The Price of Inequality: How Today's Divided Society Endangers Our Future (54 page)

17.
See, e.g., the findings the report of the UN commission charged with analyzing the causes of the crisis and coming up with remedies. Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, September 21, 2009, available as
The Stiglitz Report
(New York: New Press, 2010).

18.
Andrew G. Berg and Jonathan D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Staff Discussion Note, April 8, 2011, p. 3, available at
http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf
(accessed March 25, 2012).

19.
Dominique Strauss-Kahn, “The Global Jobs Crisis—Sustaining the Recovery through Employment and Equitable Growth,” April 13, 2011, available at
http://www.imf.org/external/np/speeches/2011/041311.htm
.

20.
There are, of course, many ways of
producing
these goods. Basic research could, for instance, be financed by the government and produced either in private laboratories, universities, or government-run laboratories. The United States has traditionally employed all of these.

21.
A report of the Council of Economic Advisers documented the high returns to government support for research and development. Council of Economic Advisers, “Supporting Research and Development to Promote Economic Growth: The Federal Government’s Role,” October 1995. A large body of literature documents the value of government investments. See, e.g., David Alan Aschauer, “Is Government Spending Stimulative?”
Contemporary Economic Policy
8, no. 4 (1990): 30–46. Aschauer has also shown that public capital investment can improve returns to private capital, along with the direct benefits it provides. See Aschauer, “Does Public Capital Crowd Out Private Capital,”
Journal of Monetary Economics
24, no. 2 (1989): 121–88.

22.
This is something that Ben Bernanke highlighted in a May 16, 2011, speech, “Promoting Research and Development: The Government’s Role,” available at
http://www.federalreserve.gov/newsevents/speech/bernanke20110516a.htm
(accessed March 3, 2012). “First, since the 1970s, R&D spending by the federal government has trended down as a share of GDP, while the share of R&D done by the private sector has correspondingly increased. Second, the share of R&D spending targeted to basic research, as opposed to more applied R&D activities, has also been declining. These two trends—the declines in the share of basic research and in the federal share of R&D spending—are related, as government R&D spending tends to be more heavily weighted toward basic research and science. The declining emphasis on basic research is somewhat concerning because fundamental research is ultimately the source of most innovation, albeit often with long lags. Indeed, some economists have argued that, because of the potentially high social return to basic research, expanded government support for R&D could, over time, significantly boost economic growth.” Indeed, real federal investment in basic research decreased from $4.3 billion in 2003 to $3.9 in 2008, adjusted for inflation. See table 6 of National Science Board, “Science and Engineering Indicators: 2010,” National Science Foundation, 2010, available at
http://www.nsf.gov/statistics/nsf10314/content.cfm?pub_id=4000&id=2
(accessed March 3, 2012). Albert M. Link and others have shown that there is a direct link between basic research and productivity growth. See Link, “Basic Research and Productivity Increase in Manufacturing: Additional Evidence,”
American Economic Review
71, no. 5 (1981): 1111–12.

23.
Studies by the Health, Education, Labor and Pensions (HELP) Committee have shown that for-profit colleges are drastically more expensive, spend less per student than nonprofit and public institutions, lead the nation in withdrawal rates—up to 84 percent for some associate’s degree programs—and account for 50 percent of all student loan defaults, even though they enroll only about 13 percent of American higher education students. These findings and others can be viewed at
http://harkin.senate.gov/help/forprofitcolleges.cfm
(accessed February 15, 2012).

24.
Some 66 percent of four-year undergraduate students graduated with some debt in 2007–08, and the average cumulative debt incurred was $27,803. Average cumulative debt has been increasing at a rate in excess of 5 percent per year. These figures were calculated by
FinAid.org
using the data analysis system for the 2007–08 National Postsecondary Student Aid Study (NPSAS), conducted by the National Center for Education Statistics at the U.S. Department of Education.

25.
This included 784 lobbyists (nearly 2 per U.S. representative) from the oil industry and 262 from the mining industry; total spending for the energy and natural resources industry’s lobbying was $387.8 million in 2011. Financial-sector spending on lobbying is even greater. Data is from
OpenSectrets.org
, the website of the Center for Responsive Politics; see in particular
http://www.opensecrets.org/lobby/top.php?indexType=c
(accessed March 5, 2012).

26.
Classic references on rent seeking, demonstrating their dissipative effects and estimating their costs, are Gordon Tullock, “The Welfare Costs of Tariffs, Monopolies, and Theft,”
Economic Inquiry
5, no. 3, (1967): 224–32; and Ann Krueger, “The Political Economy of the Rent-Seeking Society,”
American Economic Review
64, no. 3 (1974): 291–303. Interestingly, even the efforts of those with greater ability to appropriate for themselves returns commensurate with their abilities can lead to an equilibrium in which not only others are less well-off but even they are too, as they spend money (stay in school longer) and take other actions to differentiate themselves. See J. E. Stiglitz, “The Theory of Screening, Education and the Distribution of Income,”
American Economic Review
65, no. 3 (June 1975): 283–300.

27.
See Bureau of Economic Analysis, National Income and Product Accounts Table, “Table 6.16D. Corporate Profits by Industry,” available at
http://www.bea.gov/National/nipaweb/SelectTable.asp
.

28.
This is based on plausible industry assertions about the fees. Tim Hammonds, president and CEO of Food Marketing Institute, has said, “How big is the problem? The interchange fee a supermarket pays when a customer pays with plastic is more than the money that flows to the retailer’s bottom line; it’s often double. Does that seem right to you? The service provider using a computerized payment network is getting more dollars from the transaction than the net profit for the merchant who provides the labor, the land, the fixtures, the light and the heat, and the store that stocks the products.” Hammonds, speech to the FMI Midwinter Executive Conference (January 24, 2006), available at
http://c0462491.cdn.cloudfiles.rackspacecloud.com/Hammonds_Interchange_Speech.pdf
(accessed March 6, 2012).

29.
See Marc-André Gagnon and Joel Lexchin, “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States,” 
PLoS Medicine
5, no. 1 (January 2008): 1–6.

30.
In 2009 the United States spent about 17.4 percent of GDP, amounting to almost $8,000 per capita. The Netherlands and France were the next two highest countries, spending 12.0 percent and 11.8 percent of GDP, respectively. The average OECD spending was $3,223. OECD Health Data 2011, database available at
http://www.oecd.org/document/30/0,3746,en_2649_37407_12968734_1_1_1_37407,00.html
(accessed March 3, 2012).

31.
“The Measurement of Economic Performance and Social Progress Revisited—Reflections and Overview,” September, 16, 2009, CMEPSP, available at
http://www.stiglitz-sen-fitoussi.fr/documents/overview-eng.pdf
(accessed February 15, 2012), a follow-up to the report of the Commission on the Measurement of Economic Performance and Social Progress. Also available as Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi,
Mismeasuring Our Lives
(New York: New Press, 2010).

32.
Figures are available from the IMF World Economic Outlook Database, available at
http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx
(accessed February 12, 2012).

33.
Some claim, however, that the quotation is only apocryphal. See
http://www.dirksencenter.org/print_emd_billionhere.htm
.

34.
See the Commission on the Measurement of Economic Performance and Social Progress.

35.
Stephen P. Magee, William A. Brock, and Leslie Young,
Black Hole Tariffs and Endogenous Policy Theory: Political Economy in General Equilibrium
(New York: Cambridge University Press, 1989). Not surprisingly an army of lawyers is ready to come to the defense of the legal profession and to challenge these findings. See George L. Priest, “Lawyers, Liability, and Law Reform: Effects on American Economic Growth and Trade Competitiveness” (1993), Faculty Scholarship Series, available at 624.http://digitalcommons.law.yale.edu/fss_papers/624.

36.
See Andrei Shleifer and Robert W. Vishny,
The Grabbing Hand: Government Pathologies and Their Cures
(Cambridge: Harvard University Press, 1998).

37.
The theory is that fear of punishment after the fact will provide incentives for firms to behave well. But firms well armed with lawyers know that they often will escape punishment. And besides, taking risks with the environment increases profits today, and shortsighted managers are more concerned with the reality of today’s profits than what might happen to profits sometime in the future. The interests of the managers may not be well aligned with the interests of the firm, and the interests of the firm are not well aligned with those of society more broadly.

38.
Known as the problem of moral hazard.

39.
For a fuller discussion of these issues, see L. Bilmes and J. E. Stiglitz,
The Three Trillion Dollar War
(New York: Norton, 2008).

40.
The Iraq war was put entirely on the credit card: when the war started, the United States already had a deficit. But instead of raising taxes to pay for it, the government lowered taxes in 2003.

41.
Quotation is from Marshall’s 1895
Principles of Economics.
It appears on p. 555 of the 8th ed. (London: Macmillan, 1920).

42.
H. Leibenstein,
Economic Backwardness and Economic Growth
(New York: Wiley, 1957).

43.
See Paul Glewwe, Hanan G. Jacoby, and Elizabeth M. King; “Early Childhood Nutrition and Academic Achievement: A Longitudinal Analysis,”
Journal of Public Economics
81, no. 3 (September 2001): 345–68. For a recent review of literature, see Douglas Almond and Janet Currie, “Human Capital Development before Age Five,” in
Handbook of Labor Economics
, vol. 4b, ed. Orley Ashenfelter and David Card (New York: Elsevier, 2011), 1315–486.

44.
Mullainathan and Shafir are writing a book,
The Packing Problem: Time, Money, and the Science of Scarcity.
The quotation in the text is from their manuscript as reported on
http://westallen.typepad.com/idealawg/2011/07/are-you-money-poor.html
. Their argument is vividly explained in
http://www.youtube.com/watch?v=5Aw_czU1bm0.

45.
My own work has focused on a broad analysis of how higher wages can increase productivity, through lowering labor turnover, improving incentives, improving the quality of the labor force, and improving morale. The theories are known collectively as “efficiency wage theories” and were discussed in my review paper “The Causes and Consequences of the Dependence of Quality on Prices,”
Journal of Economic Literature
25 (1987): 1–48, as well as in my Nobel Prize lecture, published as “Information and the Change in the Paradigm in Economics,”
American Economic Review
92, no. 3 (June 2002): 460–501. George Akerlof (who shared with me the 2001 Nobel Prize in Economics) and Janet Yellen (currently vice chair of the Federal Reserve) have further articulated how the perception of unfairness can undermine effort. See Akerlof and Yellen, “The Fair-Wage Effort Hypothesis and Unemployment,”
Quarterly Journal of Economics
105 (1990): 255–83. Joseph W. Harder looked at a context in which there were objective measures of performance—baseball and basketball—and showed that “underrewarded individuals behaved less cooperatively and more selfishly.” “Play for Pay: Effects of Inequity in a Pay-for-Performance Context,”
Administrative Science Quarterly
37 (1992): 321–35.

46.
Alan B. Krueger and Alexandre Mas, “Strikes, Scabs, and Tread Separations: Labor Strife and the Production of Defective Bridgestone/Firestone Tires,”
Journal of Political Economy
112, no. 2 (2004): 253–89.

47.
Alain Cohn, Ernst Fehr, and Lorenz Goette, “Fairness and Effort—Evidence from a Field Experiment,” Working Paper, October 2008; and Alain Cohn, Ernst Fehr, Benedikt Herrmann, and Frederic Schneider, “Social Comparison in the Workplace: Evidence from a Field Experiment,” IZA Working Paper 5550, March 2011.

48.
Marianne Bertrand and Adair Morse have used an expression simillar to our “trickle-down behaviorism.” They’ve documented the importance of trickle-down consumerism, showing that not only does spending increase if one lives in a community with higher income inequality, but so do bankruptcy and self-reported financial distress. Interestingly, they also show that politicians in such communities support measures to make credit more available—perhaps in a shortsighted attempt to make poorer individuals feel better by being able to (temporarily) consume more. See “Trickle-down consumption,” working paper, February 2012, available at (
http://isites.harvard.edu/fs/docs/icb.topic964076.files/BertrandMorseTrickleDown_textandtables.pdf
). Robert Frank of Cornell University, Adam Seth Levine of the University of Michigan, and Oege Dijk of the European University Institute have put forward a similar hypothesis, called “expenditure cascades.” They provide empirical evidence that increased income inequality is associated with “overspending,” reflected in, for instance, higher bankruptcy rates. See “Expenditure Cascades,” available at
http://ssrn.com/abstract=1690612
, Oct 12, 2010.