The Price of Inequality: How Today's Divided Society Endangers Our Future (66 page)

49.
For many developing countries, high oil and food prices represent a triple threat: not only do importing countries have to pay more for grain; they have to pay more to bring it to their countries and still more to deliver it to consumers who may live a long distance from ports.

50.
In practice, inflation targeting is often implemented in less doctrinaire ways. Because central bankers
have
to say they are committed to fighting inflation, it has become de rigueur for them to declare that they are engaged in inflation targeting. But the better central bankers know that raising interest rates won’t dampen inflation much when the inflation is “imported” and the economy is not overheated. They know, too, that they have to look after other things, like the exchange rate and financial stability. Some central bankers don’t always acknowledge these nuances: they see inflation today and raise interest rates, even though the economy is slowing down and the full effect of the higher rates will be felt six to eighteen months later, when the slowdown has already occurred. To take one example, the ECB raised its interest rates in April 2011 in response to the threat of inflation from rising oil prices even though unemployment was still near 10 percent and expected to remain so. The economy later slowed, inflation did not increase, and the policy had to be reversed.

51.
These issues are discussed more extensively in Stiglitz,
Freefall
;
Economic Report of the President
, 1997; and J. E. Stiglitz, “Reflections on the Natural Rate Hypothesis,”
Journal of Economic Perspectives
11, no. 1 (Winter 1997): 3–10.

52.
Indeed, by some calculations, Social Security is overindexed, i.e., individuals are actually better-off when inflation increases, or at least that has been the case in the past, over extended periods of time. See the Boskin report, “Toward a More Accurate Measure of the Cost of Living,” December 4, 1996, available at
http://www.ssa.gov/history/reports/boskinrpt.html
.

53.
Countries in which there is persistent high and variable unemployment typically put in clauses that provide for automatic adjustments in wages to changes in the cost of living (called COLA, cost of living adjustment).

54.
See, e.g., Robert J. Shiller,
Irrational Exuberance
, 2nd ed. (Princeton: Prince-ton University Press, 2005. For S&P/Case-Shiller Home Price Indices see
http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us---
(accessed March 5 2012).

55.
That requires that the deceleration of inflation from an increase in unemployment is weaker than the acceleration of inflation from a decrease in unemployment. See Stiglitz, “Reflections on the Natural Rate Hypothesis.” There is a huge literature on the hypothesis that, in the long run, the relationship between the acceleration of inflation and unemployment is vertical (“the vertical Phillips curve”). See, in particular, Edmund S. Phelps, “Phillips Curves, Expectations of Inflation and Optimal Employment over Time,”
Economica
, n.s., 34, no. 3 (1967): 254–81; and Milton Friedman, “The Role of Monetary Policy,”
American Economic Review
58, no. 1 (1968): 1–17.

56.
See, in particular, Arjun Jayadev and Mike Konczal, “The Stagnating Labor Market,” Roosevelt Institute, September 19, 2010. If the only problem in the labor market was a mismatch, then one should see wages rising in the many sectors in which there was a shortage, and given the downward rigidity of wages, average wages should be rising. One piece of evidence that is sometimes alluded to is that there has been an increase in vacancies relative to the number of unemployed. But this may have more to do with the changing job composition of those sectors of the economy that are doing well and expanding. For an excellent overview—coming down to the same policy conclusion—see Peter A. Diamond’s Lecture for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, “Unemployment, Vacancies, Wages,”
American Economic Review
101, no. 4 (June 2011): 1045–72.

57.
See Catherine Rampell, “Where the Jobs Are, the Training May Not Be,”
New York Times
, March 1, 2012, available at
http://www.nytimes.com/2012/03/02/business/dealbook/state-cutbacks-curb-training-in-jobs-critical-to-economy.html
(accessed March 5, 2012).

58.
Ben S. Bernanke, “Implications of the Financial Crisis for Economics,” speech at the Conference Co-sponsored by the Center for Economic Policy Studies and the Bendheim Center for Finance, Princeton University, September 24, 2010.

Chapter Ten
T
HE
W
AY
F
ORWARD:
A
NOTHER
W
ORLD
I
S
P
OSSIBLE

1.
See chapter 1 for a more detailed discussion of the trend

2.
This is one of the major insights of the Nobel Prize–winning economists Franco Modigliani and Merton Miller. For applications to the banking sector, see Joseph E. Stiglitz, “On the Need for Increased Capital Requirements for Banks and Further Actions to Improve the Safety and Soundness of America’s Banking System: Testimony before the Senate Banking Committee,” August 3, 2011; A. R. Admati, P. M. DeMarzo, M. F. Hellwig, and P. Pfleiderer, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive,” Stanford University Working Paper no. 86, 2010, and the references cited there.

3.
The banks are now suggesting that trading derivatives on exchanges may expose the financial system to more systemic risk, because of the risk that undercapitalized exchanges will implode. There’s an easy answer: require the exchanges to be adequately capitalized, backed up by joint and several liability for all those trading on the exchanges. There’s no reason that the risks of those trading in these explosive products should be shifted to others.

4.
New Zealand and the Scandinavian countries are examples of countries that have sought such alternatives with some success. See Marie Bismark and Ron Paterson, “No-Fault Compensation in New Zealand: Harmonizing Injury Compensation, Provider Accountability, and Patient Safety,”
Health Affairs
25, no. 1 (2006): 278–83; and Alan M. Scarrow, 2008, “Tort Reform: Alternative Models,”
Clinical Neurosurgery
55 (2008): 121–25.

5.
The alternative minimum tax—ensuring that the rich paid at least a certain minimum rate on their income—was not a bad idea; but the way it was structured was flawed, because it added complexity and eventually brought into its net not just the very wealthy but many ordinary Americans as well.

6.
See the fuller discussion in chapters 2 and 3 and Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” NBER Working Paper 17616, available at
http://www.nber.org/papers/w17616
; and Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,”
Journal of Economic Perspectives
25, no. 4 (2011): 165–90. As we noted earlier, President Obama has endorsed the “Buffett rule,” the notion that the tax system, at a minimum, should be progressive, with those at the top paying at least as high a rate as other Americans.

7.
Because taxes on rents are nondistortionary, taxes on income derived (at least to some extent) from rents should be higher. See, e.g., Partha Dasgupta and J. E. Stiglitz, “Differential Taxation, Public Goods, and Economic Efficiency,”
Review of Economic Studies
38, no. 2 (April 1971): 151–74. To the extent that we can target rents in our tax on higher-income individuals, there is in fact no adverse effect: the only difference is that the public will be compensated a little more for the costs that these monopolists impose on them.

8.
In chapter 6 we noted a peculiar feature of our tax system: capital gains (largely) escape taxation when assets are passed on to heirs. That fact distorts behavior. Eliminating this provision (called step up of basis) would both create both a fairer and a more efficient tax system. Conservatives harp on the adverse effects on small businesses and farms. As we noted earlier (chapter 6 ), the vast, vast majority of small businesses fall well below currently discussed thresholds for the estate tax ($5 million for a single individual or, effectively, $10 million for a married couple). In addition, there are provisions that allow the payment of the estate tax to be spread over many years, so that there will be no or minimal interruption to the conduct of the business. Additionally, the statistics show that the top 10 percent of income earners account for nearly 98 percent of all estate tax returns; the top 1 percent account for 35 percent all by themselves. See Leonard E. Burman, Katherine Lim, and Jeffrey Rohaly, “Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax,” Urban Brookings Tax Policy Center, October 20, 2008, available at
http://www.taxpolicycenter.org/UploadedPDF/411777_back_grave.pdf
(accessed February 28, 2012). In 2009, a year in which the exemption was lower than it is now, it is estimated that just 1.6 percent of all farms had to pay an estate tax. See Ron Durst, “Federal Tax Policies and Farm Households,”
USDA Economic Information Bulletin
, no. 54, May 2009, p. 15, available at
http://www.ers.usda.gov/Publications/EIB54/EIB54.pdf
(accessed February 28, 2012). It has been estimated that a mere 1.3 percent of all taxable estates are small businesses or farms. See “The Estate Tax: Myths and Realities,” Center on Budget and Policy Priorities, February 23, 2009, available at
http://www.cbpp.org/files/estatetaxmyths.pdf
(accessed February 28, 2012).

9.
For an interesting discussion, see Steven Brill,
Class Warfare: Inside the Fight to Fix America’s Schools
(New York: Simon and Schuster, 2011).

10.
The distinctive aspect of these is that they increase homeowner
equity
, rather than encouraging debt, the peculiar feature of current tax programs.

11.
It did set up a process that, in the long run, may lead to a more efficient health care system, though it did not directly attack the two major sources of inefficiencies discussed below, or at least didn’t do so as much as it could and should have.

12.
See J. E. Stiglitz,
Making Globalization Work
(New York: W. W. Norton, 2006).

13.
As in all areas of tax and regulatory policy, circumvention is a problem, and a key challenge for government is to outsmart such attempts by corporations.

14.
See U.S. Census Bureau website, “U.S. International Trade in Goods and Services Highlights,” February 10, 2012,
http://www.census.gov/indicator/www/ustrade.html
(accessed March 6, 2012).

15.
In the 1990s, we maintained a trade deficit and full employment, even with a government surplus; but the circumstances were unusual—an investment burst fueled by a stock market bubble (the tech bubble). And it was not sustainable. In chapter 8 we explained how one could stimulate the economy even within the confines of a limited budget deficit, but the politics of what is required (under current circumstances) may make even this unachievable.

16.
Part of the reason for the trade imbalances is the role of the United States as a reserve currency. Others want to hold dollars as backing for their country and their currency. The consequences is that we are exporting T-bills (U.S. short-term bonds), rather than automobiles. Exporting T-bills, however, doesn’t create jobs. In spite of global recognition of the anachronistic system—it makes no sense for the United States to play such a disproportionate role in the global monetary system in the multipolar world of the twenty-first century—the Obama administration has resisted change, partially out of worry that if the United States was not the reserve currency, it would be more difficult to borrow so cheaply. But the United States pays a high price for this exorbitant privilege. See United Nations, 2009,
“Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System”
(also known as the Stiglitz Commission) New York: United Nations, September 2009, published as
The Stiglitz Report
(New York: New Press, 2010);
and Stiglitz,
Making Globalization Work
, chap. 9.

17.
Here’s one suggestion proposed by Warren Buffett. For every dollar of exports, the government could issue an import “chit.” Importers could import only if they had the appropriate number of chits. If importers wanted to import more than exporters succeeded in exporting, the price of chits would rise, until demand equaled supply: a market mechanism for restoring trade balance, and helping restore the U.S. economy to full employment. International trade rules are sufficiently complex that it is often difficult to ascertain what is or is not allowed. Thus, there is some debate about whether or under what circumstances this proposal is consistent with WTO rules. See Buffett, “America’s Growing Trade Deficit Is Selling the Nation Out from Under Us. Here’s a Way to Fix the Problem—And We Need to Do It Now,”
Fortune
,
October 26, 2003, available at
http://www.berkshirehathaway.com/letters/growing.pdf
(accessed March 6, 2012).

18.
See chapter 8 and the references cited there.

19.
Ann Harrison (UC Berkeley and NBER) and Jason Scorse (Monterey Institute of International Studies) report, similarly, that the combination of antisweatshop activitism plus a minimum wage led to a more than 50 percent increase in real wages for unskilled workers in foreign plants. Interestingly, while activism had an impact on wages, it had no adverse effect on employment. “Multinationals and Anti-Sweatshop Activism”
http://www.econ.ucdavis.edu/seminars/papers/146/1461.pdf
.