Joseph Stiglitz vs Former Bain Capital MD on the Economy

TODAY ON BLOOMBERG TV: Top private equity investor (and former Bain Capital managing director) Edward Conard debates Nobel Prize-winning economist Joseph Stiglitz about income inequality and whether Americans are better or worse off due to innovation in the economy.

 Have we just experienced a half-century of stagflation, or have financial risk-takers kept us ahead of Europe and Japan? What does the data show about how much income inequality has helped – or hurt – the average American?

Full interview and unofficial transcript below. Ask Betty Liu questions at @BettyInTheLoop

Professor Stiglitz on how companies, managers are re-distributing wealth from the bottom to the top:

 “The old theory of economics was compensation was related to productivity and contributions either to the firm or society because those two were supposed to be aligned. We saw in the great recession that wasn’t true. CEOs walked off with mega-bonuses when they had brought their own company, let alone the global economy, to the brink of ruin.”

“[MF Global Holdings Ltd (PINK:MFGLQ)] is an example, you mentioned Citigroup Inc. (NYSE:C) as another example where there is this incongruity between compensation and contribution. Over the last 30 years, the top 1%, the share of the national income they get, has doubled. The top 0.1%, their share of the national income has tripled. If it were the case that the increases to the income at the top trickled down to everyone, so everybody was better off, that would be one thing. But that’s not where we are.”

 “The people in the middle, the median income, are today worse off, adjusted for inflation, than they were one decade and a half ago. So all the benefits of the growth have gone to the people at the top, with the majority of Americans worse off.”

 Ed Conard’s response:  “Well, you take a decade and a half ago and that was the peak of the Internet boom. Everyone wants to take that data so they can go from peak-to-trough.”

Stiglitz: “Let me make this clear, if you go back to a full-time male worker, his income is lower than it was in the late 1960’s. We’re not talking about just one business cycle. We’re talking about a half century of stagnation.”

 Conard:  “If you look more carefully at the data, it’ll show that median incomes have grown substantially if they don’t adjust for household size, if they don’t count the taxes, the nontaxable benefits, they don’t adjust for demographics in the workforce where we’ve taken in about 20 million immigrants who earn below the median wage, we’re put working mothers to work. I think if you really step back and look at it, employment in the U.S. has grown 40% since the mid 1980’s. It’s grown 15 to 20% in Europe and Japan. We’ve made homes for 20 million immigrants who’ve educated their children. Nobody else has done more for the working poor and the middle class.”

 Stiglitz:  “We’ve had some successes, but let’s be clear about the pattern of our growth in the period before 1980 and thereafter. The period before 1980, the national growth was higher than the period after. The period before 1980 we had shared growth – people at the bottom and [people at the top].”

 “We hadn’t had de-regulation.  We hadn’t weakened the unions. We hadn’t had this unbridled CEO pay. We didn’t have the excessive financialization. As Paul Volcker pointed out, all of this innovation was directed at circumventing the regulations to stabilize the economy, rather than creating value.”

“The people at the top are not the people that invented the transistor, the computer, the laser — they’re the people who brought the financial products that brought the economy to the brink of ruin.”

 Conard:  “Let’s just parse the data. You have the 50’s and 60’s where the U.S. economy did grow rapidly, they were capitalizing on mass manufactured goods that weren’t really available prior to that. In the 1970’s and 1980’s, the manufacturing slowed to a crawl. Productivity slowed down. Then, in the commercialization of the Internet, the U.S. alone has increased productivity. Europe and Japan are down.”

 “So if you don’t see that innovation has become critically important to this economy, relative to the economy of the 1950’s, you won’t see that risk takers and innovators are really the source.”

 Stiglitz:  “You have to mention the source of innovation. The Internet. The basic research for the Internet was done by government.”

 Conard: “That doesn’t matter. It still has to be commercialized.”

Stiglitz: “Somebody has to raise the taxes to finance the basic research, the education.”

Conard: “So you get Solyndra and all of these great venture capital programs.”

 Stiglitz on income inequality: “That gives rise to the instability that led to the great recession. When you have that redistribution from the bottom of the top, that’s been a mark of the U.S. economy in recent years, there is insufficient demand to keep the economy growing. The Fed compensated for that by creating a bubble. It was a temporary palliative.”

Conrad: “I just think the data doesn’t support that. Take real estate prices, they rose in Europe and in the U.S. the same. They were under a different monetary regime.”

 “The idea that the Fed engineered an asset bubble is silly. The real estate prices in Europe and the rest of the world grew as much as they did in the United States. I don’t think you could make the argument that our monetary policy, and our subprime finance, changed prices in the U.S.”

Stiglitz: “It’s absolutely clear there was inadequate regulation, it led to a sub-prime bubble. The breaking of the bubble led to a major problem in the U.S. It was not the only thing, but it was a major problem.”

“In the U.S., we not only have the highest level of inequality of all the industrial countries, we also have the least equality of opportunity.”

 “What that shows is, this isn’t inevitable — the inequality we have is, to a large extent, a result of rent-seeking monopolies, distortions in the economy. We used to talk about there being a trade-off between inequality and economic growth or efficiency. Now we realize we could have a more dynamic, efficient economy with more equality of opportunity and less inequality if we simply…The government has to be involved and it has to stop doing some of the things it is doing like the way it distorts the economy – giving a preference to derivatives, making student loans non-dischargeable, inadequate supervision ….”

Conrad’s final rebuttal:  “Sure, information technology has disproportionately made the most talented people more productive in the economy. Their wages would have gone down if that’s all that happened, if everything had been held constant. But there’s been an enormous window of opportunity, unrealized investment opportunities, where risk-taking is needed to capitalize on those opportunities. 13 people can create Instagram and $1 billion of value in two years.”

Stiglitz: “And that’s

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