Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”
As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.
The first is his claim that the last thirty years has seen the ascendance of “deregulated capitalism.” It is not immediately obvious to me how to measure, and thus evaluate, a claim like that, but a few likely indicators seem to point against Stiglitz. For example, measured in constant dollars, government spending, both federal and combined federal, state, and local, have increased every single year during Stiglitz’s window (he said “the early 1980’s to 2007”; I represent below 1980 to 2007). Here is total spending:
As a percentage of GDP for the same period, total spending has remained fairly flat:
I could not find detailed numbers on regulatory burdens and costs before 1995, but in reports compiled by the U.S. Small Business Administration (a federal government entity) in 1995, 1998, 2001, 2005, and 2010 (all available here), total cost of regulatory burdens increased each year. Moreover, according to economists Veronique de Rugy and Melinda Warren, both total budget outlays of regulatory agencies and staffing of such agencies has steadily increased since 1980, outpacing both inflation and population growth. And economic regulation in particular—which may be what Stiglitz is primarily thinking of—has also increased throughout the period.
All of this is difficult to explain on Stiglitz’s hypothesis.
The second claim of Stiglitz’s that puzzles me is that during the last 30 years, “most Americans saw their incomes decline or stagnate year after year.” But whether measured in nominal or real terms, most incomes across the classes have increased since 1980, even if modestly. Here is income distribution from 1947 to 2007 in constant 2007 dollars:
Here is real median household income in constant 2009 dollars by race:
This indicates that most incomes have risen when measured in real dollar income. But even that leaves out the important fact that what those incomes can buy in terms of goods and services has increased dramatically. Because the cost of most goods and services tends to go down over time, and because innovation not only finds more efficient ways of bringing current goods and services to market but also produces new goods and services, what people can buy with their money—even if their incomes stayed relatively flat—has increased. Consider just one conspicuous example, the sharp decline in the price of computing power.
That point leads to my final comment on Stiglitz’s essay. Consider this passage, in which he offers his remedies for the fiscal challenges we face:
The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.
Many people, including the president again just last night, have been calling for raising taxes on the rich as at least one part of the way out of the morass. The president suggested that by “the rich” he meant those making over $250,000 per year, which is about 1.5% of American households.
I shall make no comment about the economic sense of the president’s proposed policy, or about what seems to be his zero-sum-game conception of wealth. But let us try to gain some perspective on this definition of “the rich” by comparing it to worldwide standards. People making over $250,000 in annual income are, by any worldly standards—whether measured by the rest of the world today or, even more so, in historical terms—wealthy to a degree that would have been unimaginable just a few generations ago. But then again, everyone in America is.
For most of human history, people survived on something like $1–3 per day in current dollars. Over the last seven generations of humanity, however, that has increased by something like sixteen-fold (read McCloskey’s latest for the data). Average per capita income in the U.S. in 2010 was $47,200, approximately fifty times the average for most of human history. Not a fifty percent increase, not a five hundred percent increase, but a five thousand percent increase. Worldwide, average income in 2010 was $11,200—an astonishing increase by historical standards, but only one-fourth that of the United States.
Indeed, the proportion of the American citizenry whose income is above that of the current worldwide average is . . . do you have a guess? What would you have guessed? It is eighty percent. Eighty percent of Americans earn an annual income higher than the worldwide average, which includes about two-thirds of those Americans who currently pay no federal income tax at all. Today, effectively zero percent of Americans have incomes equal to or lower than double the average worldwide income for human beings throughout most of their history.
All Americans are rich—indeed, we are rich at unprecedented levels. We are not equally rich, but we are all rich. Perhaps therein lies the rub, what really is bothering Stiglitz and others? What if it turned out that the only way we could all have these unprecedented levels of wealth is if we allowed great inequality?
5 thoughts on “Stiglitz on Deregulation and the Rich”
Nonsense! What free and unfettered markets are there with bank regulators who for no good reason at all require the banks to have much much more capital when lending to those perceived as risky, like small businesses and entrepreneurs, than when lending to “good and decent” sovereigns and triple a rated borrowers?
In fact when comparing the capital banks are required or even not required to have when lending to the US government, with the capital they need when lending to a small American business, it is more an unfettered communism that comes to mind.
PS. Our loony malfunctioning bank regulations explained in an apolitical red and blue! http://bit.ly/mQIHoi
Per, just to clarify, you’re labeling Stiglitz’s claim as “nonsense,” not my counterargument—right?
Part of the problem with Stiglitz and other of his ilk is that his terminology is not apt and that’s what creates the disagreements.
If instead of using the phrase, “deregulated capitalism” he had said, “crony capitalism” or even more aptly, “captured regulatory state”; then there would be very little raeson to disagree with the rest of his analysis.
The fact is that there has not been anything like deregulated or unregulated capitalism since the Coolidge administration. The modern regulatory state has its genesis in the Hoover administration with Roosevelt inheriting it and supercharging it. Thus if Stiglitz’ analysis of ruin by the captured regulatory state is correct he really has to start much further back in where and when to place the blame.
Wow how amazing that a bunch of right wing dimwits will lie to pretend up is down.