Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000), chair of the US President’s Council of Economic Advisers, and co-chair of the High-Level Commission on Carbon Prices. He is Co-Chair of the Independent Commission for the Reform of International Corporate Taxation and was lead author of the 1995 IPCC Climate Assessment.
After 40 years of market fundamentalism, America and like-minded European countries are failing the vast majority of their citizens. At this point, only a new social contract – guaranteeing citizens health care, education, retirement security, affordable housing, and decent work for decent pay – can save capitalism and liberal democracy.
NEW YORK – Three years ago, US President Donald Trump’s election and the United Kingdom’s Brexit referendum confirmed what those of us who have long studied income statistics already knew: in most advanced countries, the market economy has been failing large swaths of society.
Nowhere is this truer than in the United States. Long regarded as a poster child for the promise of free-market individualism, America today has higher inequality and less upward social mobility than most other developed countries. After rising for a century, average life expectancy in the US is now declining. And for those in the bottom 90% of the income distribution, real (inflation-adjusted) wages have stagnated: the income of a typical male worker today is around where it was 40 years ago.
Meanwhile, many European countries have sought to emulate America, and those that succeeded, particularly the UK, are now suffering similar political and social consequences. The US may have been the first country to create a middle-class society, but Europe was never far behind. After World War II, in many ways it outperformed the US in creating opportunities for its citizens. Through a variety of policies, European countries created the modern welfare state to provide social protection and pursue important investments in areas where the market on its own would underspend.
The European social model, as it came to be known, served these countries well for decades. European governments were able to keep inequality in check and maintain economic stability in the face of globalization, technological change, and other disruptive forces. When the 2008 financial crisis and subsequent euro crisis erupted, the European countries with the strongest welfare states, particularly the Scandinavian countries, fared the best. Contrary to what many in the financial sector would like to think, the problem was not too much state involvement in the economy, but too little. Both crises were the direct result of an under-regulated financial sector.
After the Fall
Now, the middle class is being hollowed out on both sides of the Atlantic. Reversing this malaise requires that we figure out what went wrong and chart a new course forward, by embracing progressive capitalism, which, while acknowledging the virtues of the market, also recognizes its limitations and ensures that the economy works for the benefit of everyone.
We cannot simply return to the golden age of Western capitalism in the decades after World War II, when a middle-class lifestyle seemed within reach of a majority of citizens. Nor would we necessarily want to. After all, the “American dream” during this period was mostly reserved for a privileged minority: white males.
We can thank former US President Ronald Reagan and former British Prime Minister Margaret Thatcher for our current state of affairs. The neoliberal reforms of the 1980s were based on the idea that unfettered markets would bring shared prosperity through a mystical trickle-down process. We were told that lowering tax rates on the rich, financialization, and globalization would result in higher standards of living for everybody. Instead, the US growth rate fell to around two-thirds of its level in the post-war era – a period of tight financial regulations and a top marginal tax rate consistently above 70% – and a greater share of the wealth and income from this limited growth was funneled to the top 1%. Instead of the promised prosperity, we got deindustrialization, polarization, and a shrinking middle class. Unless we change the script, these patterns will continue – or worsen.
Fortunately, there is an alternative to market fundamentalism. Through a pragmatic rebalancing of power between government, markets, and civil society, we can move toward a freer, fairer, and more productive system. Progressive capitalism means forging a new social contract between voters and elected officials, workers and corporations, rich and poor. To make a middle-class standard of living a realistic goal once again for most Americans and Europeans, markets must serve society, rather than vice versa.
Invasion of the Wealth Snatchers
Unlike neoliberalism, progressive capitalism is based on a proper understanding of how value is created today. The true and sustainable wealth of nations comes not from exploiting countries, natural resources, and people, but from human ingenuity and cooperation, often facilitated by governments and civil-society institutions. Since the second half of the eighteenth century, productivity-enhancing innovation has been the real driver of dynamism and higher living standards.
The rapid economic progress inaugurated by the Industrial Revolution, following centuries of near stagnation, rests on two pillars. The first is science, through which we can apprehend the world around us. The second is social organization, which allows us to be more productive working together than we ever could be on our own. Over time, institutions such as the rule of law, democracies with systems of checks and balances, and universal standards and norms have strengthened both pillars.
On brief reflection, it should be obvious that these are the sources of material prosperity. And yet wealth creation is often confused with wealth extraction. Individuals and corporations can become rich by relying on market power, price discrimination, and other forms of exploitation. But that does not mean they have made any contribution to the wealth of society. On the contrary, such behavior often leaves everyone else worse off overall. Economists refer to these wealth snatchers, who seek to grab a larger share of the economic pie than they create, as rent-seekers. The term originated from land rents: those who received them did so not as a result of their own efforts, but simply as a consequence of ownership, often inherited.
Such harmful behavior is especially prevalent in the US economy, where more and more sectors have come to be dominated by just a few firms. These mega-corporations have used their market power to enrich themselves at the expense of everyone else. By charging higher prices, they have effectively lowered consumers’ living standards. With the help of new technologies, they can – and do – engage in mass discrimination, such that prices are set not by the market (finding the single price that equates demand and supply), but by algorithmic determinations of the maximum a customer is willing to pay.
At the same time, US corporations have used the threat of offshoring to drive down domestic wages. And when that hasn’t sufficed, they have lobbied pliant politicians to weaken workers’ bargaining power further. These efforts have proved effective: the share of workers who belong to unions has fallen across most advanced economies, but especially in the US, and the share of income going to workers has declined precipitously.
No Excuses
While advances in technology and emerging-market growth have certainly played some role in the decline of the middle class, they are of secondary importance to economic policy. We know this because the same factors have had different effects across countries. The rise of China and technological change have been felt everywhere, but the US has significantly higher inequality and less social mobility than many other countries, such as Norway.
Likewise, where financial deregulation has gone the furthest, so have financial-sector abuses such as market manipulation, predatory lending, and excessive credit-card fees.
Or consider Trump’s obsession with trade agreements. Insofar as US workers have been ill-served by policymakers, it is not because trade negotiators from developing countries outsmarted US negotiators. In fact, the US usually gets almost everything it asks for. The problem is that what it asks for reflects the interests of US corporations, not of ordinary citizens.
And as bad as things are now, they are about to get worse. Consider America’s income inequality. Already, artificial intelligence and robotization are being hailed as the engines of future growth. But under the prevailing policy and regulatory framework, many people will lose their jobs, with little help from government to find new ones. Autonomous vehicles alone will deprive millions of their livelihood. At the same time, our tech giants are doing what they can to deprive government of the ability to respond, and not just by campaigning for lowering taxes: They are demonstrating the same genius in avoiding taxes and exploiting consumers that they previously showed in developing cutting-edge innovations. Moreover, they have shown little, if any, regard for people’s privacy. Their business models and behavior are effectively exempt from oversight.
Still, there is hope in the fact that our economic dysfunction is the result of our own policies. Some countries facing these same global forces have adopted policies that have led to dynamic economies in which ordinary citizens have prospered. Through progressive-capitalist reforms, we can start to restore economic dynamism and ensure equality and opportunity for all. The top priority should be to curb exploitation and encourage wealth creation, and this can best – or only – be done by people working together, especially through government.
The Indispensable State
Whatever form wealth-snatching takes – from the abuse of market power and information asymmetries to profiting from environmental degradation – there are specific policies and regulations that could both prevent the worst outcomes and yield far-reaching economic and social benefits. Having fewer people die from air pollution, drug overdoses, and “deaths of despair,” will mean having more people who contribute productively to society.
Regulation has had a bad name since Reagan and Thatcher made it synonymous with “red tape.” But regulation often improves efficiency. Anyone living in a city knows that without stoplights – a simple “regulation” governing the flow of cars through an intersection – we would live in perpetual gridlock. Without air quality standards, the smog in Los Angeles and London would be worse than the air in Beijing and Delhi. The private sector would never take it upon itself to curb pollution. Just ask Volkswagen.
Trump and the lobbyists he has appointed to dismantle the US government are doing everything they can to strip away regulations protecting the environment, public health, and even the economy. For more than four decades after the Great Depression, a strong regulatory framework prevented financial crises, until it came to be seen, in the 1980s, as “stifling” innovation. With the first wave of deregulation came the savings and loan crisis, followed by more deregulation and the dot-com bubble in the 1990s, and then the global financial crisis in 2008. At that point, countries around the world tried to rewrite the rules to prevent a recurrence. But now the Trump administration is doing what it can to reverse that progress.
So, too, the antitrust regulations implemented to ensure that markets work like they are supposed to – competitively – have been stripped back. By curbing rent-seeking, anticompetitive practices, and other abuses, we would improve efficiency, increase production, and spur more investment. Better still, we would free up resources for activities that actually improve wellbeing. If fewer of our best students went into banking, perhaps more would go into research. The challenges in both are great, but one is focused on taking advantage of others, the other on adding to what we know and to what we can do. And, because the burden of exploitation tends to weigh most heavily on those at the bottom of the economic pyramid, we would reduce inequality and strengthen the fabric of American society.
As the term implies, progressive capitalism recognizes both the power and the limitations of markets. It is simply a fact that, left to its own devices, the private sector will always produce too much of some things, like pollution, and too little of others, like basic research, which is the taproot of innovation and economic dynamism. Government has a central role to play not just in restraining the private sector from doing what it shouldn’t, but in encouraging it to do what it should. And through collective action – through government – we can do things that we couldn’t do alone and which the market on its own won’t. Defense is the obvious example, but the large-scale innovations – such as the creation of the Internet and the Human Genome Project – are examples of public expenditures that have transformed our lives.
Nor will the private sector ever provide many of the universal services that are the basis of any decent society. The reason the US government created Social Security, Medicare, Medicaid, and unemployment and disability insurance is that entrepreneurs and corporations would not provide these essential services, or did so with unacceptable costs and restraints (such as denial of health insurance to those with pre-existing conditions). And in many of these areas, the government has proved to be more efficient than the private sector. Social Security’s administrative costs are a fraction of those for private retirement plans, and Social Security covers a broader array of risks, such as those associated with inflation.
Our Only Option
The kind of commonsense regulations and reforms I have described are necessary to restore growth and to bring a middle-class life back into reach for most Americans and Europeans. But they are not sufficient. What we need is a new twenty-first-century social contract to ensure that all citizens are guaranteed access to health care, education, security in retirement, affordable housing, and a decent job with decent pay.
Many countries have already shown that discrete elements of this social contract are achievable. The US, after all, stands alone among developed countries in not recognizing health care as a basic human right. Ironically, while the US spends more on health care – both per capita and as a share of GDP – than any other developed country, its predominantly private system delivers worse outcomes. US life expectancy is barely higher than that of Costa Rica, a middle-income country with one-fifth the per capita GDP of America.
The US pays a high price for these failures, the costs of which will most likely continue to grow over time. The labor-force participation rate for prime-age men is at historic lows, and the rate for women has begun to decline, too. Many of those who have left the labor market are suffering from chronic health problems and are taking prescription pain medications, contributing to the opioid crisis that has come to define Trump’s America. With 21% of American children growing up in poverty, persistent underinvestment in public education will undoubtedly weigh on future productivity.
From a progressive-capitalist perspective, the key to delivering a new social contract is through a public option for services that are essential to wellbeing. Public options expand consumer choice and spur competition. Competition, in turn, will lead to lower prices and more innovation. Many hoped that the 2010 Affordable Care Act (Obamacare) would include a public option for health insurance. But, in the event, industry lobbyists succeeded in getting it dropped it from the final bill. That was a mistake.
Beyond health care, the US also needs a public option for retirement accounts, mortgages, and student loans. In the case of retirement, this could mean that individuals who want more income during retirement would have the option to contribute more to Social Security during their years in the labor force, with commensurate increases in retirement benefits. This would not only be more efficient than paying into a private supplemental plan; it would also protect citizens from exploitative wealth-management firms. In fact, many of these firms have lobbied against having to abide by any fiduciary obligations at all, effectively arguing that if they can’t fleece their clients, then they can’t make enough money to justify their existence. Conflicts of interest, from this perspective, are just part of the rough-and-tumble of twenty-first-century capitalism: why even force firms to disclose them?
Moreover, because US banks now claim that they can’t take on the risk of underwriting mortgages, roughly 90% of all home loans are backed by the federal government. But if taxpayers have already assumed nearly all of the risk while the private sector continues to reap all of the profits, there is no reason not to have a public option. The government could start offering a conventional 20% 30-year mortgage to anyone who has paid taxes for five years, at a rate just a little above the rate at which it borrows money. And, unlike private mortgages, which were virtually designed to ensure that millions would lose their homes in the financial crisis, a public option could be devised to enable workers to stay in their homes when they faced a temporary hardship.
Back to Morality
Most of these proposals are no-brainers; yet the economic reforms we need will face serious political challenges because of the influence of vested interests. That’s the problem with severe economic inequality: it inevitably gives rise to and reinforces political and social inequality.
When the original Progressive movement emerged during America’s late-nineteenth-century Gilded Age, its main objective was to wrest democratic governance from the great monopoly capitalists and their political cronies. The same goes for progressive capitalism today. It requires that we reverse the Republican Party’s systematic effort to disenfranchise large segments of the electorate through voter suppression, gerrymandering, and other anti-democratic techniques. It also requires that we reduce the influence of money in politics, and restore proper checks and balances. The Trump presidency has reminded us that such checks are indispensable for the proper functioning of democracy. But it has also exposed the limits of existing institutions (such as the Electoral College, through which the president is chosen, and the Senate, where a small state like Wyoming, with fewer than 600,000 people, has the same vote as California, with nearly 40 million), underscoring the need for structural political reform.
At stake in both America and Europe is our shared prosperity and the future of representative democracy. The explosion of public discontent across the West in recent years reflects a growing sense of economic and political powerlessness on the part of citizens, who are seeing their chances of having a middle-class life evaporate before their eyes. Progressive capitalism seeks to curb the excessive power of concentrated money in our economy and our politics.
But there is even more at stake: our civil society and our sense of identity, both as individuals and collectively. Our economy shapes who we are, and over the past 40 years, an economy built around a core of amoral (if not immoral) materialism and profit-seeking has created a generation that embraces those values.
It doesn’t have to be this way. We can have a more compassionate and caring economy, built around cooperatives and other alternatives to for-profit enterprise. We can design better systems of corporate governance, where more than just short-run profit matters. We can and should expect better behavior from our profit-maximizing firms – and proper regulation will take away some of the temptations to misbehave.
We have conducted a 40-year experiment with neoliberalism. The evidence is in, and by any measure, it has failed. And by the most important measure – the wellbeing of ordinary citizens – it has failed miserably. We need to save capitalism from itself. A progressive capitalist reform agenda is our best chance.
