Book Review: "Price of Inequality" by Joseph E. Stiglitz

In his recent book The Price of Inequality, Joseph Stiglitz condemns America for its “1 percent problem”. For the past thirty years, the nation has become increasingly divided; the upper class has seen the rapid growth in their income while the lower class has lagged behind. This gap in wealth has expanded so dramatically that by 2007, “the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800” (Stiglitz, 5).  

Unequal distribution of wealth has always existed in our society. In the past, the relatively higher incomes of the wealthy were justified on the basis of marginal productivity theory. According to the theory, the wealthy owned “a scarce and valuable skill, the market will reward [them] amply, because of [their] contribution to output” (37).  However, there is no compelling evidence that the productivity of the top 1 percent have increased so significantly over time as to justify their outsized bonuses while the average wage for typical laborers has stagnated.

Evidently, the unequal distribution of wealth today requires a new explanation. Stiglitz accuses the failure of market as the main contributor of inequality. A shrewd economist, he acknowledges that the free market capitalism does not always work perfectly. There are negative externalities, imperfect information, and agency problems that cause the market to fail. Stiglitz argues that these distortions of market occur because private incentives and social returns are not in alignment (42). In other words, the private interest of a corporation does not necessarily reflect what is good for society as a whole.

Stiglitz argues that it is the responsibility of government to design policies—taxes and regulations—that make these discrete interests align. However, the top 1 percent has successfully manipulated the political system to favor the persistence of inequality by lobbying, threatening to outsource jobs, and electing the like-minded political representatives to power. As a result, there have been many policies that favor the wealthy such as regressive tax, bank deregulation, and lax corporate governance. Such laws have diminished opportunities for the poor and perpetuated the rent seeking behavior among the top 1 percent. 

One might wonder whether Stiglitz is advocating for minimum government intervention since the wealthy have actively utilized policies to their advantage. Quite contrary, Stiglitz asserts there should be a stronger government that can curb the influence of top 1 percent and create a more competitive economy. He strongly believes that greater equality can lead to a sustainable long-term economic growth as it was when “America grew together—with growth in income in every segment” for thirty years after WWII (5).  Furthermore, greater equality can induce trust among different social sectors and thus save our ‘democracy in peril’ (153). 

In Stiglitz’s view, inequality is problematic because it begets instability. The 2007—2008 Financial Crisis not only revealed the magnitude of inequality but also aggravated it. By transferring money from the bottom up to top, inequality reduced total demand in the economy and therefore increased unemployment (106). Amidst the economic instability, banks engaged in predatory lending, in which they made too many reckless loans. When the housing bubble bursted, the wealth of the bottom and the middle evaporated with the value of their homes. On the other hand, the top 1 percent only lost part of their wealth thanks to the massive government bail out and the Fed’s prompt action to lower interest rates.  In fact, their recovery from the crisis was so successful that “the wealthiest 1 percent...had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983” (10). In the end, the financial crisis that resulted from the pervasive inequality eventually further deepened it.

What seems particularly interesting to me about this interpretation of the recent financial crisis is Stiglitz’s overly sympathetic attitude toward the borrowers. While he acknowledges that people did spend far more money than they could afford, Stiglitz seems to only portray them as victims. He asserts that many banks took advantage of the “least educated and financially unsophisticated in our society...[by] selling them costly mortgages and hiding details of the fees” (240). Undoubtedly, the US financial system prior to the crisis played an important role in encouraging such excessive consumptions. However, I believe that borrowers also share some responsibility in triggering the recession by underestimating the risk of their investment and poorly budgeting.

In the last chapter, Stiglitz sets out a reform agenda in the last chapter ranging from curbing the excess power at the top to creating more opportunities and investment in the bottom. It is understandable that the deep-seated inequality in our society necessitates a holistic remedy that he recommends. However, I still believe that some changes might be more urgent than others. If I were to have one-on-one with Stiglitz, I would like to ask him what reform policies he thinks should be prioritized among others. It would be interesting to hear what he believes to be the most pressing issue.

In general, Stiglitz does a magnificent job in analyzing the inequality and market failure in the modern US economy. However, I cannot help but feel that Stiglitz could have better organized his book. For instance, there were quite numerous instances in which he accuses the top 1 percent of exploiting politics but does not thoroughly explain ‘how’ they did so each time. He does enlist various mechanisms they use in later chapters, yet these explanations are rather scattered throughout the book. I would have preferred if Stiglitz dedicated a chapter or two to focus mainly on describing how those ruling the economy also influenced politics. Although such a task would have been very difficult given the broad topic he chose to discuss, organizing the book in this way might have helped readers better understand and adopt his argument.