Bloomberg News

Stiglitz-Hubbard Clash on Inequality Echoes Obama-Romney

July 20, 2012

Roots of U.S. Discontent Laid Bare as Stiglitz Assails Hubbard

Joseph Stiglitz, Nobel prize-winning economist and professor of economics at Columbia University. Photographer: Jerome Favre/Bloomberg

Columbia University professors Joseph Stiglitz and Glenn Hubbard agree that income inequality is a concern. They disagree over what’s behind it and how best to tackle it, in a dispute that has spilled beyond the halls of academia and onto the presidential campaign trail.

Nobel Laureate Stiglitz, 69, says the rich have rigged the system so they earn more than they contribute to the economy. He wants to increase taxes on the wealthy and argues that Republican Mitt Romney’s plan to cut government spending would “significantly” raise the odds of a recession next year.

Hubbard, 53, a Romney adviser, dismisses such criticism as unfounded and says a smaller government would be good for the economy. He opposes boosting upper-income tax rates, saying this would punish entrepreneurs, and instead backs improved training and education for people who are less well off.

The debate echoes the battle being waged between President Barack Obama and former Massachusetts Governor Romney as they try to curry favor with voters ahead of the Nov. 6 election. Obama urged Congress on July 9 to pass a one-year extension of Bush-era tax cuts for families making less than $250,000 a year, while letting rates rise for higher earners.

“It’s time to let the tax cuts for the wealthiest Americans, folks like myself, to expire,” he said at the White House.

Romney rejected that approach the following day.

“The very idea of raising taxes on small business and job creators at the very time we need more jobs is the sort of thing only an extreme liberal can come up with,” he said at a town hall-style event at Central High School in Grand Junction, Colorado.

Poll Results

Obama and Romney are tied at 46 percent each in the Gallup Organization’s tracking poll of registered voters for July 12 to 18. The margin of error is three percentage points.

“Rarely have the choices been this stark, and the polls so close,” Hubbard, chairman of the Council of Economic Advisers under former President George W. Bush and now dean of Columbia Business School in New York, said in an interview.

Stiglitz agrees. There are “some very big differences” between the two candidates on economic policy, he told Bloomberg News editors and reporters last month.

Income inequality declined during the 18-month recession, a July 10 report by the Congressional Budget Office showed. Wealthy Americans were hurt by the bear market as the Standard & Poor’s 500 Index of stocks fell almost 40 percent, while the poor benefited from increased government transfers, including Medicaid health payments.

Top-Income Households

In 2009, the top 1 percent of households captured 13.4 percent of total pretax income, down from 18.7 percent in 2007 before the start of the recession in December. That share still was higher than 8.9 percent in 1979, according to the CBO.

While the Budget Office suggested in its report that the gap has widened since the recovery started in July 2009, it doesn’t have detailed data for 2010 and 2011 to support this conclusion.

The report is a follow-up to an October 2011 study by the CBO that showed the gap between high- and lower-income households widening from 1979 to 2007.

“I’m quite concerned about what people popularly call income inequality,” specifically “the inability of wages for low to moderately skilled workers to keep rising with overall growth,” Hubbard said.

Stiglitz shares that concern and has said he finds the level of inequality in the U.S. “shocking.”

Part Ways

Where the two Columbia professors part ways is how much of the disparity is the fault of the rich, what role income differences play in encouraging hard work and enterprise, and how to position fiscal policy to best encourage growth.

In his newly-published book, “The Price of Inequality: How Today’s Divided Society Endangers Our Future,” Stiglitz pins a lot of the blame on wealthy Americans seeking to enrich themselves without contributing to the health of the economy. Among the culprits he singles out: Wall Street executives.

“The crisis of 2008 suggested persuasively that the bankers who walked off with a lot of huge bonuses had a negative effect on their companies and on our economy,” said Stiglitz, who headed the Council of Economic Advisers under former president Bill Clinton. That’s been “one of the things that has been the source of such discontent in our country.”

Disproportionate Share

Chief executive officers in general have managed to garner a disproportionate share of company profits because of deficiencies in corporate governance, according to Stiglitz. Meanwhile, workers have seen their bargaining positions erode as the influence of unions waned and immigration increased.

Stiglitz proposes a number of steps to curb what he calls “the excesses at the top.” These include improving corporate governance, ending “government giveaways” to companies and changing the bankruptcy laws to give home owners, college students and other debtors more rights.

He backs higher taxes on the wealthy, saying Obama’s proposal to allow their rates to return to pre-2001 levels, before Bush became president, is just a first step. Under the president’s plan, the top rate for households making $250,000 or more a year will rise to 39.6 percent from 35 percent.

Stiglitz also has proposed measures to help people who are less well-off, including increased spending on food stamps for the poor, stepped-up public investment and improved access to education.

‘Crony Capitalism’

Hubbard doesn’t dispute that what he calls “crony capitalism” has played a role in widening income inequality, particularly in highly regulated industries such as financial services. He just doesn’t think it is as important as Stiglitz does. “Most people who are well-to-do are well-to-do because of entrepreneurship, hard work and all of those positive things.”

He says he worries higher taxes on the wealthy will hurt the economy by discouraging risk-taking and innovation and doesn’t see how raising rates will lead to more opportunity and higher pay for people in lower-income brackets.

“I hope that in the election campaign, there will be a lot of attention placed on training programs, education programs and things that will help improve skills and not on an agenda of envy-based tax proposals,” Hubbard said.

Romney has talked about consolidating what he says are 47 federal-employment and job-training programs and providing block grants to states to manage plans of their own. He also backs the establishment of personal re-employment accounts designed to help provide on-the-job training for people who are out of work.

Scaling Back

On the tax front, the Republican presidential candidate would permanently extend all the Bush-era tax cuts, then reduce rates an additional 20 percent. He also would end or scale back some tax breaks in Obama’s 2009 stimulus program, including one for college students.

Stiglitz charges that Romney’s plan would make the tax code less progressive. A separate analysis by the nonpartisan Tax Policy Center in Washington found that some lower-income individuals might face tax increases under the Romney plan. Romney himself has promised that high-income households will pay the same share of taxes they do now.

Romney also pledges to cut federal spending to less than 20 percent of gross domestic product by the end of his first term if he is elected president. Such spending totaled 24.1 percent of GDP in 2011. In that vein, the former private-equity company executive backs the thrust of the Congressional Republicans’ budget plan, which would reduce the deficit to $797 billion in the year starting Oct. 1 from an estimated $1.2 trillion this fiscal year.

Jobs Deficit

“The Romney plan is going to slow down the economy, worsen the jobs deficit and significantly increase the likelihood of a recession,” Stiglitz said.

Hubbard takes issue with that judgment, saying work he’s done with Harvard University professor and Romney adviser Gregory Mankiw suggests that gradual reductions in government spending will help, not hurt, economic growth. Such a plan would assuage fears that taxes will need to be raised in the future and offer more clarity about the path for budget policy, encouraging companies to spend and invest more now, he said.

“A fiscal consolidation does not have to be contractionary,” in spite of what Stiglitz said, Hubbard added.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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