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Rewriting (some of) the rules of the American economy: the Stiglitz Report

Joseph E. Stiglitz, Ph.D

On May 12, Joseph Stiglitz and the Roosevelt Institute (a progressive thinktank of which Stiglitz is the chief economist) released a 100 page-longreport, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity.  US Senator Elizabeth Warren and New York City Mayor Bill de Blasio also spoke at the report’s launch, suggesting that the document could become an important political manifesto for the American Left.

The report is slickly designed, with inset ‘definition boxes’ and innovative graphics adorning the green-and-white pages, and a video of the launch looms large on the report’s website. And it has received considerable attention, being covered in the New York Times, Slate, and Time, with many journalists speculating that it may foreshadow Hillary Clinton’s economic thinking, since Clinton has used Stiglitz as an economic advisor.

But what does Rewriting the Rules of the American Economy actually say? Are any of its proposals novel or original? And what does the report tell us about the state of current progressive economic thinking?

The American dream, the current rules, and reform

The report (which has a long list of contributing authors and acknowledged individuals) begins with an executive summary and extended introduction, which signal to the reader the direction of the report’s analysis.

Emphasis is placed on the fact that the “American dream increasingly appears to be a myth”. Traditional economic models are criticised: the introduction notes, for example, that there is no evidence that redistributive measures undermine economic growth, as many economists have long claimed (as part of a broader efficiency-equality trade-off).

And the report’s authors make it clear that inequality in America is the product of specific policies, rather than being natural and inevitable. “Inequality has been a choice,” says the report, “and it is within our power to reverse it.” The introduction indicates that the report will take an “institutionalist approach” in suggesting how inequality might be reversed. Such an approach, according to the report, involves recognising the importance of power and the need for rules to tame that power. It also involves finding a “broader range of policy solutions” than those normally recommended by economists.

The second section of the report, ‘The Current Rules’, describes and evaluates the present-day policy landscape in the United States of America. It discusses policy challenges across a range of areas: the innovation-stifling effect of patents, the threat posed by free trade agreements, the failure of the financial sector to produce socially optimal outcomes, the trend towards an increasingly regressive tax system, a skewed monetary policy that prioritises inflation targets over employment, the weakening of labour power, and the continuing scourge of racial discrimination and gender discrimination.

The third section of the report then recommends a suite of policy reforms to address each of these problems. Amongst other things, the report criticizes investor-arbitration settlement clauses in free trade agreements, talks about the need to regulate non-banking financial institutions, demands regulation of debit and credit fees, advocates for worker representation on corporate boards, explains the need to reform immigration law, proposes that US firms operating overseas be taxed on all global profits, suggests that monetary policy be more focused on employment outcomes, and calls on politicians to raise the minimum wage and protect reproductive rights.

The tour through such diverse topics is as breathless as this list suggests.

A more transformative economics?

Some of these solutions might seem tepid to United Kingdom readers looking for novel policy ideas. Legislating for paid sick leave and paid family leave, or subsidizing childcare, are hardly radical moves–although they remain necessary reforms in the United States.

However, some of the suggestions in the report are bold and to be welcomed. The push to reform the criminal justice system to reduce incarceration rates–through allowing more discretion in the use of mandatory minimum sentences, improving legal representation, and eliminating “onerous fees”–is an encouraging sign that the campaign against mass incarceration in the United States is moving towards the mainstream of political debate.

The proposed creation of public financing for housing is also creative. The report notes that the government already backs lending for housing indirectly, and says that a “government homeownership agency” could reduce transaction costs, minimize risky products, benefit borrowers, and encourage the private financial sector to be more responsible.

In many ways the report echoes Anthony Atkinson’s recent book, Inequality: What Can Be Done?, in focusing on strengthening labour, questioning the value of the rise of technology, and advocating for a less regressive tax system. In the recent work of Piketty, Atkinson, and others, and now with the release of this report, there appears to be a new progressive surge in economic thinking–or at the very least, a new sense of confidence amongst economists calling for the State to take its regulatory and redistributive responsibilities seriously.

In some respects, though, Rewriting the Rules could be criticised for being not transformative enough. There is a reference to the financial sector now making up 7% of the US economy, but no discussion of diversifying the economy so that there is less reliance on finance.

Furthermore, Stiglitz and the other authors perpetuate dominant Democratic Party rhetoric, which could be criticised as intellectually hollow. Despite discussing the emptiness of the notion of the American dream (and despite citing statistics about limited social mobility in the US), the report maintains a focus on equality of opportunity as a guiding ideal; it does not engage with richer debates about systemic racial or gender-based injustices, or about the values and end-goals of a new progressive politics.

It also uses the middle class as its primary point of reference: the final sentence says that there is a need to “establish rules and institutions that ensure security and opportunity for the middle class”. Of course, some of the report’s policy prescriptions could be beneficial for those not in the middle class: including the prescriptions relating to the strengthening of unions and reform of immigration and criminal justice law.

As well, it may be that the report is seeking to be palatable to US politicians, who continue to make the middle class (construed very broadly) their lodestar. But it is nevertheless the case that the report, in adopting this middle class frame, misses an opportunity to attempt to revamp the terms and priorities of US political thinking.

A second limitation of the report is that, as Jim Cranshaw of People & Planet has said about recent trends in progressive economic thinking, Rewriting the Rules does not explain how new policies can be moved from ideas into action.

There are at least 37 policy ideas in Rewriting the Rules, and the report is to be commended for focusing on different areas of the economy–on trade relations and the labour market, on the financial sector and the tax system–rather than on one or two big ideas.

However, there is insufficient attention paid to the barriers blocking change, and no programme is sketched for overcoming these barriers. Is there a need for a populist movement, which calls for an economy that works for real people? Do thinktanks need to join forces and reach a consensus on key economic changes? Can vested interests be brought round to the report’s recommendations? These questions are not asked, or answered.

The most charitable reading of the report is that it is written directly for politicians–that it is an attempt to give politicians a set of ideas, and that it expects politicians to find ways to turn ideas into legislation or policy action. (It may also be an attempt to encourage economists to explore certain proposals more deeply.)

But if the report does assume this electoral-political theory of change, then this theory is a fairly technocratic vision that does not empower activists, advocates, and the general public. And the report still does not consider how politicians ought to ward off the influence of lobbyists (although it does nod at their influence when referring to the need for campaign finance reform).

Moreover, if the report is a guide for progressive politicians (such as, say, Elizabeth Warren and Bill De Blasio), it could be criticised for being not specific enough. To put the point another way: if what the report is trying to do is make it easy for politicians to implement transformative change quickly, one might expect precise policy prescriptions.

But at crucial points the report is vague in its phrasing. Take, for example, what the report says about patents and about monetary policy. On patents,Rewriting the Rules says that there is a need for both incentives for innovation and fair competition. The report says: “Better balance is possible.” But what does this mean, and how could this be operationalized? The report is not clear.

In relation to monetary policy, Rewriting the Rules notes that the Federal Reserve currently sets interest rates with inflation and employment goals in mind, and says “[t]he Fed should place a greater priority on full employment.” Stiglitz and his co-authors are a little more specific on this point. They note that inflation should be allowed to rise above 2 per cent, and that it should consider broadening its instruments. But again the language is open-ended: how can the Fed ensure “greater priority” is given to full employment?

Perhaps the report is attempting to avoid being sectarian by staking out strong positions. But by omitting specific recommendations, the report ends up being not completely satisfactory to anyone: it does not provide, at a general level, new language and framing for the activist and the advocate; and it does not provide more specific policy recommendations for the technocrat and the politician.

Why regulation matters – and bringing back the State

Overall, despite these weaknesses, we should recognize the great value of this report. It will spark debate (in the US and elsewhere) by highlighting the need for economic policy to be bold, and by suggesting that economists also consider health policy, the criminal justice system, and issues of race and gender.  In addition, the report’s own gaps reveal what is most urgently needed in progressive economic thinking today: specific policy prescriptions, but also deep,creative thinking about the framing, language, and assumptions of modern economic debates.

Most importantly, the report draws our attention back to a key State function that has not been defended at length in recent times: namely, regulation.  Throughout the report, and its title, the focus is on rewriting the rules for the economy–an accessible way of saying that the regulatory framework needs to be changed.

And it is high time regulation was the subject of more analysis. The UK and the US have both been engaged in single-issue debates, for example about the financial sector and free trade agreements, that touch on regulation (and threats to regulation) but do not address this broader topic directly. Had a stronger case for regulation been established prior to the global financial crisis, the crisis may have been if not averted, then at the very least mitigated–and addressed more swiftly.

Rewriting the Rules reminds us that only the State can regulate in a robust way, and that regulation is a key part of a functioning economy. It may not be a flashy topic, but regulation may be a key pillar in a new framework for the role of the State in the twenty-first century economy.

Economists, policy-makers, and activists now need to add further pillars: by, for instance, explaining other core State functions, such as redistribution and the steering of the economy as part of what Mazzucato has called “the entrepreneurial state”. And this emerging framework, if it is developed, could well contribute to the intellectual counter-narrative to neoliberalism that progressives all around the world are seeking.

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