The Great Divide

right good evening and welcome everybody it's wonderful to see a full house and possibly slightly more than full house and I know that there could have been many more people here if weird if the theater was bigger so you're all very welcome here to Elysee my name's Jon Hills I'm co-director of the new Elysee international inequalities Institute which is hosting this evenings lecture this is in fact our third we started on the first of May this is actually our third event under the auspices of the new Institute we were lucky enough to have Tony Atkinson launching his new book on the 30th of April day before we started in fact that that is available as a podcast on the LSE events website they we had a symposium last week with Thomas Piketty talking about different aspects of his book capital in 21st century that I from the sequence on the LSE events website I think that will probably available in the next couple of days in a series of four video casts of that I'm delighted to be welcoming professor Joseph Stiglitz to the LSE this evening I first came across his work as a student in the nineteen late 1970s the lectures on public economics with Tony Atkins and he was as you I think all of you having queued for tickets or having used very quick fingers on the website to get here know all about his work he was chief economist at the World Bank he's a university professor at Columbia at the moment he was of course and and he's chair of the Brooks world poverty Institute up in the University of Manchester and of course he he won the Nobel Prize in 2001 he is the author of not only a very large number of academic contributions but also his best-selling books on globalization its discontents on the roaring night is on free fall and the book he talked about when he was last talking to us the price of inequality and just in the last few days I think he's published they from the Roosevelt Institute in the u.s. available online rewriting the rules of the American economy an agenda for growth and shared prosperity and I think maybe I hope you may say something about that this evening so what he's going to be talking about this evening is his new book new to us the Great Divide which is a collection of his writing over the last three or four years focused in particular on the crisis on the response to the crisis and on of course inequality and this evening he's going to be focusing within the huge range that the book covers he's going to be talking about inequality different aspects of it and I hope touching on policy towards it now can I say please can you turn mobile phones to at least silent if you are tweeting the hashtag is hashtag LSE Stiglitz so only favorable comments know there will probably be a kind of compilation of them put put together afterwards I'm not sure whether these things are censored but I'm sure the comments will all be favorable I should say that after the after he's given his lecture the world as usual be a chance for question for questions and answers I hope will I'm sure there'll be many of you who'll be wanting to to put questions to him and then there will be a chance those of you who have copies of the book and would like it signed there will be I think for a short period Joe is prepared to to sign that but it's my huge pleasure on behalf of LSE and the international inequalities Institute to welcome you to talk about the Great Divide well it's a real pleasure to be here again my own interest in and the subjects of inequality really began with growing up in Gary Indiana which some of you may know is an industrial town or was an industrial town on the southern shores of Lake Michigan in the way it was the reflected the quintessential history of industrialization in the United States it started in 1906 as the largest integrated steel mill and it it was a it was really a company town so much so that the name Gary comes after the chairman of the board of US Steel so you can't be much more corporate than that but then it it it flourished with industrialization and then as America became de-industrialized it's now become a wasteland they make movies there it's a little bit safer than dang Somali so if you want to make a movie about Somaliland and fighting you can look at the devastation there and it gives you a feeling without having all the without having oh the the backdrop of of being blown up just a few gang wars that you might have to face as you make your movie well as I was growing up what I saw was high levels of inequality much of it related to racial discrimination and episodic unemployment my parents of my my classmates were frequently every two three four years unemployed because of business cycle and then episodic strikes the civil strife so I hadn't realized when I was growing up that this was the Golden Age of capitalism that this was as good as it got and that of course is that one of the major messages of the of Thomas Piketty book that you I talked about last week and one of the topics are going to be talking about is why was that the golden age what happened after that but it wasn't actually that golden as as I'll try to explain a little bit later I wrote my thesis at MIT on the subject of inequality inequality has not as many of you may know not been a fashionable subject within economics in fact Bob Lucas wrote a famous a speech and article Robert way quoted in one of his articles about saying that something to the effect that of all the subjects in economics the most poisonous to talk about was inequality so it was it was a subject that not only was not discussed it was viewed with considerable hostility and if we have time I can come back and explain that hostility but obviously there was a a political dimension to that but I I decided that this was this was the reason why I switched out when I was in college for majoring in physics which I thought I was going to do it my life's work and when into economics because I thought these problems the social problems were so much more important well that led to my PhD thesis which are an abbreviated version of which was published in econometrics and I still think as I reread it it was really good and and and I think really more people should should read it and I was encouraging you but a few years ago I was asked by Vanity Fair to write an article about inequality and I wrote an article that did get a lot more attention so the moral of the story for for those of you who go into academia if you want readership Vanity Fair is better than econometrics the title of that book summarizes a lot about what the title of that article summarizes a lot about what this book is about the title of that article was other 1% for the 1% and by the 1% for those of you who don't know a lot about American history and which I assume as most of you having the in the middle of the u.s. civil war between north and south there is a famous speech called the Gettysburg Address that every American kid has to learn and it was Lincoln's address to try to explain what this whole war was about and what he said was this was a war about seeing whether government of the people for the people and by the people will survive and so I made a paraphrase of that and say well it hasn't survived we have a new form of government of the 1% for the one present and by the 1 percent and that tells you a lot about why there is this inequality it's not just economic forces it's the way our policies and politics have played out and so what I want to do in this very limited amount of time just go through first describe very quickly the various dimensions of inequality and as I say some of this giving that you've had a couple of talks should be a matter of review I talked about some of these issues last time I was here but some of the things have gotten worse since then they and and then go on to to some of the what I view as major changes in our understanding in in the nature of inequality so there's been an enormous growth in inequality that's why it's getting so much attention now and this is true especially in the United States which has more inequality than any of the other advanced kind Treece but unfortunately countries that have followed the u.s. model and unfortunately UK is among those countries in fact they call it sometimes the anglo-american model model they have also shown an increase in inequality and you'll hear from the government occasionally well things are better in the last two hours or the last three years but that's out to narrow legs to look look at what is going on in the world you have to see things in in broader terms so there are multiple dimensions of inequality there's more money at the top and just to give you a flavor what's happening in the United States in the period three years after the end of the Great Recession you know the administration and the Federal Reserve announced the end of the recession in 2009 ninety one percent of all the increase in income went to the top one percent and that meant for most Americans for the 99% there was no end of the recession and it really illustrates the the Great Divide the the differences in the directions in which our economy has been going there are more people in poverty there's been an evisceration of the middle and by that I mean not only has there been stagnant income in the middle but it's also the case that there are fewer people say plus or minus fifty percent of median income and just to show you some some numbers to illustrate what is the these things this is a chart I'm sure you've seen in your previous discussions of what's happened to the top one percent that it was very high right before the Great Depression then came down and that period in the fifties that I was growing up is this low period where the Golden Age of capitalism and down he's gone back away way back up so the top one is getting between 20 and 25 percent of the income and you know there are various metrics that reflect the same thing a number that I find very very startling is the fact that median income in the United States today is actually lower than it was a quarter century ago with excess is that for most Americans the economy has not increased not giving them benefits for a quarter of a century but things are even worse when you look at the bottom the or if you look at various demographic groups you know the median income is is is an average for all different demographic groups and one demographic group that I have some sympathy for are is males and the median income of a full-time male worker is lower today than it was 40 years ago so if you want to understand some of the disillusionment some of the anger that you see in American men it is the fact that they've you know they were told every generation was going to do better and they've had 40 years exit almost two generations of decline the things at the bottom are even worse the minimum wage the wage that people you know at the bottom get annoying stakes is lower than it was 45 years ago so basically there's been a half century oh no pay increase for those at the bottom now from my point of view an economic system that doesn't deliver for most of its citizens is a failed economic system and so this issue this debate about inequality is also a discussion about whether our economic system really is working and if it's not working why it's working and I'll come back and talk about that a little bit later so there's been the knot is this a more money at the top more people in poverty evisceration in the middle there never a number of other dimensions of inequality there are inequalities and wealth exceed those in income and again a simple number just can't a capsule aches a lot of what's going on there are eight Americans who have inherited their wealth so it's not from hard work they made an important decision as one of my friends billionaires says they won the sperm bank and the sperm lottery and and they they have the right father and so these these eight Americans from two families have as much wealth as the bottom forty four percent of all Americans which is testimony to how much money is there top and how little money there's at the bottom I can go on and tell you how bad these two families are but I won't you know they they've gotten their money least one of them from exploiting poor people exploiting workers minimum wage workers exploiting the political system we're inequalities in health and this is of course especially large in the Artic stakes where where we don't haven't had a a public health system we haven't had access to public health and and you see enormous increase in equality's and those at the bottom and the United States say the woman who don't graduate from high school which is just a way of carrot have had a decline in life expectancy the greater than the next going on in Russia he's cut down by several years and you know you use that you know a health crisis and there's even inequality and access to justice I have one essay in in this volume where I talk about this inequality and access to justice young Americans every day we have this ritual of where we say I pledge allegiance to the flag is a very anyway I would say except this this ritual pledging allegiance to a and then as that Pledge of Allegiance goes on there's a phrase that says with justice for all but actually if you look at what's happened we now ought to be amending that pledge of allegiance to say with justice for all who can afford it which is of course those who have money and and we saw that very clearly in the crisis where our justice system our so-called justice system was throwing people out of their homes who didn't know away any money the banks were lying to the courts and saying that they had expected signing affidavits that they had verifying that they these individuals owed money when in fact they had not verified and many does individuals did not owe money the courts gave total deference to to to the banks the poor individuals couldn't afford a lawyer and there was no court-appointed lawyer and they were just thrown out of their homes and the irony is that none of the banks and bank officials who lied and when I say glide by the thousands these were you know perjury thousands and thousands of times saying these people owed us money none of them have been held accountable no man when was brought to justice so these are all examples of dimensions of any quote of inequality in our society but the most immediate aspect I think of inequality is something that Americans think of part of their self-identity and many people think of part of America's identity which is equality of opportunity people talk about as the American dream and there are people who make it from the bottom to the middle and bottom to the top they're counted immigrants are successful but what we mean but what the economists or social scientists mean by equality of opportunity are what are the probabilities what is the mobility matrix look like what are the correlations between the children and their parents and in those terms America is among of the countries with the least equality of opportunity that is to say a young Americans life prospects are more dependent on the income and education of his parents than in other advanced countries so I tell my students you know there's only one important decision you have to make in life and that is choosing the right parents and after you if you mess up on that you know the game is over this kind of inequality in opportunity is not a surprise there's now a large body of research talking about the systemic relationship between inequalities and incomes and inequalities in equality and outcomes and inequality of opportunity and you know I don't have time to go through it I talked about some some of that in the book about but what are the relationship the most important aspect has to do obviously with access to education and that's particularly true in the United States where we have a locally based education system locally controlled locally financed but it's true in other countries where there there has been this local because local education because where you live depends on your parents income and if you are income is low you live in a poor neighborhood and you go to schools that are underfunded and poor the problem in the United States has been getting worse and I don't know this data for other countries that maybe some other people here will know but one of the things that's happening architects we have now data just come out in the last couple years showing America has become a more economically segregated country which means that which people with more and more in proximity with rich people and poor people poor people with poor people and that means as we become more economically segregated and more separated the great divide in terms of income space chili has increased it means that those who come from poor families are more likely to live in poor communities and have less of an economic opportunity this just shows the an example of working across countries the record and in a graph between inequality and income and mobility the the likelihood of increasing your income and what you see not surprisingly is countries like then the Scandinavian countries have the highest level of mobility and there is a systematic relationship between the two the interesting research that's been done in the United States looking across counties and showing the counties with more inequality of income and outcomes have lower equality of opportunities what I want to do now is is spend a few minutes talking about some of the changes in our understanding of inequality and this more in a theoretical sense but in terms of the data about over the last the last five years or so the first change is I hardly I don't even list it on these slides is the rejection of trickle-down economics because in some sense there was never any good theory or empirical evidence trickle-down economics was that if you threw enough money at the top everybody would gain as I already mentioned we've thrown a lot of money at the top you saw how the top was doing and you saw the stagnation in the middle and the stagnation at the bottom so clearly trickle-down hasn't worked interestingly both the Obama administration and the Federal Reserve tried trickle-down economics in spite of the fact that it had not worked for decades tried it as a method of recovering from the crisis so if you notice what the what the Obama administration did is we you know we allocated seven hundred billion dollars and I just don't know what your background is but I just want you to know seven hundred dollars is a lot of money so we allocated seven hundred billion dollars and for the recovery and and then actually I was on on the conference where when the right after Lehman Brothers broke you know and and the crisis you know it was was steaming up and and the Bush administration had proposed a major bailout of seven hundred billion dollars the question is how did they choose seven hundred billion dollars they thought a trillion dollars was we scare people so they wanted what is the largest number of smaller than a trillion dollars that looks like it's smaller and they said seven hundred billion that's the fine calculation of policy analysis that was done so I was on the conference tried to decide what was the Democratic response to this what would Obama do Obama was already the candidate and you know this meeting was over conference call mostly bankers not a surprise and then a few other people and the bankers response was why didn't you limit it to seven hundred billion dollars you know why are you so cheap you know we need more money well we might need more money and basically I said well you know you ought to be prying not just trickle-down economics throwing the money at the bank's you know let's pray help people were being thrown out of their homes and they basically the bankers booted me down and said and then and then the interesting thing is that Obama then supported the bush initiative for the bank bailout and a couple billion dollars a couple billion out of 700 billion was allocated to homeowners and then they didn't spend it they set rules that that ensured that most people weren't eligible so it was an experiment in trickle-down economics and another experiment of trickle-down economics that failed but QE quantitative easing monetary policy tried another example of that what they said as will lower interest rates and what was the basic philosophy of this and I'll come back if I have time to talk about later what was the basic philosophy your lower interest rates and you create a stock market bubble you make the rich richer and maybe they'll spend a little bit more money and then everybody will benefit so the Fed tried trickle-down economics it had a little effect I don't want to say nothing it had a big effect increasing inequality it was right that it created a stock market bubble and the 1% recovered their wealth very quickly the 99% still have not recovered well the change in our understandings of inequality that I wanted to talk about I want to begin with the repeal of kaku's Nick Salam goosenecks a great Nobel Prize winner one of the originators of the national income statistics talked about this plausible story of why inequality with first rise in the early stages of development and then would fall and the idea was very simple as the economy develop to develop some parts the economy are more able to take advantage of the new opportunities and they pull out but then as the economy grows those that are behind catch up and so the idea was that that inequality would fall and we saw if you remember the chart I show about what happened after 1920 19 you know 1940 inequality fell and fell dramatically and consistent with coos necks was writing in the 1950s now he thought it was you know he didn't call it a law but other people gave the name law well what we now know and this was really brought out very forcefully by pic ADIZ work was that after 1980 equality started to rise again so the question is something was peculiar about this period between nineteen say the end of World War two in 1980 and and the question is what what what what was the reason for this one interpretation was that inequality is the natural state of capitalism and that's basically the the view the pickety takes it's a natural state of capitalism and there was an aberration after World War Two having to do with the high degree of social cohesion that the war brought about there were lots of peculiar things that period just a frame was the period of the fastest economic growth not only in the United States but in Western Europe it was the period of shared prosperity every group in our country grew but though both those at the bottom grew more rapidly so everybody participated but inequality came down in a significant way we had peculiar things like top marginal tax rates when we were growing the fastest let me remind you growing the fastest top marginal tax rates in the United States was 91% now if you listen to current governments both the United States and UK you would believe that a ninety-one percent top marginal tax rate intrapreneurship would have totally disappeared the economy would have gone down the tubes to use an American colloquialism it didn't happen in fact as I said the economy grew very rapidly so there were many things that were distinct about this period and so one interpretation was that this eventually by 1980 the sense of social cohesion had evaporated and we were going back to the natural state of the capitalism and a way that is the perspective of Piketty there's an author interpretation and I'm gonna argue very strongly for that that the increase in inequality after 1980 was a result of a change in policies a whole raft of changes of policies not just one thing but a whole constellation and I'll try to talk about what some of those changes were but one way of thinking about the exact let me put it in the American perspective the the the philosophy was very clear and it was Reagan who articulated this here and Thatcher and in the UK case of the United States the view was we're going to lower the top tax rate way way down to 35 30 percent and we're going to strip away all the regulations and the two things together are incentivized and liberalizing freeing up the economy and that will result in faster economic growth they recognized I think that it would lead to more inequality had to but they said the economy would grow so much faster that the size of the piece that those in the middle and the bottom get would actually get bigger so economists jargon it was a preto improvement everybody would be better off some people would be more better off than others but let's put aside the politics of envy everybody would be better off well it didn't work out that way they were right about one prediction it did lead to more inequality even more than they probably had advertised but I summed what would happened in you know the subsequent third of a century the bottom 90% of America saw no increase in their income and all the increase in GDP went to the top so I sometimes say you know put yourself back in in history and assume that Reagan had come or anybody had come to the American people and say I have a deal for you I have a new economic policy a new set of rules and regulations frameworks a whole set of brilliant ideas and the carrot what it's going to do for you is ensure that you will see no increase in your income for the next third of a century and all the increase of income is going to go to the top 10% now would the American people probably in a Democratic Society have voted for that wonderful deal I don't think so but that was the deal that we got but we didn't get it by a vote on that issue that wasn't what was that we were promised something different from what we got and one of the themes is that except Allah sees that has gotten gotten us to where we are and the policies have been a secretion you know step by step nothing dramatic no major change I mean there were big changes under Reagan but most of us happen is a step by step recent change in the rules of the game the policies of tax policy expenditure policies monetary policy every aspect of our economy in our society in ways that cuman ibly have led to what I view as disastrous outcomes and that's why we've begun a campaign which was referred to is rewriting the rules rewriting the underlying institutions regulations that define our economy so that's this he was showing you the executive summary this is the whole report is somewhat heavier and we released it last week in in Washington at a big event where where Elizabeth Warren spoke mayor de Blasio spoke we met with Clinton's people and it is we're trying to define the agenda going forward a little bit less timet agenda than some people in the labour party defined here in the UK with the hope that a vision of an alternative will receive a lot more attention than a more timid policy so far it's been it's been working as I said I believe very strongly that the the underlying what's underlying is not the fundamental nature of capitalism but it is the policies some of which actually are I think contrary to what we really mean by a market economy sometimes I label this as air Sox capitalism a fake capitalism when you bail when you when you have a system where you socialize losses and privatized gangs that's not a market economy that's sort of a fake market economy but as we walk across countries we see the large differences in outcomes among the advanced countries why that's so important is suggest that is policies not economic forces that are at play the the underlying forces of Technology of globalization are similar in all the advanced countries it's not like the Saint you know technology is just limited to one country technology is basically universal same thing about globalization basically we all face the same global rules but how that gets shaped by our economy by our society by our politics is very markedly different and that is why there are such different Oh both in inequalities in income wealth and opportunity and that leads to the view that I repeat over and over again in this book that inequality is a choice it's a result of how we structure the economy through tax and expenditure policies through our legal frameworks our institutions even the conduct of monetary policies and with this all these affect market power you know economists don't like to talk about power and that's because the basic model that's taught to you in your first undergraduate course the basic framework is the competitive model the competitive equilibrium model and that begins with the assumption that no one has market power but we know that's not true or at least we should know that's not true who are some of the richest people in the world though gags Carlos Slim they made their money not in competitive markets they made their money from the exercise of monopoly power if you asked the question why is it that African Americans are so disadvantaged relative to others it's not a woman relative to men it's not just the inexorable workings of markets of competitive markets and has to do with the exercise of political market political and economic power the rules of the game and the fact the conditions under which workers can engage in collective bargaining or the threat of firms moving abroad outsourcing affects the bargaining power of workers at the microeconomics scale you know the bargaining power of workers and firms are distinctly different and just to give you a couple examples of of how of how the rules of the game can shape market power in the United States we had a healthcare system that was employer based you got your healthcare through your employer and we had a system where the insurance companies would not cover you for what was called a pre-existing condition that means if you're on the job I mean you have one employer and you discover that you have a problem like a cancer then no other insurance company would insure you that meant you had to stick with your existing employer and that meant your existing player who knew that had total power over you you couldn't leave if he you know if he didn't give you a pay raise of even if you cut your pay raise if you mistreated you you had no opportunity if we design a system of transportation that poor people can't get to the jobs very easily there are fewer jobs that are accessible that affects the number of firms that they can access that affects market power so all our trade rules all our you know all our expenditure policies all of these cumulative lis affect the market power what is going on right now in the United States is a big debate about trade policy the reason that there's such opposition to it is that we are rewriting the rules but unfortunately we're not rewriting the rules to balance the system we're rewriting the rules to give more power to corporations as you look at the legal system that is embedded in that trade agreement it's a legal system which is on there it represents a deviation from what most of us will call the rule of law in equal access to justice so maybe in the question people will go through this but but that's an example of how step-by-step brick by brick we create a more unequal Society monetary policy how does monetary policy play in well if you have it in a central bank that focuses on inflation and whenever they say we can see that why do the eyes of inflation that was the expression they would use they would raise interest rates what would that do well every time we have a recession wages go down wages go down relative to prices and so so your wages go down we can see this and then what happens when recovery economy recovers so wages start to go up the moment wages start to go up before they get back to where they were before the recession they raise interest rates to create more unemployment if you have higher unemployment obviously the bargaining power of workers is weakened so this has resulted in a ratchet effect of wages successfully getting weaker and weaker well all of this means that what is at stake here is not just a question of redistribution you know sometimes people who say we're concerned about an inequality all the discussion is about redistribution our focus the argument in this book is that it's really about the distribution of income wealth before taxes and transfers how our economic system creates market power that league's some people to be better off and other people to be worse off there are some other changes in our understanding of inequality let me go through them fairly quickly one is the idea of sometimes called Okun's law who argued that yes you might want to have more equality but if you did that you'd have to give up in economic performance and now we realized that equality and economic performance are actually complements there's not a trade-off there are many reasons for this but what I want to emphasize is this is not a left-wing view this has now become mainstream even though our map has been stressing the fact that inequality affects economic performance and they've been going around the world I've been there you know in meetings with them where they tell governments all over the world that they have to address the problem of inequality because their concern is about growth and stability and if you don't have if you have too much inequality you'll get poorer and poorer economic growth them and instability so once you recognize that the the inequality that that equality that equality and growth are complements the argument that you sometimes hear that you can't afford to have more equality is absolutely wrong in fact it would help our economy there a couple essays that that that pick up this theme one of the one of the way I try to bring home the fact that we can't afford to have more equality is after World War Two we were you know at nineteen forty-five we were a much poorer country than we were today seventy years ago you know there's been economic growth we were actually GDP now with the BRICS we could think emerging markets is larger than the GDP of advanced countries today so that shows you what's happening in 70 years well when we in ended World War two our debt GDP ratio was 130 percent and just to put this in perspective when the Greece Greek crisis broke out it had a debt GDP ratio of one hundred and ten percent but at the end of World War two we said we were going to provide free for your education to the best colleagues anybody could get into for everybody who fought in the war which was all young men and many young women we didn't say we couldn't afford it what we said is we had to do it for our economy sake and for as a matter of social justice so we could afford it then we could afford it tonight today and and the same thing about UK today the same thing what we see is Scotland has decided to have free university education the income is the same roughly as England and it's a choice and they've made other choices and one could debate about whether it's the right choice of wrong choice but these attempts to get greater equality are a matter of choice but even poorer countries have made different choices one of the fun things about being chief economist the World Bank is that you get to travel all over the world and see what's going on a few years ago I went to Mauritius which is a small island a small country off the east coast of Africa poor but it's one of the fastest-growing countries in Africa and a country with a very strong Social Democratic commitment and they provide four years of free college education to everybody who can get into college so if they can afford it we can afford it the issue is obviously it's not going to spend as much on you know they're not going to spend half a $50,000 kind of college education that we charge at Columbia but they have to you know adjust it for their income it's how you choose to spend your your money but if equality is the result of policies that must mean that it's going to be shaped by politics and this is where we get into this very vicious circle that economic inequality inevitably translated into political inequality and then that political inequality translates into rules of the game that create more economic inequality and that is where the United States and many other countries are today mired there are brought consequences of this it's not only that it weakens the economy it undermines democracy it divides society and this is especially so when the inequalities are evident are located along racial and ethnic lines there's one chapter in the book where I talk about some of the the the political science literature which shows that when you have inequalities along those lines you are more likely to have civil strife and you know I used to say well but we of course that Dax in the emerging markets in developing countries but then I started thinking about Baltimore and Ferguson and you start understanding that that helps understand what is happening in the United States we are having our own form of civil strife in City after City of the city because we have in the United States very divided country not it's a great divide not only of income but that that income is is that those two bikes have a very large ethnic and racial dimension to them of course one of the reasons why why this whole issue has risen to the top of the political agenda is that the nature of inequality in America and this is true in many of the other advanced countries in European countries is now really making inaccessible what had been viewed as the basic tenants of what we call middle that class lifestyle of retirement security education of one's children even the ability to own a home well before concluding I wanna I want to spend just a few minutes talking about how this interpretation differs from the interpretation that you had last week of a Piketty besides the fact that it's shorter the and basically his interpretation or that you know he has to his analysis is a very rich analysis and and and much of what you know I don't think he would disagree with most of what I would I've said but he focused since on a perspective that emphasizes the inherent nature of capitalism and you know most of you know he he talks about the return on capital exceeding the growth rate the result of that is that with capitalists saving their income Oh their income capitalist wealth an income will increase relative to national income well what I want to do is first spend just a few minutes trying to explain some of the makes internal logic problems the problems with with with the construction of the the theoretical model that ought to lie behind those assertions those who want to want to read read about this more you can go back to my 1969 paper or a great further elaboration in a paper that they'll be coming out at the Roosevelt Institute and the NBR so what matters is not just the rate of return on capital but the rate of return times the savings rate obviously if they weren't saving any of their income it when compound and so the compounding is determined not by their just the rate of return but the product the rater turn in the savings rate and in most of the standard models the product SR is actually less than G so you go back the the classic growth model of solo you can show that in solos growth model in the long run SR is always going to be less than G there's another fundamental problem which is that in any coherent model the return on capital has to be endogenous the needs to be what we what I call macro and micro consistency the behavior the individuals has that up to the behavior of the macro economy and if it were the case that what he calls wealth was the same as the capital stock I'll come back to try to elaborate on what this means if they were w8k were the same then the law of diminishing returns which is one of the most strongly held laws and economics would imply that the rate returning capital would have to fall and continue to fall until that inequality was no longer the inequality that he posix would no longer be true but also something else would be going on if you would have capital deepening there's more and more capital then wages ought to be rising again one of the most you know deepest beliefs in in economics is capital deepening oughta lead to a rise in wages this is true even if you have skill-biased technical change you can show that there in an in this paper that I I mentioned there's a very general aggregation theorem that says that the average wage you know add together skilled and unskilled workers the average wage would have to rise but that's not books been happening if you look in fact at the average if you look at what's happening to wages and you you you take they've been stagnating and in fact there's a you can't explain one of the most curious phenomena that has opened up in the last thirty third of a century and that is while productivity has been increasing wages have not that is to say look at the last say third of a century the United States productivity has roughly doubled but wages have stagnated now you can go through if you were a committed neoclassical economist you could go through some arcane potala make an exercise of trying to explain deviations between the average and marginal productivity that might be able to reconcile these facts but it would be just a Ptolemaic exercise I don't think you find any plausible story of how it could be that average productivity has doubled and no wage increase in a competitive market but of course what I emphasized earlier it's not clear that we really have the competitive market and it could have been significant increases in market power in the last third of a century and I believe there have been there are some more puzzles you can only explain about 1/2 to 3/4 the growth and wealth the wealth income ratio by national savings so when we talk about savings is people you know are in the back of our mind we have something like a primitive agriculture economy you you grow your seed and then every year you eat some of it and some of it you plant back and over time you get more and more capital accumulated you know so so savings is not consuming but we have data on savings out of national income and when you look at that data you simply cannot explain the increase in the wealth income ratio if you to interpret wealth as capital back you can only explain about 1/2 to 3/4 well the unexplained part which I sometimes called the well through sexual I believe it's best explained very simply it's a growth of rents there are all kinds of rents land ranks exploitation ranks intellectual property rents but failure to include that those rents to include land to include monopoly power was I think you know as I look back in my 1969 paper that was the big mistake in my paper and that's what I've tried to correct and in my ongoing work and these factors can can go a long way to explaining not only not only the wealth residual but also the other puzzles that I talked about and the the puzzles that are thrown up by what has happened so once you recognize that wealth is not just capital it's not just the stock of productive assets but includes the value of land the capitalized value of exploitation rents what I mean by exploitation wrecks monopoly power all kinds of rents in our economy it's the capitalized value and so you shouldn't think about wealth in capital as the same idea same idea I'm that's really the fundamental mistake the pickety in picady analysis he tries to equate the two and one could be going up when the other is going down so the fact we've looked at data based on oacd and for many countries and what we see is that even though the wealth income ratio is going up the capital income ratio is going down the two are moving in opposite ways in fact many of the sources of increasing wealth that are associated with rents actually lead to decreased productivity let me just give you two examples I've tried to bring the point home one of them is if monopoly power gets larger that's a larger distortion in the economy but the capitalized value of those rents will go up as an increase in rents and people at the economy will actually be worse off so even though wealth is going up take another example if the banks succeed in convincing Congress convincing there's a bribe Congress to give them bigger bailout ransom the capitalized value of those bailout rents will show up in the share value of the of the banks so wealth of the economy goes up as we measure it but the wealth of taxpayers which is not included in the data goes down because we will be paying the bailout it's just a transfer from taxpayers to the corporations we measure the corporations we don't measure that the negative side so all of that means that wealth and capital can move in different directions of course we then have to explain what goes what is the sources of ranks why banks have gone up why exploitation ranks why land ranks have gone up the box of of that I don't have time to do that but what I want to emphasize is that when we start thinking about that we realize that monetary policy and financial policy can increase the value of land rents and that's what we've seen in QE QE lower interest rates and liberalisation of financial markets can give rise to a bubble and in land values is an increase in land values of wealthier country if the price of land in Southampton which is where a lot of the billionaires that have summer homes and and you know I steaks or the or the Riviera that goes up the countries and richer it's the same amount of land that we had before but the wealth goes up in fact you can argue as wealth goes into land there's less wealth to invest in productive assets so the bottom line is that monetary policy financial policy actually is a major source of the increase in land rents and a major reason for the increase in inequality and then as we start thinking about this way we realized the key distinction is not so much between debtors and creditors of cheating lifecycle savers and inherited wealth they have very large differences in portfolio composition which is one of the reason like QE has played such a role in increasing inequality well let me just conclude to me there are three basic important conclusions that come out of this kind of analysis out of my book the great divide the first is that incremental changes will not suffice we need a comprehensive agenda which will significantly reduce inequality and increase equality of opportunity and there is that kind of comprehensive agenda there's no magic bullet but there are lots of things together that will make a difference the second thing is a note of urgency decisions today will affect inequality decades later just like the decisions made a third of a century ago have cumulative Lee led to where we are today and the final point is the real question is not economics you know if they left it to me I could solve this problem the real question is the politics and whether the vicious circle that I talked about the the role of money in politics will allow us now to change course and try to create a fairer and more equal society and an economy that will perform better thank you thank you very much indeed for an enormous Lee appreciated lecture for covering so much ground we do have 20 minutes for Question and Answer could I ask you there are a lot of you in the hall I imagine that a lot of you may want to ask questions so could you make your questions brief and could you avoid them being a long manifesto could you could you say who you are and roughly where you're from the LSE or or from elsewhere and I'll take questions in groups of three there are roving microphones this is being recorded and will be podcast so if you wouldn't mind waiting until the microphone reaches you so I've got a first question just here a second question there in blue and a third question at the back right at the back of the gallery I think it is such an amazing talk I can get your share on Twitter if you want to see major changes would it be not interested be interesting not to sell capitalism capitalism as an economic model but as a global machine of total repression through the medium of poverty and would this not also explain why the poor get poorer and the self titled elite get richer thank you hi I'm Takahashi from the University of Tokyo my question is how do we realistically rest some of that collected political and economic capital amongst so few without or by overcoming the anticipated backlash of those fear thank you and then the gentlemen right at the back of the gallery and thanks Otto Mendoza from LSU student those the growth of inequality eats allowing and growing spaces for the civil society meaning NGO and coming from Mexico where we some people proud that we have the richest man of the wall and some people start to question that and in your final conclusions it's politics how do you govern a country where you have these sparkling power in the business sector and you don't have really a strong state that can balance that power okay so there's a three really easy smash let me begin on a hopeful note on Mexico and I think it has to do with the strength of civil society voter engagement the interesting thing is that while the issue of increasing competition particularly in telecom for those who you know don't know Carlos Slim at was the monopolist in in the telephone sector he his wealth is based not just on exercising market power in one market but in many markets so so but I engaged actually in a debate with him almost 10 years ago on trying to whether there should be a change in competition policy in telecom and the good news is after about 10 years of public debate a lot of pressure they passed a new telecom bill that is creating new competition and the interesting thing is is how people reframe so I was with this Sun a week ago and at some point oh this is great this new competition is really going to spur us on and we're going to where it could even do better so what what what is interesting is somebody's trying to drown this out I think but I think what is and I think there was some truth in that I think that they at that point have said we do really have to have more competition in our economy so it was a combination of civil society waking up to what what needed to be done and a government that was a little bit more dynamic than previous um one or dynamic than previous governments and and it happened so to me that represents actually a really startling outcome because it was one person who had an enormous amount of you might say obviously money but also political power and the system was able to was able to change and it is testimony to the importance of of civil society I think in these in these battles and you know that's you know what when I wrote when we wrote this report this was not just an academic report it was written it was written through that Roosevelt Institute which is a think-tank so should every one of the presidents has their own library in part associated with the library is often a think-tank this particular think-tank the Rose is related to Franklin Roosevelt you might think you know obviously a little bit left of senator perspective on things but this is actually a one where we've engaged not only Congress who we had when we issued it we had meetings with both the Senate and the House of Representatives to try to explain them we had massive Matt press coverage and so it's you know fairly well organized but we have a campus network throughout the United States we have more than 10,000 students engaged in political activity so it's part of our attempt to try to get these messages to get students engaged and to create the next generation of active civil society and and to try to bring these issues to the fore they the second question about backlash and and how could they continue pushing the extremes of inequality the interesting thing if you go back even to Adam Smith he talks about self-interest rightly understood that he had the view that people ought to understand that it is not in their self-interest to create a to dividing society an interesting thing is there are many members of the 1% who understand that it's also interesting there there many who don't and and that's really a lot of what we're trying to do is because you we recognize you know that we have a political system when which money you know that I've said you know Americans a political system is better described as one dollar one vote then one person one vote one has to deal with that reality but part of what we're doing is to try to make people understand people in the 1% that it's not in their self-interest to create a society in which we have these huge device where we have this kind of backlash where we have riots in Baltimore and I think there's a growing understanding of that I don't want to say it's universal we you know it is a political fight and we know that and but what is interesting is how many people are beginning to to understand the the kind of tenants that I try to put forward one of the reasons I wrote the book quite honestly and it's one of the reasons I didn't mention you know I wrote the my first Vanity Fair article but after that article came out I was asked by the New York Times to curate a series called the Great Divide which is from which the title of this book and we had articles in the New York Times on a regular basis basically more than once a week I didn't write all of them but that that kept bringing out the many dimensions of inequality so that there was an increasing awareness of the nature of inequality so you know this won't happen on its own is these kind of realization and it won't happen just from an ivory tower there has to be some engagement and unfortunately you know we were a you know I was lucky to be able to to do to have interactions with people in New York Times Vanity Fair and to try to get these messages messages out the question about what is the basic nature of capitalism and it is really a deep and a complicated question what I want to emphasize and I don't use the word capitalism too much what I really want to talk about is market economies and there are a couple points market economies don't exist in a vacuum some people in the right have the view that market economies just there are some god-given rules of market economies and and they don't we we structure a market economy and how we structure the rules that we put down determine how those market economies perform they determine the degree of inequality in our society and they also determine the efficiency of our economy and in many different ways so what is true is that a lot of the battle over over inequality today is over how those rules get made and who makes those rules and that's the real danger of globalization in my mind the the real danger and that's why the big debate we're having United States and I hope you're having in Europe is the extent to which there is a ceding of power about making the rules to some abstract Trade Agreement apps you know some some international body that is not democratically account so and let me make it clear this is not an accident you know it was not an accident that that in the 1980s there was this idea that monetary policy should not be politically accountable you know people said we want an independent monetary policy that would pursue a focus just on inflation that that was a political agenda and so an economist many of whom are seemingly respectable became victim of this political process and as some of you may have suffered and read some articles in in that or even written some of the articles in that vein but let me to bring that home when I was chairman of Council of Economic Advisers one of the Republicans wanted the the officially the Federal Reserve has a mandate of inflation but also growth and most importantly unemployment and now also financial stability okay and one of the Republican congressman wanted to change the mandate to focus just on inflation and you know he was citing people we won't mention their names from University Chicago who said you know that's the right economic model so I said to President Clinton let's make that a campaign issue do the American people want a monetary policy that focus that cares about unemployment and as soon as President Clinton said yeah we're willing to fight on that issue the Republicans said no we're not interested in fighting on that issue because they know what the outcome would be so it was so clear that this was a political issue the mandate of the Fed is a political issue and yet economists have tried to but so people have tried to use that and move it out of the politics so that's where where the eggs you know in my mind a focus on trying to understand how moving rules about intellectual property capital financial regulation out of the democratic process even if there's a ultimately you have to pass a a boat for a treaty the fact is that the kind of detailed democratic debate isn't there and they don't want that because if there were they would reject most of those provisions thank you let's take one more round I've got Robert Wade was in first thanks Joe you showed that of the past 30 years wages have been more or less stagnant while income gains have been concentrated at the top so one might expect that surveys of happiness would show rising frequency of unhappiness in the population as a whole but actually that's not the case the surveys show that the the the American population has become more happy even as the gap between them and the top has increased so the question is how might you explain that could you put just posit too long Ellen House we're from the London School of Economics my question is what is your definition of politics because you've talked a lot about the economic side of it and a lot of times when you talk about policies they seem to be economic policies and I think this is of interest to people in this country there are a lot of other debates going on around inequality for example human rights and what are the rights that we have and how is that part of our politics and policy so I'd like to hear you talk a little bit about how these other types of politics would contribute to the phenomenon that you've talked to thank you could you get the microphone - there's a lady at the back there white shirt hi I'm loose I work for a delayed gratification a slow journalism magazine I'm interested in how the way that we measure economic output affects how we manage our policy and I think in 2009 you're part of a commission to come up with a more inclusive a representative number than the GDP so my question is what other shortcomings after GDP and how does it miss guide policy okay good questions again not easy and the last question the first question are somewhat related Robert Kennedy who famously said that GDP measures everything except what's important in life and and when GDP was first formulated it was just a measure of economic activity and it over time has become a measure taken to be a measure of well-being actually increasingly it's a poor measure or both because in terms of economic activity a large part of GDP is imputed just numbers that are made up that that we don't measure very well so there's a whole set of you know you just say you know how we measure government services how do we measure housing services we don't do that very well and then we don't measure lots of things like leisure activities we don't measure insecurity so those are important aspects of well-being that are not brought in to to our metrics so this is really important because what we measured really does affect what we do so the government says oh this reform is going to lead to more growth what they really mean is more measure growth by GDP but if that reform actually led to more insecurity worse environment well-being will go down and one of the things we've emphasized you know once you start thinking about inequality is you know I've said GDP in the United States is a terrible measure of how well economy is doing because in terms of what the experience of most individuals is they the median income has stagnated for a quarter century that's a far better measure of how well our economy is doing than GDP we ought it you know the the the the president the campaign ought to be saying something's wrong with our economy nothing's been delivered for most Americans for a quarter century but they don't do that they focus on GDP so this is a that's why the these are very not only important in assessing how well we're doing very important in assessing trade-offs and whether we better to have an environmental policy one of the critiques criticism of better environmental policy at no cost us in GDP that's only because we're not measuring performance in the right way so that's why these issues I think are really important and there's a continuing agenda going on at the OECD the part of this is in the what they call better living index where they're trying to talk about how what really makes for better living for better standards of living and we have there's something called a high-level expert group what we're trying to reexamine continuing the examination of of the GDP indicators Roberts question about unhappiness one part of our work ethic International Commission was tried to incorporate results about perceptions of well-being it was the most controversial aspect probably because we we don't there is something in the surveys because they're replicable very hard to compare overtime or or over across countries some countries are you know you look at them and you know France is a country you know we love to visit France you know that they there's a kind of you know it's a wonderful place to visit the French are chronically unhappy and you know we we envy their five weeks six weeks of vacation and we say you know should that make you happy and they say yes it is it's really important but somehow it doesn't show up in their happiness surveys I just think you know Americans are chronically optimistic you know they're you know they've just gone bankrupt they you know somebody's dying in the family you know they're sick and you ask them how do you feel oh you know never been better and and and with those saying is you know or they'll say it could be worse you know that then you know we'll get through this and it will learn from the experience well you know maybe there is redemption through suffering but but I think it's a characteristic o them what you know that they see things aren't very good and they want to feel that they're not the bottom of the heap nobody wants to feel you know there's a famous radio program in the mixed United States called Lake Wobegon and you know and the it always begins it's it's it's a like some place in Minnesota I believe and the defining characteristic of this town and Lake Wobegon is everybody in this village is in the top half so that's just the characteristic you know they they're all in the top half of the class they're all healthier than anybody else and if if that's always true you know with maybe an aberration here and there their perceptions are my only say out of sync with reality and you see that in so many ways it actually has a very difficult play of impact on on on our politics most Americans supported there was a surveys supported the repeal of the inheritance tax in the state tax you don't pay estate taxes until if you're married couple until your income your earpick west is more than ten million dollars and you know there are only a few hundred people that pay estate taxes a year you know I think it's endureth out and anyway it's not a lot of people I wish more Americans had to worry about it but most Americans are worried that they will wind up and win the lottery and have this difficult problem of having to pay this estate tax on their income the request of over ten million dollars you know you've got blessed them I hope that happens but the likelihood of this so you know they're all there knowing that they're going to win the lottery so that that and and that makes you happy if you know you're gonna win the lottery you should be happy if you have that inside track now the final question quickly fairly quickly okay it was the hardest question it was about what about Reich's and how does that fit in to the analysis you know obviously I focused on economic policies but the distinction between the two are not very clear like what I talked about is power in many aspects equal you know gender equality is an aspect of rice and it's an economic issue the right to medical kit healthcare many people think you know it's in the Declaration of Human Rights but the United States signed that declaration of human rights but it still doesn't recognize it so you can say it's a human right I'm saying it has a big effect on how of the nature of inequality and it has a effect on how our economy performs little things like family leave policy are what are they rights or are they economic policies rights to collective action you know the ILO basic rights the United States is try to undermine those rights and it even goes to political Reich's I mean the there there has been a systematic onslaught in the United States on the right to vote you might say well aren't you a democracy where everybody has the right to vote the answer is no that there is a real attempt to make it more difficult for poor people to register to vote and to vote and so you know if you know if you're a Republican and you know that it's more likely that poor people are going to vote Democratic an important part of your agenda is to make sure that poor people don't vote and there are some people who go further for instance now I talked about criminal about inequalities in justice United States has a mass incarceration program we have five percent of the world's population twenty five percent of the people in prison in the world and if you're convicted of a felony you can't vote and large fractions of african-americans have been convicted and can't vote so this is and there's been a you know a very powerful book called chip crow except I think it's a deliberate attempt to deprive people of rikes and part of the agenda of creating inequality it's all about the rules and that's and and whether you talk about it as economic rules or political rules what they are doing shaping inequality in America and unfortunately we're exporting this is one of our export products is many of these ideas and unfortunately too many people come to America to study economics and they come back believing in Chicago economics and so there is not only a political battle there's also intellectual battle that has to be fought thank you very much could I could I just make could I just make two announcements the first announcement is that I said at the beginning Joe very kindly for a few minutes be signing copies of his book if any of you would like that the second is to say that while we've been talking I'm told US Treasury secretary Jack Lew has been confirmed to be speaking on the morning of Wednesday the 27th of May so some of you may well be interested in that the details beyond the Elysee website tomorrow but again could I thank you very much for our much greater than average level of enjoyment thank you

Channel: LSE

Views: 29,813

Rating: 4.817544 out of 5

Keywords: LSE, London School of Economics and Political Science, London School of Economics, University, College

Id: x1q8XOX_IEE

Length: 91min 28sec (5488 seconds)

Published: Thu May 21 2015

Reddit Comments

[u/tedemang]

Great talk! One of better ones from Stiglitz recently, and good audio as well.