Stiglitz versus Krugman on the economic dangers of rising inequality

Two recent pieces in The New York Times address the subject of rising income inequality in the United States, a subject covered at greater length in Timothy Noah's book reviewed yesterday.

In "Inequality Is Holding Back the Recovery," Joseph Stiglitz says that during the recent election,

each side debated issues that deeply worry me: the long malaise into which the economy seems to be settling, and the growing divide between the 1 percent and the rest — an inequality not only of outcomes but also of opportunity. To me, these problems are two sides of the same coin: with inequality at its highest level since before the Depression, a robust recovery will be difficult in the short term, and the American dream — a good life in exchange for hard work — is slowly dying.

Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues — as it did in a special feature in October — that the magnitude and nature of the country’s inequality represent a serious threat to America, we should know that something has gone horribly wrong. And yet, after four decades of widening inequality and the greatest economic downturn since the Depression, we haven’t done anything about it.

And he goes on to explain this in detail.

Paul Krugman, in a column titled "Inequality and Recovery," expresses some disagreement with some of what Stiglitz has to say. Partly he argues against the idea (as also presented in Nick Hanauer's talk I mentioned in the review of Timothy Noah's book) that the rich don't create as much demand as a robust middle class. To paraphrase Krugman, the rich may not buy more pairs of pants, but they buy more yachts. Well, yes, but the rich also spend money on such things as big houses on expensive land and engage in other spending that doesn't create the kind of demand that increases the productive output of the economy. And I'm sure Krugman would respond, inter alia, that the money spent on big houses and overpriced watches and so on ultimately makes its way back into the economy to be spent on various other things. It's a complicated subject that I'm no doubt guilty of oversimplifying, and it's certainly possible I'm mistaken (if in good company). But for whatever it's worth, I'm inclined to side with Stiglitz, and not just because he reinforces my own prejudices on the point.

Incidentally, both Stiglitz and Krugman are winners of the economics Nobel Prize, and (despite that) both are also good writers, so it's an interesting discussion. By all means read what they have to say; they know a lot more about this than I do.

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