09 crisis (337)." However, when making such claims, it would be more convincing to refer to
other literature as well, and to discuss it thoroughly in the book, instead of giving only a brief
reference to it. Especially, since there are so many different views and opinions on who and what
has contributed to the crises and slow economic growth.
Another example is when Stiglitz argues that "those at the top, of course, have continued to
be helped by the Federal Reserve (11)." Geoffrey Woglom, Professor of Economics, disagrees with
"Stiglitz's blanket criticism of Federal Reserve policies as motivated in the interest of the 1 percent."
Contrary, he thinks that the policy of the Fed in 2008 prevented a worldwide depression and was,
therefore, in the "interest of the 100 percent." Thus, we see here that both authors take very different
opinions on the role of the Federal Reserve in times of the crisis.
We have seen how Stiglitz blames the government and rent seeking activities by the top, for
most of the inequality. However, when we read other books and articles on this subject, we can
observe opposed views. Therefore, it is important to realize that other factors, on which Stiglitz
does not focus so much, may have contributed to the inequality to a much larger extent than Stiglitz
suggests. This is because the book represents Stiglitz view on the issue, which might be formed by
different experiences and factors than other scholars. Thus, in order to support his arguments,
Stiglitz uses data and findings of research methods which, more or less, are in line with his own
argument. However, it would have been useful if Stiglitz had been less subjective and if he had
discussed different views and opinions more thoroughly throughout his book.

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 Furthermore, Stiglitz represents the issue as if inequality, in any case, has a negative effect
on economic growth. This, while the relationship between inequality and growth has been subject to
debate for a long time. For example, Barro, in his article 'Inequality and Growth in a Panel of
Countries', states that "there is evidence that the negative effect of inequality on growth shows up
for poor countries but that the relationship for rich countries is positive", but that the "overall effect
of inequality on growth" is weak (8). Furthermore, Panizza and Frank are two other scholars who
have studied the relationship between inequality and growth in the United States, and who both
reached different conclusions. Panizza finds no relationship at all, whereas Frank (2009) concludes
that there is a positive long-run relationship.
These are just few of the many different outcomes, which suggests that assessing the
relationship between inequality and economic growth is highly complicated. In my opinion, this is a
good enough reason to directly challenge Stiglitz's argument. On top of that, it must be stressed that
much of the existing empirical literature did not make use of the "appropriate distributional
statistics", due to the "limited availability of distributional data", as Brzezinski indicates (4). He
adds to this that "most of the empirical studies have relied on the most popular inequality measure -
namely, the Gini index - which is most sensitive to changes in the middle of the distribution (4)."
All of this together, makes it difficult to determine the extent to which Stiglitz has considered and
taken into account these factors and influences when he came to his conclusions.
Another flaw of the book, in my opinion, is that Stiglitz justifies his focus on rent seeking,
as main cause of inequality, as a matter of different opinions. As he states, "as expected a few critics
suggested that I paid less attention to market forces than I should have and, correspondingly, gave
too much weight to rent seeking. As I explain in the text, it is essentially impossible to single out
any one factor's relative contribution, given how intertwined the various forces shaping inequality
are; there can be honest differences of opinion (12,13)." However, if Stiglitz admits that it is
difficult to determine to what extent a certain factor has contributed to the inequality, then why does
he still focus on rent seeking for the main part? This statement, in my view, significantly affects the
validity of his argument. This is reinforced by the fact that many scholars ascribe much of the
inequality to other factors and events.
A third flaw of the book could be observed if we look at how Stiglitz approaches other
views with regard to the cause of inequality. In my opinion, it is necessary to stay objective, even
though a particular finding might seem more plausible than another. We know by now that Stiglitz
sees rent seeking and, especially, the lack of governmental action in stopping this, as the main cause
behind inequality. This might have led to the fact that he connects almost every other possible cause
to this argument. For example, he states that globalization has certainly contributed to the growing
inequality, but he immediately adds to this that this is so because of the way "globalization has been
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managed", and that the people at the top are "among the winners from globalization in the United
States (107)." Both the government and the top are implied in this statement. We see this type of
arguing more often throughout the chapter and throughout the book. Stiglitz does discuss other
potential causes of the inequality, yet, always in connection with either 'rent seeking' or
'governmental policies', or both.
In conclusion we could say that Stiglitz belongs to the group of economists that finds a
negative relationship between inequality and growth. According to Stiglitz, this inequality is caused
because the top 1 percent of the population gets a too large share of total income in the United
States. This is achieved by rent seeking behavior (by the top) and the allowance hereof by the
government. Thus, Stiglitz argues, if we want to change the rising gap between rich and poor, we
need to focus on these two aspects.
However, Stiglitz often based his arguments on personal experiences and acquired
knowledge during his economic career, which makes it difficult to determine the validity of these
arguments. This is reinforced by the fact that the empirical data he uses, is often incomplete.
Furthermore, one might conclude that Stiglitz focuses too much on his own perspective, instead of
integrating his opinion into the wider debate on the causes and consequences of inequality.

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