The Price of Inequality - Comprehensive Study Guide

Bibliographic Data and Publication Details

• Author: Joseph E. Stiglitz.
• Additional Works by the Author:
  • Freefall: America, Free Markets, and the Sinking of the World Economy.
  • The Three Trillion Dollar War: The True Cost of the Iraq Conflict (co-authored with Linda J. Bilmes).
  • Making Globalization Work.
  • The Roaring Nineties.
  • Globalization and Its Discontents.
• Publication Information:
  • Title: The Price of Inequality: How Today's Divided Society Endangers Our Future.
  • Publisher: W. W. Norton & Company (New York, London).
  • Edition: First Edition.
  • Copyright: $2012$ by Joseph E. Stiglitz.
  • ISBN: $978-0-393-08869-4$ (hbk.).
  • Manufacturing: Courier Westford.
  • Production Manager: Devon Zahn.
  • Library of Congress Cataloging-in-Publication Data: HC110.I5S867 $2012$.
  • Dewey Decimal Classification: $305.50973-dc23$.
• Dedication: To Siobhan and Michael and Edward and Julia, in hopes of a less divided country and world.

Concluding Comments on Ideology and Perception (Chapter 6)

• The Power of Perceptions: In politics, perceptions are paramount. Ideologues often "cherry-pick" examples to support broad generalizations, a psychological phenomenon where individuals remember only evidence consistent with their initial beliefs.
• High Inequality and the Debate: The extreme inequality in the United States makes balanced debate difficult. The top $1\%$ has significant financial stakes in winning ideological battles regarding the role of government.
• Nuanced Approaches to Intervention: Stiglitz advocates for a medical-style assessment of government and market roles. Rather than focusing on extreme success or horror stories, one should ask:
  • What are the conditions under which an intervention works?
  • What are the risks of doing nothing ($inaction$)?
  • What are the limitations of intervening?
• Framing and Co-option: The powerful frame discussions to benefit their interests. Because they cannot simply impose rule in a democracy, they must "co-opt" the rest of society.
• Malleability of Beliefs: The wealthy possess the instruments, resources, and incentives to shape public perception via appeals to fairness and efficiency, even when real outcomes benefit only them.

Chapter 7: Justice for All? How Inequality is Eroding the Rule of Law

• The American Identity and the Rule of Law: The Pledge of Allegiance characterizes America as "one nation… with liberty and justice for all." This implies that the rule of law should prevail, everyone is innocent until proven guilty, and all are equal before the law.
• The Three Battlefields of Inequality:
  1. The battle over laws, regulations, and their enforcement (Chapter 7).
  2. The battle of the budget (Chapter 8).
  3. The conduct of monetary policy and macroeconomics (Chapter 9).
• Alternative Legal Frameworks: There is more than one way to define and implement the rule of law. Different frameworks have varying consequences for efficiency and distribution. The wrong kind of rule of law can extend inequities and transfer wealth from the bottom/middle to the top.

The Economic Necessity of the Rule of Law

• Externalities: Actions by one person can harm or benefit others. If those who injure others do not bear the full consequences, they have no incentive to take precautions.
• The Polluter Pays Principle: Economists argue that entities should be forced to pay for their externalities (e.g., steel producers paying for pollution).
• Subsidies through Neglect: Not paying the full cost of environmental damage is equivalent to a subsidy, similar to not paying the full cost of labor or capital. This results in a distorted economy.
• Shaping the Game: Corporations shape rules to limit their liability.
  • Examples: Nuclear power plants and offshore oil rigs are shielded by laws limiting liability. Without these government subsidies and liability caps, it is questionable if nuclear power plants would exist.
• Risk Takers and Inadequate Incentives: When others bear the risk, firms take larger gambles.
  • Case Study: Deepwater Horizon ($April\,2010$): BP executives skimping on safety increased immediate profits but led to a spill of millions of barrels of oil in the Gulf of Mexico.
• Asymmetry in Litigation: Corporations often "nickel-and-dime" those they hurt. Victims often cannot afford long legal battles or expensive lawyers.
• Ronald Coase and Property Rights: Coase argued that in a world with zero transactions costs, assigning property rights (e.g., "air rights" for smokers vs. nonsmokers) results in the same efficiency. In the real world, however, transaction costs exist, and the assignment of rights has massive distributive consequences (who pays whom).
• Political Power and Exploitation: If economic power is uneven, the wealthy use political power to design the rule of law to exploit others and preserve inequality through industry-specific regulations, bankruptcy laws, or intellectual property rules.

Predatory Lending and Consumer Protection

• Reckless and Predatory Practices: During the housing bubble, banks targeted the least educated and financially unsophisticated with costly mortgages and hidden fees.
• State-Level Contention (Georgia, October $2002$): Georgia attempted to pass a consumer protection law to halt fraudulent lending.
  • Response from Rating Agencies: Standard & Poor's (S&P) threatened not to rate any Georgia mortgages, which would prevent securitization. The threat was effective, and the state reversed the law.
• The Regulatory Gap: Unlike a simple "caveat emptor" (buyer beware) world, modern finance requires regulation to prevent abusive and deceptive products.
• The Fight Over Elizabeth Warren: Despite public support for a consumer protection agency, the banking sector resisted. When the agency was created via the Dodd-Frank bill, banks successfully campaigned to prevent Elizabeth Warren (a Harvard law professor and chair of the Congressional Oversight Panel) from heading it.

The 2005 Bankruptcy Law and "Partial Indentured Servitude"

• The Purpose of Bankruptcy: Traditionally designed to give individuals a "fresh start" (dating back to the Jubilee year in the Book of Leviticus).
• The 2005 Shift: Congress passed a creditor-friendly law making it harder for distressed borrowers to discharge debts.
  • Mechanism: If an individual owes $100\%$ of their income, banks can add $30\%$ interest annually. This can force a debtor to work "one-quarter time" for the bank for the rest of their life to pay off fees and interest.
• Distorted Incentives: Banks focused on up-front fees rather than long-term losses, emboldened by the fact they could squeeze money out of borrowers regardless of housing market conditions.

The Student Loan Crisis

• Withdrawal of Support: States have withdrawn support for higher education over the last $25$ years, leading to increased student indebtedness.
• Non-Dischargeable Debt: The $2005$ law made it impossible to discharge student debt in bankruptcy. This removes the incentive for for-profit schools or banks to ensure the education yields a real return.
• The For-Profit Education Industry: This sector generates $30\,billion$ a year, with up to $90\%$ of revenue coming from federal student loan programs (over $26\,billion$).
• Accountability Battles: Schools and banks successfully fought government standards that would have linked loan eligibility to graduation rates and job placement.
• Guaranteed Profits: Banks enjoyed rewards with no risk due to government guarantees and the bankruptcy-proof nature of the loans. In $2010$, the government scaled back the program to reclaim tens of billions of dollars from banks for students and the public.

Global Parallel: Microcredit in India

• The Original Vision: Muhammad Yunus (Grameen Bank) and Sir Fazle Hasan Abed (BRAC) used microcredit to empower poor women in Bangladesh.
• Commercialization: For-profit banks entered the "bottom of the pyramid." In India, they charged high interest rates for loans meant for medicines or weddings. This led to a wave of suicides among farmers overburdened by debt, marking a shift from empowerment to exploitation.

The Foreclosure Crisis and the Erosion of Due Process

• Procedural Safeguards: Legal systems require proof of debt before eviction. Banks, in their rush to lend, disregarded these safeguards.
• MERS (Mortgage Electronic Registry System): An electronic registry created by banks to bypass traditional property law and speed up claim transfers. It lacked democratic mandate and adequate safeguards.
• Robo-signing: To handle millions of defaults, banks used "robo-signers" who signed hundreds of affidavits daily without verifying records. This constituted a systematic policy of lying to courts.
• The "Too-Big-to-Be-Accountable" Doctrine: Banks knew their size protected them from accountability. Fining them billions might require another government bailout.
• Justice Statistics Comparison:
  • Savings and Loan Crisis: Resulted in $7,000$ criminal referrals, $1,100$ charges, and $839$ convictions (with approximately $650$ people receiving prison sentences).
  • 2008 Crisis: No bank officer has gone to jail for foreclosure fraud as of the book's publication. Attorney General Eric Holder and U.S. district attorneys had not brought suits for foreclosure fraud.
• Victim Impact: An estimated $8\,million$ Americans were foreclosed upon since the crisis began, with $3$ to $4\,million$ more expected.
• Corruption American-Style: Influence is bought through campaign contributions and lobbying rather than direct bribery of judges. In state-elected judiciaries, the link between money and "justice" is even tighter.
• The Obama Administration's Stance: The administration fought against state attempts to hold banks accountable. For example, federal banks threatened to stop doing business in Massachusetts when Attorney General Martha Coakley sued banks for deceptive and fraudulent foreclosure practices.
• Income Discrimination: Banks took an average of $2\,years\,and\,2\,months$ to foreclose on mortgages over $1\,million$, but only $6\,months$ for those under $100,000$.

De Facto vs. De Jure and the SEC

• Access Barriers: If a judicial system is slow and costly (de facto), it is inherently unfair to the poor even if fair on paper (de jure). Corporations use delay tactics to force settlements from people who cannot afford to wait.
• Intellectual Property Arms Race: Large firms can trespass on the IP of small firms because they have more legal resources.
  • Patent Trolls: Law firms like NTP, Inc. buy "sleeping patents" to extort successful firms like Research in Motion (BlackBerry), which eventually paid over $600\,million$ to settle despite questionable patent validity.
• SEC and Securities Fraud Settlement Pattern:
  • Banks engage in fraud.
  • SEC brings civil action.
  • Banks reach a settlement, paying a high fine without admitting or denying guilt.
  • Banks promise never to do it again, then repeat the behavior.
• The Citigroup/Judge Rakoff Case ($November\,2011$): Judge Rakoff rejected a $285\,million$ settlement from Citigroup, calling the bank a "recidivist." Citibank had built securities designed to fail so it could bet against its own clients. Investors lost $700\,million$, while Citibank made $160\,million$.
• Systemic Fraud: The New York Times found $51$ instances involving $19$ companies where firms broke fraud laws they had previously agreed to obey.

Chapter 8: The Battle of the Budget

• Austerity Narratives: Following the Great Recession, calls for austerity (expenditure cuts) rose in the U.S. and Europe.
• Reduction Commissions: President Obama established a bipartisan commission led by Alan K. Simpson and Erskine Bowles. Other proposals came from the Bipartisan Policy Center and Paul Ryan of the House Budget Committee.
• Debt Ceiling Crisis ($Summer\,2011$): House Republicans refused to increase the debt ceiling without substantial deficit reduction, shifting the national focus away from unemployment and inequality toward debt reduction.