TERRY GROSS, HOST:
This is FRESH AIR. I'm Terry Gross. My guest, Joseph Stiglitz, is best known for two things: winning the 2001 Nobel Prize in Economics and helping popularize the expression the one percent with his May 2011 Vanity Fair article "Of the One Percent, By the One Percent and For the One Percent."
The article described the increase in inequality in the U.S. and its political system that seemed to give disproportionate voice to those at the top. Stiglitz expands on that in his new book, "The Price of Inequality: How Today's Divided Society Endangers Our Future." Stiglitz is a professor at Columbia University. During the Clinton administration, from 1993 to '97, he served on the Council of Economic Advisors, first as a member, then as chair.
After that, he was chief economist and senior vice president of the World Bank. In 2009 he was chair of the U.N. General Assembly's Commission of Experts on Reform of the International Financial Monetary System.
Joseph Stiglitz, welcome back to FRESH AIR.
JOSEPH STIGLITZ: Nice to be here.
GROSS: Why were you concerned about inequality? Like, what did you see around you that made you think this is what I have to investigate?
STIGLITZ: I grew in Gary, Indiana, which in a way reflects the history of industry in America. It was a city that was founded in 1906. It had a lot of immigrants. It had a lot of African-Americans. And as I was growing up, I saw the ways in which markets weren't working well.
I saw high levels of discrimination, which lead to poverty in the bottom. I saw episodic high levels of unemployment. I saw business cycles. I saw all kinds of inequalities. And so it was clear that America wasn't quite the dream that was depicted in some textbooks, and I wanted to understand why those textbooks were wrong and I wanted really to make a contribution to do something about it.
GROSS: You wrote a Vanity Fair article last year that was titled "Of the One Percent, By the One Percent and For the One Percent" that helped popularize the phrase the one percent. Who is in the one percent?
STIGLITZ: Obviously it's a very small group, a very elite group whose incomes are very high. This one percent gets about 20 percent of all the nation's income. It consists disproportionately of CEOs, of those in the financial sector, but there's an array of other people; the high-paid lawyers who help serve the CEOs and those in the financial sector is an example. Relatively few entrepreneurs are among these.
GROSS: You write that for the past 30 years the top's been growing faster, and the bottom has been declining. What measure is that? Like what is that based on?
STIGLITZ: Well, there are a variety of measures. One measure is: What is the share of those at the top? And what is the percentage of the population that falls below the poverty level? The percentage of the population falling below the poverty level has increased dramatically in the last few years, and the percentage of income of those at the very top, the upper one percent, is now about 20 percent, much higher than it was, say, two or three decades ago.
I think most Americans understand that our system today isn't fair. One of the roles of the government is to try to make our system fair. And one part of fairness is that everybody ought to pay a fair share of their taxes, of their income in taxes. And a basic premise, I think, that most Americans believe is that if your income is very, very high, you ought to pay at least the same percentage of your income in taxes as somebody whose income is lower.
Most Americans, I think, would not agree with the view that speculators ought to be taxed at half the rate of those who work for an income.
GROSS: You say in your book that the most egregious aspect of recent tax policy is lowering the tax rate on capital gains; in other words, lowering the tax rate on profits that you make in the stock market. And this happened first under President Clinton. You served under President Clinton. You were the chief of the Council of Economic Advisors.
Were you in that position when the president lowered the tax rates on capital gains, something that you really disapprove of?
STIGLITZ: Yes, I was chairman of the Council of Economic Advisors at the time, and I very strongly opposed it. I thought it was wrong. I thought it was wrong because it increased inequities in our society and it encouraged speculation, and that it would not lead to faster real economic growth. And unfortunately all three of those concerns turned out to be true.
Unfortunately, even in spite of the evidence showing that capital gains taxes led to more speculation, more instability, President Bush lowered the capital gains tax rate even further, and that has led to a period in which the rate of - growth of inequality was higher than it has ever been, at least in recent memory, and led to the kind of instability that led to the great crisis.
GROSS: This is the kind of thing Warren Buffett's talking about when he says that his secretary gets taxed at a higher rate than he does because his profits are through capital gains, and her profits are through wages, and wages get taxed for most people at a higher rate than capital gains do.
So when you were arguing with President Clinton about whether capital gains should be cut or not, what was his argument?
STIGLITZ: I think the basic - what was going on at that particular moment was the Republicans controlled Congress and he wanted, like any president, to show that he was doing something. The view among some of the political advisors was that doing something was better than doing nothing. My view was that doing something that was wrong was worse than doing nothing.
And unfortunately that was one of those instances where the political advisors won, and I think a wrong decision was made.
GROSS: So you're saying you think that was a political decision, not really an economic decision.
STIGLITZ: That's right. If it had been an economic decision, it would have been shaped markedly differently. For instance, one of the arguments that some people argue for capital gains having special tax - a lower tax rate - is that it encourages innovation. If that's the case, then you might have said let's give a lower capital gains tax rate for those who engage in innovative activity, but not for land speculation, not for taking a gamble on CDSs, derivatives, betting on whether Greece is going to collapse or not.
These are activities that actually weaken our economy, the global economy, don't strengthen it. So you could have had a targeted capital gains reduction. I think one could have justified that on some economic grounds. I still would have disagreed with it, but at least that would have made some sense.
GROSS: You write that after World War II, people of different classes saw their incomes rise, that everybody prospered. But now it's different. The middle class is diminishing. People in the middle class and below are seeing decreases in their wages, where people at the very top, the very, very top, are doing very well. What changed, you know, in the past 30 years?
STIGLITZ: Well, you're absolutely right that the nature of our growth today is markedly different than it was in the decades after World War II. There we had shared prosperity. More recently what we've had is exactly the opposite.
You know, it would be one thing if those at the top did very well, but as they were doing well, the benefits, you might say, trickled down to everybody else. But right now most Americans are worse off than they were 15 years ago. So there has not been shared prosperity.
And this relates to some of the reasons that we have such inequality. One of the reasons that we have such inequality is that much of the income of those at the top arise from rent-seeking. It rises from taking advantage of others.
GROSS: You used the word rent-seeking. Rent-seeking. You have explain what you mean.
STIGLITZ: Well, the idea of rents are returns that people get not because of the efforts that they exert, not because of the contributions they make to our society, but like a landlord, just because they own some asset. So we - it's a term economists use to describe the income of monopoly, the income associated with exploitation, the income that arises from using political influence to get gifts from the government, to get large amounts of money either from the government paying you over-market prices, like it does for the drug companies, or giving you access to resources at below-market prices, like it does to the oil and mineral companies in the United States.
GROSS: OK, so you were saying that the income at the top has increased a lot because of what you've described as rent-seeking.
STIGLITZ: That's right. If you look at the people who are doing very well, they're not the people who have made the most important contributions to our society, not the people who've, for instance, invented major technological advances like the transistor or the laser or the computer, the things that really have transformed our society.
They are people who've exercised their monopoly power, perhaps having made a contribution but then leveraged that contribution into huge profits by using monopoly power. They include the CEOs of some of the corporations who take advantage of - abuse corporate governance deficiencies so that they take an outsize share of the corporate profits.
They include the - many of the CEOs of the banks and other financiers who take advantage of our under-regulated financial system, our over-bloated financial system, not a - it's not that their income is related to their contribution to society. We know that these banks brought us to the brink of ruin, and in spite of that, they've walked off with mega-bonuses.
GROSS: In trying to describe where you think the American economy has gone wrong and why there's such a disparity between the people at the top and the people everywhere else, you use student loans as an example. Why do student loans for you exemplify what went wrong?
STIGLITZ: Well, they help illustrate a basic point that I try and make in the book, that market forces do play a role in shaping inequality, but market forces are actually shaped by political processes, by legislation that can either give more scope for inequality or restrict it.
So take student loans. Here it's understandable why particularly people in the poor - in the bottom - understand that their future prospects depend on education. But we passed a bankruptcy law that totally distorts the market. It allows derivatives to get priority over any other claimants. And at the same time it says students cannot discharge their debt even in bankruptcy, and yet they are saddled for the rest of their lives with these student debts.
And we've seen the consequences of these student debts, people graduating with a huge burden; $25,000 is now the average student debt. The banks feel relatively assured, particularly in the era that - where the government guaranteed, it's now withdrawn these programs because finally the government realized what - the gift that they were giving to the banks as they were bearing the risk and the banks were taking the profits.
So they curtailed that, but it is still a relatively safe bet for banks to make these student loans because students cannot discharge the debt regardless of whether they get the jobs that they hope to get.
GROSS: If you're just joining us, my guest is Joseph Stiglitz. He's a Nobel winner in economics and the author of the new book "The Price of Inequality: How Today's Divided Society Endangers Our Future." Let's take a short break here, and then we'll talk some more. This is FRESH AIR.
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GROSS: If you're just joining us, my guest is Joseph Stiglitz. He is a Nobel Prize-winner in economics and the author of the new book "The Price of Inequality: How Today's Divided Society Endangers Our Future." And he teaches at Columbia University.
When you served as chair of the Council of Economic Advisors under President Clinton, what did you see firsthand about how lobbying works in financial regulation, for instance, you know, in economic decisions? Give us an example of something that you saw that for you epitomizes what the problem is.
STIGLITZ: I think the example that most epitomizes the problems that I've been talking about was the repeal of the Glass-Steagall Act that allowed investment banks and commercial banks to come together. After the repeal of Glass-Steagall, the differences between the investment banks, which took rich people's money, invested in high-risk activities, high return, the difference between those banks and ordinary commercial banks was abolished, and the unfortunate consequence of that was that the commercial banks began to act like investment banks, undertaking high-risk activities with ordinary individuals' money.
It had two other consequences. One was that the banks grew bigger and bigger. They became too big to fail. That meant that they - if they gambled and won, they walked off with the profits, but if they gambled and lost, they knew that the government would bail them out, which they were right, it did bail them out.
And finally, there are a host of conflicts of interest that were apparent in the years before the Great Depression and which had led to the passage of the Glass-Steagall Act, an act which served the country well. In the decades following the passage of this - Glass-Steagall Act separated the commercial and investment bank - the United States had no financial crises, no major bank failures.
In the period after deregulation, we've seen the kind of instability that we face.
GROSS: Well, getting back to the question of lobbying, you're saying in your book that part of the problem with our economy is lobbying, is that, you know, banks and corporations have so much power in the lobbying process that they have a lot of input into the political process, you know, and that this works to get legislation that favors them economically, such as Glass-Steagall.
So since you were in the Clinton administration, when the lobbying for this began, is there anything specific you can tell us that you witnessed about the lobbying process and why it's so effective?
STIGLITZ: There are many aspects of this lobbying process. One of them, of course, is the revolving doors, that you have people who come from Wall Street, go into government and then leave government and go back into Wall Street. So when you have this kind of revolving door, it's not just that their interests are not well-aligned with that of the public; it's that their mindset is, you might say, captured by the industry from which they come.
They see their interest, the interest of Wall Street, as if it were in the public interest. So that's probably the - one of the most important ways. But of course you also see it through campaign contributions, which affect both the administration and Congress. And it's the interaction of the two which is so strong.
Unfortunately, some parts of the administration are themselves so influenced by, in this case, the financial sector that they take a more active role than they - and see the world through the eyes of the financial sector. There used to be an expression, what's good for General Motors is good for the United States, and vice versa. I think increasingly, given the strength of the financial sector, many thought that what was good for the financial sector was good for the economy.
We would have had a stronger economy if we had not allowed our financial sector to get so bloated, if we had not de-regulated. As a teacher, I feel this very intensely because I see a disproportionate fraction of our best students going into the financial sector rather than going into the kinds of activities that would lead to real innovation, you know, the laser, the invention of the computer, the transistor, the kinds of things that would really transform our technology and our society.
And this is, in a way, the largest waste, but it's also very much related to the underlying problem of inequality because one of the prices that we pay is that the sources of this high inequality, the bloated financial sector, for instance, distort the way in which we use our scarcest resources, our people and our money.
GROSS: Well, Joseph Stiglitz, thank you so much for talking with us.
STIGLITZ: It's been a real pleasure.
GROSS: Joseph Stiglitz is the author of "The Price of Inequality." He's a Nobel Prize-winning economist who's a professor at Columbia University.
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