• Policy research and debate

Joseph Stiglitz, winner of the Nobel Prize in economics, was at Calouste Gulbenkian Foundation, at the invitation of its President, for a conference entitled “The Global Economy and Inequality”. The auditorium of the Foundation filled to listen to one of the greatest experts on the issues of inequality and globalization for almost two hours.

rising inequality and its multiple dimensions

The former vice president of the World Bank, which he left in opposition to the political orientation of the institution, began his analysis by noting that the economic slowdown in industrialized countries since the 1970s coincides with the sustained growth of inequality in these countries, calling into question the apparent empirical regularity between the level of income per capita and the level of inequality as stylized in the famous Kuznets curve.

Growing inequalities have manifested themselves in multiple dimensions: inequality of income, inequality of wealth (the 8 richest families in the US have as much as the 44% poorest Americans), and unequal access to basic services such as health, justice (“and justice for all … who can afford it”), and education (the main route to social mobility), showing a concordance between results of inequality (income, wealth) and inequality opportunities.

distribution of income between labour and capital

To illustrate the growing inequality of income in the United States, Stiglitz presented historical records that show the contrastive evolution of wages and productivity in recent decades. Between 1948 and 1972, during the so-called Golden Age of capitalism, productivity per hour worked increased by 96.7%, closely followed by hourly wages which increased 91.3%. However, between 1973 and 2014, productivity per hour worked increased by 72.2% and hourly wages rose a mere 9.2%, resulting in a distribution of the value added of the economy which is increasingly unfavourable to workers.

Stiglitz joked, before this worrying scenario, that the United States tend do more and better than every other country in the world in every aspect, and inequalities are no exception. Therefore, he expressed his concern that some European countries seem, as in other subjects, eager to “copy the American model”.
In Europe – and in Portugal in particular – however, this dynamic of inequality in recent decades was not as persistently negative as in the US. However, the share of GDP that accrues to workers (wage share) is currently at a historic low (see Figure 1), following a gradual decline of this ratio since the beginning of the century (only briefly interrupted during the early years of the financial crisis) and a steeper decline thereafter (see Figure 2).

Figure 1: Wage share, Portugal, European Union and Euro area (12 countries), 1961-2017
Figure 1
Source: AMECO
Figure 2: Wage share, Portugal, 1995-2015
Figure 2
Source: AMECO

So, although the statistical trends are not as significant as in the US, it is important to remember that the recession during the “adjustment” period led to an increase of inequality in Portugal – as documented, for example, by Carlos Farinha Rodrigues in the books Afirmar o futuro: políticas públicas para Portugal – something that Stiglitz also recalled.

inequality is a political choice

The key message to be drawn from Stiglitz’s lecture is that inequality is largely a matter of political choices. Policies in the areas of taxation and public spending, as well as legal frameworks, institutions and the conduct of monetary policy, shape the economic environment in which market relations occur, affecting the balance of power between the various parties involved and hence the distribution of income and wealth that stems from the the market process in that particular context. Thus, Stiglitz is quite critical of Piketty’s marginalist explanation of the growth of inequality, which hinges on the mathematical formulation of a rate of return to capital that is higher than the growth rate of the economy, not least because much of the income of the rich does not come from productive capital, but rather from extractive revenues. Just as the theoretical acceptance of the Kuznets curve – to describe an empirical relationship between the level of income and the level of inequality – completely ignored the role of policies and institutions in the market economy.

The very policy response to the recent financial crisis, Stiglitz said, followed the logic of ‘trickle down economics’ that began to spread with Reagan. This response reinforced existing inequalities, through the aid granted to banks and a growth strategy mainly based on ‘quantitative easing’, which, looking to stimulate the economy through the inflation of financial securities, increased the wealth of the holders of these securities, many of them already members of the club of the top 1%.

The influential economist still gave some advice to national political actors: even during fiscal consolidation period, as the one Portugal is currently going through, there are options that can be taken at the level of taxation, public spending and legislation in order to reduce inequality and promote inclusive growth.

international trade agreements

Asked by the audience about new free trade agreements such as TPP (Trans-Pacific Partnership) or TTIP (Transatlantic Trade and Investment Partnership), Stiglitz replied that, in his view, these Treaties were not truly about free trade, because tariffs between these countries were already waste. Instead, the main motivations behind these agreements, he warned, were the geographical extension of the protection of intellectual property rights (especially for the pharmaceutical industry) and the protection of international investors, since these agreements include a provision making it possible for international investors to take legal action against nations on the grounds that the enactment of a given regulation affected their expected profits, and there are many examples of legal disputes between multinational companies and countries, particularly developing countries, triggered by such provisions.

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