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Nobel-winning economist says wealth gap is bad for growth



This news story was published on March 3, 2012.
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By Andrew Tangel, The Record (Hackensack N.J.) –

HACKENSACK, N.J. — Joseph Stiglitz, a Nobel Prize-winning economist, offered a sobering outlook this week on Europe’s debt crisis, predicting the euro in its current form was unlikely to survive.

In a speech Wednesday at Ramapo College in Mahwah, N.J., Stiglitz — a Columbia University professor whose resume includes stints as the World Bank’s chief economist and Clinton administration adviser — said Europe’s austerity measures wouldn’t end the crisis, only lead to greater civil unrest or debt-saddled countries like Greece leaving the continent’s common currency.

After his speech, The Record sat down with Stiglitz to talk about wealth inequality, taxes and how to spur growth in the United States. Questions have been edited for clarity, answers for length.

QUESTION: Occupy Wall Street has forced income inequality into national discourse. Putting aside the question of whether disparities in income and wealth are fair, what is the impact of income and wealth inequality in this country, and if that gap continues to grow, what could be the economic consequences?

ANSWER: Inequality is bad for growth, stability and efficiency. … Inequality peaked both before the Great Depression and before the Great Recession, and it’s not an accident. So basically, when we have a lot of inequality, demand goes down. … All this inequality was offset by creating a bubble. The bubble allowed people to consume more. Now we have the inequality but we don’t have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it’s going to be very difficult for us to get back to full employment.

A lot of the inequality that we have in the United States is created by distortions — excessive financial sector, monopolies like Microsoft … giving the oil companies, mining companies resources at a discount. … These things distort the economy, while they create wealth at the top. So it’s not wealth creation — it’s wealth redistribution, which makes the size of the pie smaller.

Q: And how do you go about decreasing inequality, just by taxing the wealthy and ending breaks for big companies?

A: And the loopholes, the distortions, the giveaways. … When you tax capital gains at half the rate of others, you encourage speculation. And so you divert resources to speculative activity, including the best brains at Columbia, into speculation rather than into creative activities.

Q: So the government should increase taxes on the wealthy, redistribute that money through government programs?

A: Well, not just redistribute but also invest the money in education, technology, infrastructure, to make our economy more efficient, more productive.

Q: We’re in a presidential election, and there are a lot of economic arguments being made regarding tax and regulatory policies and the labor market. What do you see some of the biggest economic myths — and misunderstandings — permeating today’s political discourse in the United States?

A: The first is that reducing the budget deficit would stimulate the economy by restoring confidence, which you hear over and over again. No evidence that has ever worked. You might call it the austerity myth — that’s the most serious one.

The second one is that raising taxes on upper-income individuals will lead them to save less, invest less, will have adverse supply-side effects. Again, no evidence of that.

The third is that lowering (the) corporate income tax rate across the board will stimulate investment in the United States. No evidence of that. … If you want to encourage investment, what you do is lower taxes on firms that invest and you raise taxes on firms that don’t invest. You can restructure the taxes to provide incentives to invest.

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