The Case for Progressive Capitalism: A Review of People, Power, and Profits by Joseph Stiglitz

People, Power, and Profits book coverFirst, let’s start with some statistics: Over the last 30 to 40 years, every major statistical measure of income inequality in the United States has increased significantly, now approaching the same extreme levels as prevailed before the Great Depression. If you visit inequality.org, the charts speak for themselves.

Over the last third of a century, the income share for the top 1 percent has doubled while the poverty rate has remained the same. The richest Americans have experienced the fastest income growth while middle class incomes have stagnated (imagine if middle class incomes had doubled and what that would mean for home ownership). From 1979 to 2017, worker productivity has increased by 138 percent while worker hourly compensation has increased by only 23 percent. The difference in wealth creation has gone to the top. In 1965, CEOs made 24 times the wages of the average production worker; in 2019, they made 185 times the average salary.

In 2017, just 26 people had as much wealth as the bottom 50 percent of the world, 3.9 billion people. If inequality is not a problem, then what would this number have to be before it is? 12? 6? 1? Some degree of inequality is of course fair and efficient as an incentive and reward for work, but surely there is a level that ceases to be fair, and we seem to have passed it long ago.

In healthcare, of the top 33 major industrialized countries in the world, the US is the only one without some form of universal coverage. The US spends more on healthcare per capita but has poorer public health outcomes, where life expectancy has actually been declining. In education, the price of college is increasing eight times faster than wages, with student debt accounting for the largest chunk of non-housing debt. In addition, our students consistently rank in the middle of the pack or lower compared to other advanced nations in terms of performance in science, math, and reading.

These are the facts, and not many would propose that this situation is anything close to ideal. The question is, how did this happen, and more importantly, what can we do about it. In his latest book, People, Power, and Profits, Joseph Stiglitz, a Nobel Prize winner and former chief economist of the World Bank, sets out to answer these two questions.

According to Stiglitz, the economic and political situation we find ourselves in is the result of trends beginning in the late 1970s, the result of both parties prioritizing the interests of business and the wealthy. We are caught in a vicious cycle where increasing economic inequality leads to political inequality, which leads to looser regulation and further economic inequality, and so on. Progressive policies are the only path out of the cycle, otherwise the forces in place will continue to perpetuate the problems.

Extreme inequality and economic volatility are the result of four decades of policies built on two assumptions that seem to be fairly obviously false: 1) that the market, left alone, is always efficient, and 2) that tax cuts for corporations and the wealthy will stimulate growth and trickle down to everyone else.

That the market is not always efficient should be obvious; in addition to the conspicuous examples of the Great Depression and 2008 financial crisis, the market by itself will tend to produce too much of some things (pollution) and too little of others (basic research, help for the poor and disabled). Free-riding is a problem for corporations just as it is for individuals. Public goods are under-produced in the market and externalities like pollution are over-produced because corporations have every incentive, in the absence of countervailing forces (regulation), to maximize profit at the expense of others.

Besides, the market cannot function without some kind of structure and regulation; therefore, the issue is not the choice between more or less government but rather in recognizing who benefits from the current arrangements.

As the inequality statistics clearly show, it is obvious who benefits—corporations and the ultra-wealthy. Four decades of trickle down economics have created the exact opposite—income and wealth trickling up. Middle class wages have remained constant while top incomes have soared—that is the exact opposite of what was supposed to happen under the policies of lower taxes and less regulation. As for growth, as Stiglitz wrote:

“For the third century after World War II, from 1947 to 1980, the US grew at an annual rate of 3.7 percent, while for the last third of a century, from 1980 to 2017, the average growth rate has been only 2.7 percent, a full percentage point lower. This is a major decline, nearly 30 percent.”

So the solution cannot possibly be more tax cuts for the rich and even less regulation, yet these are exactly the policies being implemented by the current administration. One definition of insanity is doing the same thing repeatedly and expecting different results; after four decades of lower growth and increasing inequality, belief in trickle down economics is nothing if not insane.

Inequality will simply not fix itself, and business, operating within the current environment, has no incentive to fix it either. The only thing the 2017 tax bill and lower corporate tax rates have done is create a record number of stock buybacks, again benefiting the wealthy.

The situation could also get worse; technological innovation and artificial intelligence will likely reduce demand for low-skilled workers, driving down wages, increasing unemployment, or both. Even as corporations save money via automation, consumer demand will plummet as unemployment and low wages will decrease overall consumer spending, which makes up 68 percent of the economy.

The market will not magically reorient itself to produce fair and equitable outcomes in the face of disruption; more than likely, asymmetries will be exploited to benefit a minority at the expense of the majority, as usual. The cost of inaction is too high, which means something must be done other than exacerbating the problem by giving business more market power.

As Stiglitz wrote, “The true wealth of a nation is measured by its capacity to deliver, in a sustainable way, high standards of living for all its citizens.” According to this definition, the US falls short. What can be done?

In the second part of the book, Stiglitz offers a way forward, but to appreciate the recommendations, people have to get over their bias against any and all forms of government spending. We’ve been told for four decades that the government is evil and the market is infallible, and for that we have record levels of inequality, stagnant middle class wages, poverty, declining life expectancy, widespread job insecurity, poverty traps, healthcare inefficiency, and inequality of opportunity. If we want to change this, we cannot do so by catering to the same market forces and business interests that created the situation in the first place.

The government is corrupt only to the degree that it implements policies that benefit a minority of wealthy individuals at the expense of the majority. We should demand that our government start working for the common good, not business interests. Stiglitz offer several suggestions for political and economic reform in this regard, from increasing voter turnout and limiting Supreme Court justice terms to overriding the Citizens United decision and taxing short-term financial speculation.

It’s worth pausing to note that progressive capitalism, in terms of specific policy, does not adopt a single approach at the exclusion of all others. Disagreement on policy implementation is inevitable and desirable. The real problem is not in healthy debate about policy details but rather in thinking that the best option is to do nothing, or to hopelessly rely on trickle down economics and market fundamentalism.

As the country continues to generate wealth, progressive capitalism simply says that more of that growth should make its way down to the middle class in terms of increased income, better services, or both, and that smart government intervention is the only way this is going to happen, as the last four decades of overreliance on the market make perfectly clear.

The type of intervention necessary is a whole other issue, a discussion that free-market fundamentalists can distract us from even having. But as the problems of inequality become more widely recognized, it is a discussion we need to have. An economy that works for everyone rather than the few is one that finds a better balance between extreme collectivism at one end (communism) and extreme individualism at the other end (US-style free-market capitalism). Finding that balance requires smart regulation and spending.

It’s not that other countries can’t and aren’t already doing this. American exceptionalism tells us we can’t learn anything from anyone else, but other countries are in fact managing universal healthcare with better health outcomes at lower cost, providing more affordable education for more people, and limiting inequality with more progressive taxation. We ignore this at our own peril.

As to which recommendations would be more effective is an open debate. For example, should we implement a universal basic income for all or instead rely on right-to-work programs and negative income tax? Both programs seek to reduce inequality and increase opportunity, but as a matter of policy, the more effective option is unclear. The point is, these are the types of debates we should be having, not whether something different needs to be done at all.

If we can all get over our aversion to government spending and blind faith in the market, perhaps people like Stiglitz can write more substantive books about the pros and cons of competing progressive policies rather than trying to talk people out of an economic theory that has repeatedly refuted itself for 40 years.

Stiglitz reminds us that we need to get back to basics, recognizing that real growth depends on basic research and science, which leads to technology, innovation, and productivity gains. Our increases in standard of living are mostly attributable to gains in a better scientific understanding of the world. This puts universities and basic research at the head of an agenda for economic growth, but as we’ve seen, these are the very things, as public goods, that the market left to its own will undervalue and underproduce. Instead of true wealth creation, in the current economy we get a disproportionate level of rent-seeking, exploitation, and transfer of wealth. Instead of an economy based on innovative products and services, we get real estate speculation and financial trading, the simple act of moving money around and exploiting small discrepancies in information.

Despite what is portrayed in the media, I think it’s probably true that most Americans do not want to have to worry about healthcare premiums, copays, and deductibles; that most Americans want access to more affordable education for themselves and their children; that most Americans don’t want billionaires getting richer at the expense of the middle class; and that most Americans want to live in a country that is at the forefront of scientific discovery and innovation. If this is not so radical to believe, then we all need to drop the fallacy of the free market, stop distracting ourselves with less pressing issues, and start thinking more seriously about how to create an economy that is more equitable in terms of opportunity, income, and wealth.

Further Reading

Saving Capitalism: For the Many, Not the Few by Robert B. Reich

The Common Good by Robert B. Reich

The Price of Inequality: How Today’s Divided Society Endangers Our Future by Joseph Stiglitz

Capital in the Twenty First Century by Thomas Piketty