Stiglitz: Much of What Goes on in the Financial Sector is Rent-Seeking

An interview with Joe Stiglitz:

Why does growing inequality matter? ...

We care about inequality partly because we pay a high price in terms of our economic performance. We care about it also because of the impact that it has in every other aspect of our society -- our democracy, our rule of law, our sense of identity or a land of opportunity -- because we aren't anymore.

The people at the top are not the people who made the most contributions to our society. Some of them are. But a very large proportion (is) simply people I describe as rent-seekers -- people who have been successful in getting a larger share of the pie rather than increasing the size of the pie.  ...[W]e don't understand the extent to which our economy has really become a rent-seeking economy.

How has the financial sector contributed to the growing inequality?

Much of what goes on in the financial sector is this kind of rent-seeking.

The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top....

There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives. In bankruptcy, derivatives got protected and workers and everybody else has to swallow their losses. That encourages more risk-taking.

At the same time, they pushed for laws that made it more difficult for ordinary Americans to discharge their debt and (were) particularly bad for students who can't discharge their debt no matter what happens, no matter how they have been deceived by the schools, even in the event of bankruptcy. ...

How else can the government act to reverse this trend in inequality?

Inequality in the United States has many dimensions; too much money at the top, many people in poverty, the hollowing out of the middle class. And each of these requires its own solution.

We have to have a more progressive tax structure. And what is interesting to realize is that our tax structure not only is unfair, but actually distorts our economy. It lowers growth and increases inequality. If you tax speculation at less than half the rate you tax people who work for a living, what you do is you encourage speculation. You weaken the economy. Speculative activities are activities associated with high levels of inequality. And that way you increase inequality. We tax in a sense a lot of the rent-seeking activities at a lower rate because they get under the rubric of the capital gains tax. ...