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PORTSIDE  May 2012, Week 1

PORTSIDE May 2012, Week 1

Subject:

Joseph Stiglitz: The 99 Percent Wakes Up

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Fri, 4 May 2012 22:33:42 -0400

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[An excerpt from `From Cairo to Wall Street' edited by
Anya Schiffrin and Eamon Kircher-Allen. 272 pp. The New
Press. $17. -- moderator]

Joseph Stiglitz: The 99 Percent Wakes Up

by Joseph E. Stiglitz 
May 2, 2012 5:15 PM EDT
http://www.thedailybeast.com/articles/2012/05/02/joseph-stiglitz-the-99-percent-wakes-up.html
 
     Inequality isn't only plaguing America-the Arab
     Spring flowered because international capitalism is
     broken. In From Cairo to Wall Street: Voices from
     the Global Spring, edited by Anya Schiffrin and
     Eamon Kircher-Allen, Nobel laureate Joseph Stiglitz
     says the world is finally rising up and demanding a
     democracy where people, not dollars, matter-the
     best government that money can buy just isn't good
     enough.

There are times in history when people all over the
world seem to rise up, to say that something is wrong
and to ask for change. This was true of the tumultuous
years of 1848 and 1968. It was certainly true in 2011.
In many countries there was anger and unhappiness about
joblessness, income distribution, and inequality and a
feeling that the system is unfair and even broken.


Both 1848 and 1968 came to signify the start of a new
era. The year 2011 may also. The modern era of
globalization also played a role. It helped the ferment
and spread of ideas across borders. The youth uprising
that began in Tunisia, a little country on the coast of
North Africa, spread to nearby Egypt, then to other
countries of the Middle East, to Spain and Greece, to
the United Kingdom and to Wall Street, and to cities
around the world. In some cases, the spark of protest
seemed, at least temporarily, quenched. In others,
though, small protests precipitated societal upheavals,
taking down Egypt's Hosni Mubarak, Libya's Muammar
Qaddafi, and other governments and government officials.

Something Is Wrong

That the young people would rise up in the dictatorships
of Tunisia and Egypt was understandable. They had no
opportunities to call for change through democratic
processes. But electoral politics had also failed in
Western democracies. There was increasing
disillusionment with the political process. Youth
participation in the 2010 U.S. election was telling: an
unacceptably low voter turnout of 20 percent that was
commensurate with the unacceptably high unemployment
rate. President Barack Obama had promised "change we can
believe in," but he had delivered economic policies that
seemed like more of the same-designed and implemented by
some of the same individuals who were the architects of
the economic calamity. In countries like Tunisia and
Egypt, the youth were tired of aging, sclerotic leaders
who protected their own interests at the expense of the
rest of society.

And yet, there were, in these youthful protesters of the
Occupy Movement-joined by their parents, grandparents,
and teachers-signs of hope. The protesters were not
revolutionaries or anarchists. They were not trying to
overthrow the system. They still had the belief that the
electoral process might work, if only there was a strong
enough voice from the street. The protesters took to the
street in order to push the system to change, to remind
governments that they are accountable to the people.


The name chosen by the young Spanish protesters-los
indignados, the indignant or outraged-encapsulated the
feelings across the world. They had much to be indignant
about. In the United States, the slogan became "the 99
percent." The protesters who took this slogan echoed the
title of an article I wrote for the magazine Vanity Fair
in early 2011 that was titled "Of the 1%, for the 1%,
and by the 1%." The article cited studies that described
the enormous increase in inequality in the United
States-to the point where 1 percent of the population
controls some 40 percent of the wealth and garner for
themselves some 20 percent of all the income. In other
countries, the lack of opportunities and jobs and the
feeling that ordinary people were excluded from the
economic and political system caused the feeling of
outrage. In his essay, Egyptian activist Jawad Nabulsi
discusses how the system was fixed in favor of the upper
classes, and he uses the word fairness repeatedly to
describe what was lacking in Egypt under Mubarak.

Something else helped give force to the protests: a
sense of unfairness. In Tunisia and Egypt and other
parts of the Middle East, it wasn't just that jobs were
hard to come by, but those jobs that were available went
to the politically connected. In the United States,
things seemed more fair, but only superficially so.
People who graduated from the best schools with the best
grades had a better chance at the good jobs. But the
system was stacked because wealthy parents sent their
children to the best kindergartens, grade schools, and
high schools, and those students had a far better chance
of getting into the elite universities. In many of these
top schools, the majority of the student body is from
the top quartile, while the third and fourth quartiles
are very poorly represented. To get good jobs, one
needed experience; to get experience, one needed an
internship; and to get a good internship, one needed
both connections and the financial wherewithal to be
able to get along without a source of income.


Around the world, the financial crisis unleashed a new
sense of unfairness, or more accurately, a new
realization that our economic system was unfair, a
feeling that had been vaguely felt in the past but now
could no longer be ignored. The system of rewards-who
received high incomes and who received low-had always
been questioned, and apologists for the inequality had
provided arguments for why such inequality was
inevitable, even perhaps desirable. The inequities had
been growing slowly over time. It is sometimes said that
watching changes in income inequality was like watching
grass grow. Day by day, one couldn't see any change. But
as those who live near abandoned subprime houses know
all too well, within a few months, scrub and weeds can
quickly replace the best of manicured lawns. Over time,
the change is unmistakable, and so too, over time, the
inequality has increased to the point where it cannot be
ignored. And that's what's been happening in the United
States and many other countries around the world.

Even in the United States, a country not given to class
warfare, there is today a broad consensus that the top
should be taxed at a higher rate or at least not taxed
at a lower rate. While some at the top may believe that
they earned what they received through hard work, and it
is their right to keep it, the reality (which many of
the richest do realize) is that no one succeeds on his
own. The poor often work far harder than the richest. In
developing countries, the poor lack the chance of
education and have no access to funds, and their
economies are dysfunctional, but they work long hours
carrying water, looking for fuel, and toiling at manual
labor. Even in developed countries, life chances are
affected by where one is born and the education and
income of one's parents. Often it comes down to luck,
being in the right place at the right time.

It was not just the worsening inequality that outraged
the protesters of 2011. It was a sense that at least
some of those incomes were not honestly earned.
Injustice motivated the Occupy Wall Streeters just as it
motivated the young Tunisians of the Arab Spring. If
someone earns huge incomes as a result of a brilliant
contribution that leads to huge increases in incomes of
the rest of society, it might seem fair that he receive
a fraction, perhaps a substantial fraction, of what he
has contributed. Indeed, the dominant paradigm in
economics attempted to justify societal inequalities by
saying (I should say, assuming) that they were related
to differences in "marginal" productivities: those who,
at the margin, contributed more to society got more.

Faces of Occupy Wall Street

Now, in the aftermath of the crisis, it seemed grossly
unfair that the bankers walked off with outsized bonuses
while those who suffered from the crisis brought on by
those bankers' reckless and predatory lending went
without a job. It seemed grossly unfair that government
bailed out the banks but seemed reluctant to even extend
unemployment insurance for those who through no fault of
their own could not get employment or to provide
anything but token help to the millions who were losing
their homes. What happened undermined the prevailing
justification for inequality, that those who made
greater contributions to society receive (and should
receive) larger rewards. Bankers reaped large rewards
even though their contribution to society-and even to
their firms-had been negative. In other sectors, CEOs
who ran their firms into the ground, causing losses for
shareholders and workers alike, were rewarded with
gargantuan bonuses.

If no one is accountable, the problem must lie in the
economic system. This is the inevitable conclusion and
the reason that the protesters are right to be
indignant. Every barrel has its rotten apples, but the
problem, as MIT Professor Susan Silbey has written,
comes when the whole barrel is rotten.

Much of what has gone on can only be described by the
words moral deprivation. Something wrong had happened to
the moral compass of so many of the people working in
the financial sector. When the norms of a society change
in a way that so many have lost their moral compass-and
the few whistle-blowers go unheeded-that says something
significant about the society. The problem is not just
the individuals who have lost their moral compass but
society itself.

What the protests tell us is that there was outrage and
that outrage gives hope. Americans have always had an
idealistic streak, reflected both in the instruction in
schools and in political rhetoric. Kids read the
Declaration of Independence, "all men are created
equal," and they read the words literally, all men,
white and black, and they believe them. They recite the
Pledge of Allegiance, which promises "justice for all,"
and they believe it.

Market Failures

The list of grievances against corporations was long,
and longstanding. For instance, cigarette companies
stealthily made their dangerous products more addictive,
and even as they tried to persuade Americans that there
was no scientific evidence of the dangers of their
products, their files were filled with evidence to the
contrary. Exxon had similarly used its money to try to
persuade Americans that the evidence on global warming
was weak, even though the National Academy of Sciences
had joined with every other scientific body in saying
that the evidence was strong. Chemical companies had
poisoned the water, and when their plants blew up, they
refused to take responsibility for the death and
destruction that followed. Drug companies used their
monopoly power to charge prices that were a multiple of
their costs of production, condemning to death those who
could not afford to pay.

The financial crisis itself had brought out more abuses.
While the poor suffered from predatory lending
practices, almost every American suffered from deceptive
credit card practices. And while the economy was still
reeling from the misdeeds of the financial sector, the
BP oil spill showed another aspect of the recklessness:
lack of care in drilling had endangered the environment
and threatened jobs of thousands of people depending on
fishing and tourism.

But even before the crisis, the evidence was that the
market economy was not delivering for most Americans.
GDP was going up but most citizens were worse off. Not
even the laws of economics long championed by the
political right seemed to hold. Earlier, we explained
how the theory that is supposed to relate rewards to
social contributions had been falsified by the Great
Recession. The theory holds that competition is supposed
to be so strong in a perfectly efficient market that
"excess" profits (returns in excess of the normal return
on capital) approach zero. Yet each year we saw the
banks walking off with mega-profits so large that it is
inconceivable that markets are really competitive.
Standard courses in economics talk about the law of
demand and supply, where prices are determined to equate
the two. In the theoretical model, there is no such
thing as unemployment, no such thing as credit
rationing. But in fact, we have a world in which there
are both huge unmet needs (e.g., investments to bring
the poor out of poverty, to bring development to Africa
and the other less developed countries in other
continents around the world, to retrofit the global
economy to face the challenges of global warming) and
vast underutilized resources (e.g., workers and machines
that are idle or not producing up to their potential).
As of December 2011, some 25 million Americans who would
like a full time job can't get one, and the numbers in
Europe are similar.

Innovation and globalization provide the most recent-and
the most important-contexts to observe the failings of
the market. Both were supposed to make our economy more
prosperous, and yet both seem to have resulted in an
economy in which most citizens are becoming worse off.

In recent research, Bruce Greenwald and I have traced
the roots of the Great Depression to an increase in
agricultural productivity so rapid that fewer and fewer
people were needed to grow the world's food. In the
United States in 1900, a large portion of the labor
force worked on farms; today less than 2 percent of the
population grows more food than even an obese population
can consume-and there are large amounts left over for
exports. Over time, most people working in agriculture
who were no longer needed looked for alternative
employment. But at times, the movement away from
agriculture was far from smooth. Between 1929 and 1932,
agricultural prices plummeted, and incomes fell by an
amount variously estimated at one-third or two-thirds.
Such precipitous declines in income resulted in
corresponding declines in demand for manufactured goods.
Rural real estate prices plummeted and credit became
unavailable, and so, despite their already low income,
farmers were trapped in the declining sector. Just when
migration out of the rural sector should have been
increased, it came to a halt. If people had been able to
relocate, if new jobs had been created, the increases in
productivity would have been welfare-increasing, but as
it was, given the market failures, those in both the
city and the rural sector suffered.

It seems strange, in the midst of the Great Recession,
when one out of six Americans who would like to get a
full-time job is unable to get one, to see stores
replacing low-wage cashier clerks with machines. The
innovation may be impressive, profits may even be
increased, but the broader economic and social
consequences cannot be ignored: higher unemployment,
lower wages for unskilled labor as the balance of demand
and supply tilts more against workers, and greater
inequality.

Political Failures

The political system seems to be failing as much as the
economic system, and in some ways, the two failures are
intertwined. The system failed to prevent the crisis, it
failed to remedy the crisis, it failed to check the
growing inequality, it failed to protect those at the
bottom, and it failed to prevent the corporate abuses.
And while it was failing, the growing deficits suggested
that these failures were likely to continue into the
future.

Americans, Europeans, and people in other democracies
around the world take great pride in their democratic
institutions. But the protesters have called into
question whether there is a real democracy. Real
democracy is more than the right to vote once every two
or four years. The choices have to be meaningful. The
politicians have to listen to the voices of the
citizens. However, increasingly, and especially in the
United States, it seems that the political system is
more akin to "one dollar one vote" than to "one person
one vote." Rather the correcting the market's failures,
the political system is reinforcing them.

Tax systems in which a billionaire like Warren Buffett
pays less taxes (as a percentage of his income) than
those who work for him, or in which speculators who
helped bring down the global economy are taxed at lower
rates than are those who work for their income reinforce
the view that politics is unfair, and contribute to the
growing inequality.

The failures in politics and economics are related-and
they reinforce each other. A political system that
amplifies the voice of the wealthy also provides
opportunity for laws and regulations-and the
administration of laws and regulations-to be designed in
ways that not only fail to protect the ordinary citizens
against the wealthy but enrich the wealthy at the
expense of the rest of society.

Globalization and Markets

My criticism of globalization lies not with
globalization itself, but with the way it has been
managed: it is a two-edged sword, and if it is not
managed well, the consequences can be disastrous. When
managed well-and a few countries have succeeded in
managing it well, at least so far-it can bring enormous
benefits.

The same is true for the market economy: the power of
markets, for good and for evil, is enormous. The
increase in productivity and standards of living in the
past two hundred years have far exceeded those of the
previous two millennia, and markets have played a
central role-though so too has government, a fact that
free marketers typically fail to acknowledge. But
markets have to be tamed and tempered, and that has to
be done repeatedly to make sure that they work to the
benefit of most citizens. That market control happened
in the United States in the progressive era, when
competition laws were passed for the first time. It
happened during the New Deal, when social security,
employment, and minimum wage laws were passed. The
message of the Occupy Wall Streeters, and other
protesters around the world, was that markets once again
needed to be tamed and tempered. Even in parts of the
Middle East, where they brought increases in growth, the
benefits did not trickle down.

From Cairo to Wall Street

In more than forty years of travel to developing
countries, I have seen these problems at close hand. And
throughout 2011, I gladly accepted invitations to Egypt,
Spain, and Tunisia, and I met with protesters in
Madrid's Retiro Park, at Zuccotti Park in New York, and
in Cairo where I spoke with the young men and women who
had played a central role at Tahrir Square. As we
talked, it was clear to me that they understood how in
many ways the system has failed. The protesters have
been criticized for not having an agenda, but such
criticism misses the point of protest movements. They
are an expression of frustration with the electoral
process. They are an alarm.

At one level, these protesters are asking for so little:
for a chance to use their skills, for the right to
decent work at decent pay, for a fairer economy and
society. Their requests are not revolutionary but
evolutionary. But at another level, they are asking for
a great deal: for a democracy where people, not dollars,
matter; and for a market economy that delivers on what
it is supposed to do. The two demands are related:
unfettered markets do not work well, as we have seen.
For markets to work the way markets are supposed to
work, there has to be appropriate government regulation.
But for that to occur, we have to have a democracy that
reflects the general interests, not the special
interests. We may have the best government that money
can buy, but that won't be good enough.

In some ways, the protesters have already accomplished a
great deal: think tanks, government agencies, and the
media have confirmed their allegations, of the high and
unjustifiable level of inequality, the failures of the
market system. The expression "we are the 99 percent"
has entered into popular consciousness. No one can be
sure where the Arab Spring or the Occupy Wall Street
movements will lead. But of this we can be sure: these
young protesters have already altered public discourse
and the consciousness of both ordinary citizens and
politicians.

Copyright c 2012 by Joseph E. Stiglitz. This excerpt
originally appeared in From Cairo to Wall Street: Voices
From the Global Spring c 2012 by Anya Schiffrin and
Eamon Kircher-Allen.


Joseph E. Stiglitz is University Professor at Columbia
University and the winner of the 2001 Nobel Prize for
Economics. He served on President Clinton's economic
team as a member and then chairman of the U.S. Council
of Economic Advisors in the mid-1990s, and then joined
the World Bank as chief economist and senior vice
president. Stiglitz has received the John Bates Clark
Medal. He was a Fulbright Scholar at Cambridge
University, held the Drummond Professorship at All Souls
College, Oxford, and has taught at M.I.T, Yale,
Stanford, and Princeton.

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