Dissolving trust

Joseph Stiglitz is an economist of some note. He won the Nobel prize for Economics in 2001. He served as the Chair for the Council of Economic Advisors (under Clinton) and the World Bank Chief Economist. He recently wrote the book The Price of Inequality and summarized it for Vanity Fair. Here is the basic premise:

There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Here are the reasons he gives:

Give a rich person twenty million (close to Romney's annual income) and only a small part of the money would be spent. Give that same amount spread over five hundred working class people and nearly all of it will be spent. As inequality goes up, consumption goes down. Total demand goes down. Unemployment goes up. Consumption takes another hit.

When a resident of a house pays the owner for the privilege of living there that payment is called rent. This is quite different from wages that result from a making a good or providing a service. The term rent has expanded to include all kinds of return on ownership claims, such as income from mineral rights, from preferential taxes, from efforts to make the marketplace less competitive, from economic speculation (how Wall Street makes money these days).

When an economy is built on seeking rent, it drives money towards the top. It is concerned with getting more of the pie rather than growing the pie. It crowds out other, more meaningful, economic activity.

The more unfair an economy is seen, the less workers are motivated for the company and the less productive they become, the more talent is wasted, and the looser community bonds become.

Widening inequality dissolves trust. The winners are wary and the losers (the 99%) see every encounter with boss, business, or bureaucrat as someone trying to take advantage of them. Trust is critical in politics and governing and when gone there is less agreement in what government should do.

Mistaken beliefs about inequality, reinforced by ideology, have catastrophic effects on economic policy. So…

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound.

In summary: In terms of issues important to the rich, more inequality means less worker productivity and a society with less trust. As the society as a whole becomes dysfunctional, even the rich will pay dearly.

Stiglitz concludes by saying:

So, the advice I’d give to the 1 percent today is: Harden your hearts. When invited to consider proposals to reduce inequality—by raising taxes and investing in education, public works, health care, and science—put any latent notions of altruism aside and reduce the idea to one of unadulterated self-interest. Don’t embrace it because it helps other people. Just do it for yourself.