By Gregory Cowles
Published: July 6, 2012
UNEQUAL EXCHANGE: For a few weeks now, two drastically different arguments about America’s income gap have been bouncing around the hardcover nonfiction list. In “The Price of Inequality” (currently at No. 27 on the extended list), the Columbia professor and Nobel-winning economist Joseph E. Stiglitz makes the case that the growing gulf between haves and have-nots is a drag on the economy and a drain on society. Meanwhile, in “Unintended Consequences” (at No. 12), the former Bain Capital managing director Edward Conard says inequality is healthy and America could use more of it. This is a political dispute as much as an economic one, of course: Conard is close to his old Bain colleague Mitt Romney, and Stiglitz was chairman of President Clinton’s Council of Economic Advisers from 1995 to 1997. But basic economic theories are also at play. Who’s right? I’m not qualified to judge — I was a French major — but the books are in such perfect, symmetrical opposition that I’ve been a little surprised not to see their authors duking it out on every Sunday morning talk show. So I figured I’d give them the chance here. A condensed version of this exchange will be published in the July 15 Book Review.
INEQUALITY IS BAD: “I’m not arguing that there should be no inequality,” Stiglitz said via e-mail. “There is a need for incentives, and any system of incentives will lead to some differences — perhaps large differences — in incomes. But I am arguing that excessive inequality is bad for economic growth and stability; even the I.M.F. has recognized this. The weight of evidence, some of which I cite in my book, is really on my side: (excessive) inequality is bad for growth.
“There are a variety of reasons I lay out in my book. It leads, for instance, to underinvestment in the ‘public good,’ including infrastructure, education and technology. The level of inequality in the United States has clearly reached this ‘excessive’ level. It has more inequality than any of the other advanced industrial countries. Indeed, the growth of inequality in recent years has meant that while G.D.P. per capita has increased, income of the median household has essentially stagnated. Trickle-down economics has not worked.
“Even more disturbing is that the United States has become the country with the least equality of opportunity among the advanced countries for which there is data, and this includes many in ‘old Europe.’ This means that a child’s life prospects are more dependent on the income and education of his parents than in these other countries; and it also means that we are not making use of one of our most valuable resources, our young people.
“I argue further that the way inequality is created in the United States — much of it the result of market distortions like monopolies, the ‘abuses’ of the financial system, chief executives taking advantage of deficiencies in corporate governance to claim a larger share of corporate revenues, using campaign contributions to get preferential tax treatment, corporate welfare and other gifts from the public — actually weakens the economy. The inequality is not the result of innovations that enhance growth. The richest are not the inventors of the laser and the transistor, the discoverers of DNA, the innovators who have transformed our lives and our economy. Rather, many have succeeded in garnering for themselves a larger share of the national pie — not increasing the size of the pie.
“Conard’s position is that inequality is good because it spurs innovation. But the incentive structures of the bankers spurred reckless risk-taking at the expense of the public and exploitation — not innovations that led to sustained faster growth. The wealthy use their money to buy favors from the government, whether direct gifts or laws and regulations that give them scope to exploit others.
“As I wrote in response to a question posed to me by Vanity Fair:
“The real drivers of growth and innovation are young businesses, and small- and medium-sized businesses, and especially in high-tech areas, these are typically based on government-supported research. Part of America’s problem today is that too many of those at the top don’t want to make their fair share in contributing to these ‘public goods,’ with many paying taxes that are but a fraction of those who are much less well off.
“Just providing low tax rates to those at the top — giving them more money that they could invest in the United States and innovate — doesn’t mean that they will or have. There is, sometimes, no sense of responsibility or obligation. Some of those at the top (like the infamous Facebook investor) would rather give up their citizenship than pay the low capital gains tax rate. But more generally, many have decided it is better to create jobs abroad, or to buy expensive villas abroad — money that doesn’t stimulate our economy or make it stronger.
“I can see the argument for encouraging real entrepreneurship, innovation and job creation through lower tax rates on those things. But it doesn’t make sense to allow lower taxes for job-destroying private equity firms or country-destroying speculators/hedge funds than for the scientists who win Nobel Prizes.”
INEQUALITY IS GOOD: “Joe argues the rich have garnered an increasing share of income by unproductively manipulating government policies, which slows overall G.D.P. growth,” Conard wrote. “His hypothesis doesn’t explain why American productivity growth has accelerated from 1.2 percent per year in the 1970s and ’80s to 2 percent per year since the commercialization of the Internet, while Europe’s and Japan’s productivity growth has slowed considerably relative to the United States despite similarly educated workforces and access to the same technology. Nor does it explain why United States employment and total middle-class income have grown more than twice as fast as Europe’s and Japan’s since the 1980s.
“I argue that the payoffs for successful risk-taking needed to produce innovation were higher in the United States for a variety of reasons, including government policies, at a time when the commercialization of the Internet opened a rich window of untapped investment opportunities. Higher payoffs motivated more risk-taking and investment (properly measured to include the wages of innovators). This had a powerful compounding effect over time. Success raised the bar for success. Talented American workers worked longer hours, took more risk and earned more income than their counterparts in Europe who diminished their work effort. Success produced new companies, like Google and Facebook, that provided valuable on-the-job training, which increased their workforces’ chances of success. Success put equity into the hands of investors more willing to bear the risks needed to produce innovation. While some critics call this ‘trickle down,’ even liberal economists, like Dean Baker, agree the benefits from investment and innovation are at least five times more valuable to non-investors than investors.
“I believe Joe and I share the same objective: growing middle- and working-class employment and incomes as fast as possible. We should grow concerned about income inequality when it sets back this objective — if and when the rich use their wealth to thwart innovation or to take rightfully earned income away from the middle class and the working poor, for example. Joe claims we have reached that point, but comparisons to Europe and Japan make that hard to believe. In addition to faster growth, the top 10 percent in the United States pays a substantially greater share of taxes relative to their share of income than their counterparts in Europe and Japan. And higher government expenditures in Europe are funded by higher taxes on the middle class, not the top 10 percent. This would not be the case if the rich controlled the American political process to their advantage.
“We should also grow concerned when a backlash to inequality threatens to dampen the incentives for the risk-taking needed to produce innovation and employment growth. In the aftermath of the financial crisis, slow growth and high unemployment have fomented this backlash. But the slow growth of Europe and Japan demonstrates that we should be far more concerned about the difficulty of generating employment growth in high-wage economies than reducing income inequality. So far, the United States has proven to be the superior real-world alternative by a wide margin. As I argue in my book, theoretical alternatives, like Joe’s, are fraught with unintended consequences: in this case, slower employment growth.”