Nobel laureate Joseph Stiglitz: Inequality is holding back the recovery (Paul Krugman disagrees)

The New York Times launched a new blog this week called The Great Divide, looking at inequality in the U.S. The blog is moderated by Joseph E. Stiglitz, a Nobel laureate in economics, a Columbia professor and a former chairman of the Council of Economic Advisers and chief economist for the World Bank. Stiglitz wrote the initial post in the blog, entitled “Inequality is holding back the recovery.”

“Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined,” Stiglitz writes. “Inequality stifles, restrains and holds back our growth.”

Stiglitz argues there are four major reasons inequality is squelching the recovery:
– The middle class is too weak to support the consumer spending necessary to drive growth
– The middle class is unable to invest in the future through education or starting/growing businesses
– The weak middle class holds back tax receipts needed for infrastructure, education, health, etc.
– Inequality leads to boom-and-bust cycles that make the economy more volatile and vulnerable

Stiglitz blames the economic policies of both the Obama and Bush administrations for making things worse.

“Instead of pouring money into the banks, we could have tried rebuilding the economy from the bottom up. We could have enabled homeowners who were ‘underwater’ — those who owe more money on their homes than the homes are worth — to get a fresh start, by writing down principal, in exchange for giving banks a share of the gains if and when home prices recovered. We could have recognized that when young people are jobless, their skills atrophy. We could have made sure that every young person was either in school, in a training program or on a job. Instead, we let youth unemployment rise to twice the national average. The children of the rich can stay in college or attend graduate school, without accumulating enormous debt, or take unpaid internships to beef up their résumés. Not so for those in the middle and bottom. We are sowing the seeds of ever more inequality in the coming years.”

He offers suggestions for President Obama’s second term.

“What’s needed is a comprehensive response that should include, at least, significant investments in education, a more progressive tax system and a tax on financial speculation.”

A lot to talk about here. Do you agree with Stiglitz’s arguments? Do you think inequality is holding us back from an economic recovery? What about his prescription for fixing it? Would education investment or a more progressive tax system make a difference?

Economist and New York Times columnist Paul Krugman (also a Nobel laureate) disagrees with him. In two responses to Stiglitz (Jan. 20 & Jan. 21), he says he’d love to blame slow growth on inequality. “But I couldn’t and can’t convince myself that the theory and evidence really support that view,” he writes in the second piece. “Inequality is a huge problem – but not for employment growth in 2013 or 2014.”