To Grow Again, Attack Inequality

What are the roots of economic disparity?

Republicans blame President Obama for the economy’s slow recovery. They note, correctly, that recovery from previous recessions was much quicker. But that’s like comparing recovery from a mild cold with that from severe pneumonia: No one would blame the doctor if the latter took a long time.

A careful diagnosis shows that we can restore our country to shared prosperity. But it won’t happen on its own, and it won’t happen if we pursue the failed policies of austerity.

Postwar recessions have been of two varieties. In some, the private sector accumulates too many inventories, and the economy slows down until they’re worked off. Others are induced by the Fed, which, worried about inflation, sometimes steps on the brake too hard. This is what happened in our severest (until now) downturn, under President Reagan. For this, there is an easy solution: the Fed takes its foot off the brake and moves it toward the accelerator.

The current downturn is of a different sort entirely. It combines a financial crisis and a housing crisis with deep underlying structural problems. The country is going through a transformation from a manufacturing economy to a service economy (just as, in the years of the Great Depression, it was moving from agriculture to manufacturing). Markets don’t manage such transformations well.

And there’s a another deep problem: The country faces enormous inequality, the largest among advanced countries. Since those at the top consume a much smaller fraction of their income than the rest, when money moves from the bottom to the top — as has been happening in the U.S. for the past three decades — total demand is weakened. The weaknesses in the economy today arise from lack of demand; firms won’t invest if there is no demand for their products.

It’s not only inequality in income and wealth that is making us frail, but inequality of opportunity. We think of our country as a land of opportunity. In fact, the life prospects of a young American are more dependent on the education and income of his parents than in any of the advanced countries for which there is data. The American Dream has become a myth.

The bubble and its breaking has made matters worse. There is excess capacity in real estate, implying that there won’t be a full restoration of construction — 40% of all investment in the years leading up to the crisis — anytime soon. Households borrowed excessively, fooled by their seeming wealth from the housing bubble. The bottom 80% of America consumed 110% of their income. Even after paying off their excess debt, they’re not going to return to this profligacy.

America exported its toxic mortgages to the rest of the world, and now it looks like the world is returning the favor. The Euro crisis is bringing on a global slowdown. That means that we’re not going to be able to export our way out of our weakness.

In short, with consumption, investment and exports all likely to remain weak, the only hope for recovery is with public spending. But austerity — advanced by those Republicans who misdiagnose the problem — is weakening us even more. Already, there are one million fewer public-sector jobs than before the crisis. And the way we’re cutting public expenditures, including cutbacks in teachers and social spending, is exacerbating the recession’s already heavy toll on the bottom and middle.

What’s needed for a robust recovery follows in a straightforward way from this diagnosis: more government spending, especially on investments directed at addressing the two underlying related problems, our structural transformation and our persistent and outsized inequality.

There are many policies that would help. Strengthening education is one. Another is redirecting resources to other activities that grow the economy, rather than those in which wealthy corporations and individuals seek to preserve and enlarge their privileges at the expense of the rest.

A tax system that allows so many corporations to escape taxation— and many in the top 1% to pay a paltry effective tax rate of only 15% — exacerbates inequality and deprives our society of revenue needed to invest in the future. Taxing speculation at less than half the rate imposed on those who work for a living distorts our economy too.

In the decades after World War II, we grew more rapidly than we have in the decades since 1980, and we grew together. All segments saw increases in income, but those at the bottom grew most rapidly.

Since 1980 we have grown apart. To make America’s economy healthy again, we need to invest in our common future. It is only through these investments that we can restore our country to shared prosperity.


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Read 2425 times Last modified on Friday, 24 January 2014 10:31

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  • Comment Link Thahira Sunday, 26 January 2014 15:14 posted by Thahira

    America’s economy went into a rut after the recent recession and it is still reeling from the blows that were thrown its way. Joseph Stiglitz believes that in order to propel its recovery America needs to invest in her common future. There are several steps that need to be taken in order to make this happen. First would be to let go of failed policies of austerity and establish new ones that will accommodate the transformation from a manufacturing economy to a service economy. And he feels that because this recession in particular came about due to the combination of a financial crisis and a housing crisis, it is important to channel investments towards uplifting these. Moreover, another significant problem that he identified was the widening level of inequality. To solve this he feels that investments need to be made towards improving education and other activities that help the economy grow instead of towards profit makers who have personal agendas. Further a tax system that minimizes the opportunities available for people to evade taxes is vital. So in essence, Stiglitz feels that by directing America’s investments in the right way it will be possible to restore the economy once again and build up a future of shared prosperity.