Academic journal article Global Economic Observer

For Joseph Stiglitz the Great Social Division in USA Is a Vital Issue to Be Urgently Resolved

Academic journal article Global Economic Observer

For Joseph Stiglitz the Great Social Division in USA Is a Vital Issue to Be Urgently Resolved

Article excerpt


(Joseph Stiglitz: The Great Divide: Unequal Societies and What We Can Do About Them, Publica, Bucharest, 2015)

Part I, II, III

1. Stiglitz's ruthless criticism against American capitalism

After two years Joseph Stiglitz returns on the matter of US social inequality, which seems to be a complex process with many causes, with a new book, in fact a collection of articles or essays published by Vanity Fair, Project Syndicate and New York Times. Stiglitz has identified four crucial and interconnected issues facing the developed capitalist society: the enormous social inequality, poor economic management, globalization, the role of the state and the market. Social inequality was caused by wrong macroeconomic policies, recent financial crisis, economic stagnation and globalization. The explanation for these challenges lies in the role played by the interest groups, the so-called 1% that influenced politics and that generated a poor management of economy and globalization effects. Only through the politics one may find good solutions as the markets cannot do this. Stiglitz is convinced that only a reform of democratic system for making political rulers more accountable may remove social division and ensure general prosperity.

In US although there was an economic boom in the 90's and between 2002 and 2007 the middle class has strongly declined and social inequality has continuously deepened, among other things due to a tax decrease applied by George W. Bush Administration to rich people. Stiglitz believes that inequality weakens aggregate demand, and economy and fiscal policies are the most effective instruments for strengthening the demand and improving the social equality. But improper fiscal policies may put additional pressure on monetary policies which, by cutting interest rate and relaxing regulations, try to stimulate the economy. Monetary policy managers have been market fundamentalists who underestimated the risks of their policy with the result of a speculative bubble and an unprecedented growth of inequality. In the first part of the years 2000 there was a consumerist orgy in USA, 80% of Americans spending on average 110% of their income.

Stiglitz rightly asks who is responsible for the recent financial and economic crisis (the Great Recession) and finds more actors and failures (such as risk management) outside macrostabilisation policy. Stiglitz blames the free market proponents who strangely seek help from the state during a crisis, the Republicans headed by Bush Jr. during two wars, tax cuts and huge deficits, the politicians who instead of doing public investments have accepted the deregulation and liberalization of the financial/banking sector, the deregulation activity that was started by Reagan Administration and continued by Clinton Administration that led to excessive securitization and derivatives, high risks and moral hazard, non-visionary and even fraudulent behavior of banks and rating agencies. Deregulation and liberalisation of financial markets associated with the free movement of capital have negatively affected not only USA but also emerging economies that instead of getting prosperity were hit by currency crises. Income redistribution towards financial/banking sector was made through market manipulation and through abusive practices of credit cards and loans (exaggerated commissions and interest rates). Financial sector made an effective lobby for public policies that have increased social inequality and hardly supported the free market ideology involving privatization and liberalisation, limited progressive taxation, targeting monetary policy on inflation and not the employment rate. For Stiglitz in transparent and competitive markets profits fall to almost zero, but this cannot happen if the government has become the prisoner of corporations, especially of financial ones. Some economists are guilty of what happened in the financial sector, as they supported the idea that markets are self-regulating. …

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