Stiglitz and “Rent Seeking” Chapters 1 - 4

The Stiglitz Book is Part Fact and Part Partisan Polemic 1. Inequality was growing worse even before the Great Recession. 2. “…much of America’s inequality is the result of market distortions, with incentives directed not at creating new wealth but at taking it from others.” [True, but who/how are these incentives created?] 3. Chapter 1 Summary on p. 31 echoes what we have discussed so far.

Rent Seeking 1. Hidden and open transfers and subsidies from the government. 2. laws that make the market less competitive 3. lax enforcement of laws governing markets 4. Allowing corporations to pass costs on to the rest of society (p.48) PROBLEM – He is describing basic politics here – e.g., ethanol!

Information and Markets 1. If Markets are transparent then no one has an information advantage and the market is efficient. 2. In an efficient market buyers have full information and “get what they pay for.” 3. If information is asymmetric the side with the most information can take advantage of that by charging higher prices/offering less to the other party. 4. Complexity can be a bad thing (many financial derivatives ).

What is Driving the Recent Increase in Inequality? 1. Globalization – The loss of high paying blue collar manufacturing jobs in particular. 2. Returns to Education and the rising price of Education. 3. High technology and Machines (require highly skilled workers). 4. The decline of Unions (this has been going on since the 1950s). 5. Discrimination against Women and Minorities.

CAP: When I was Your Age, Figure 1

CAP: When I was Your Age, Figure 2

CAP: When I was Your Age, Figure 3

CAP: When I was Your Age, Figure 4

CAP: When I was Your Age, Figure 5

Arthur Okun is Wrong! 1. You can have both greater equality and greater efficiency simultaneously! 2. Solution: Higher Taxes and increased government spending on education, technology, and infrastructure.