Book review: People, Power, and Profits

Last month, I reviewed Joseph Stiglitz's book Globalization and Its Discontents. This month, I fast-forwarded to reading his most recent book People, Power, and Profits. This book builds on Stiglitz's previous books on globalisation, inequality, economic policy and finance, and proposes and agenda to reclaim capitalism and rebuild the middle class in America. And this really is a book about America, and the failings of its democracy, its recent decades of deregulation, and its engagement with globalisation. There are insights that other countries can draw on (I'll come to an example a bit later), but the readers who will gain the most from this book are readers with an understanding of the US experience.

The book was published in 2020, and written while President Trump was still in power, and Stiglitz's anxiety about the potential for a second term Trump government is plain. However, he is clearly looking beyond that, and the book has an undertone that is more hopeful than you might expect. Nevertheless, Stiglitz doesn't pull any punches in considering where things went wrong:

...we got the economics, the politics, and the values wrong.

We got the economics wrong: we thought unfettered markets - including lower taxes and deregulation - were the solution to every economic problem; we thought finance and globalization and advances in technology would, on their own, bring prosperity to all. We thought that markets were, on their own, always competitive - and so we didn't understand the dangers of market power...

We got our politics wrong: too many thought that just having elections was all that democracy was about. We didn't understand the dangers of money in politics, its power...

We got out values wrong. We forgot that the economy is supposed to serve our citizens, not the other way around.

A lot of the book focuses on power (it's in the title, after all): political power, but especially market power. Rent seeking and regulatory capture, concepts that would hopefully be quite familiar to my ECONS102 class, also make a frequent appearance. In particular, the intersection of market power and financial deregulation is implicated as particularly problematic:

The most important failing of the banks, however, was not the multiple ways they cheated and exploited others or the excessive risk taking that brought the global economy to its knees, but their failure to do what they were supposed to do - provide finance, at reasonable terms, for businesses as they sought to make investments that would allow the economy to grow.

His solution for the banks' failings involves re-focusing it away from short-term profits, and undermining the role of market power:

By circumscribing the riskier and more abusive ways the financial sector makes profits, we will encourage it to do more of what it should be doing. But that won't be enough. We also need to make the financial sector more competitive.

Stiglitz's solutions to the US problems are far-reaching, including increased investment in education, research and development, reforming social protection and the welfare state, health care, home ownership, and a greater focus on social justice. Not all of the policy prescription is appropriate for other countries, where social security and health care in particular, already largely follow Stiglitz's prescriptions.

However, one aspect that I think New Zealand could consider is his prescription on home ownership. Stiglitz advocates for government provision of mortgage finance. The government could provide mortgages at lower interest rates than the private sector (because of the government's much lower borrowing cost), and administer repayments through the tax system (lowering transaction costs). Stiglitz also notes that such a system could more easily deal with contingencies (such as unemployment, or reduced income), which would reduce the number of foreclosures. He doesn't go quite this far, but it might be possible to make mortgage payments income-contingent (like the students loans system is currently). This strikes me as something that New Zealand could consider as a complement to social housing, helping more low-income and young people onto the property ladder, and freeing up the inadequate quantity of social housing for those who are truly in need.

I quite enjoyed this book. However, I wonder how much of my enjoyment was underpinned by having some understanding of the current policy settings in the US. Readers who do not follow US politics and policy as closely may well find some of the current (and past) politics a little bewildering. This isn't to suggest that those readers won't similarly enjoy the book - they'll probably just encounter a number of 'what the...?' moments. US politics is crazy, but it's important to understand, because, as Stiglitz notes several times in the book:

The difficulty is not the economics, but the politics.