Over the years, the Swedes have often honored conservative economists who believe in the free market and who criticize well-meaning government programs. More recently, the prize has also gone to scholars who query market forces, such as George Akerlof and Robert Shiller. Deaton’s work can be cited by both sides of the markets-versus-intervention debate. (In a 2014 post, I took issue with some of his approach to inequality.) But inside the field of economics, few question his credentials or his commitment to scholarship.
What Scented Candles Say to an Economist
Still, another standard financial sign of an impending downturn is the relationship between short- and long-term interest rates, known as the yield curve. Normally, this has an upward slope because investors need a higher return the longer their money is tied up. However, if they expect the economy to weaken soon, and the Federal Reserve to respond by cutting interest rates, the yield curve will slope down.
This held true before the 2008 financial crisis: There was a negative yield curve for months. The problem was that hardly anybody paid attention to it.
.. Commentators sometimes say that steering the economy using G.D.P. data is like driving a car using only the rearview mirror.
Austerity’s Grim Legacy
More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows. Meanwhile, the austerity policies that were put into place in 2010 and after had exactly the depressing effects textbook economics predicted; the confidence fairy never did put in an appearance.
Why the Rich Are So Much Richer
All this rent-seeking, Stiglitz argues, leaves certain industries, like finance and pharmaceuticals, and certain companies within those industries, with an outsized share of the rewards. And within those companies, the rewards tend to be concentrated as well, thanks to what Stiglitz calls “abuses of corporate governance that lead CEOs to take a disproportionate share of corporate profits” (another form of rent-seeking). In Stiglitz’s view of the economy, then, the people at the top are making so much because they’re in effect collecting a huge stack of rents.
.. This isn’t just bad in some abstract sense, Stiglitz suggests. It also hurts society and the economy. It erodes America’s “sense of identity, in which fair play, equality of opportunity, and a sense of community are so important.” It alienates people from the system. And it makes the rich, who are obviously politically influential, less likely to support government investment in public goods (like education and infrastructure) because those goods have little impact on their lives. (The one percent are, in fact, more likely than the general public to support cutting spending on things like schools and highways.)
.. More interestingly (and more contentiously), Stiglitz argues that inequality does serious damage to economic growth: the more unequal a country becomes, the slower it’s likely to grow. He argues that inequality hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst.
.. When we talk about the one percent, we’re talking about two groups of people above all: corporate executives and what are called “financial professionals” (these include people who work for banks and the like, but also money managers, financial advisers, and so on). These are the people that Piketty terms “supermanagers,” and he estimates that together they account for over half of the people in the one percent.
.. After all, companies with private owners—who have total control over how much to pay their executives—pay their CEOs absurd salaries, too.
.. So what’s really going on? Something much simpler: asset managers are just managing much more money than they used to, because there’s much more capital in the markets than there once was. As recently as 1990, hedge funds managed a total of $38.9 billion. Today, it’s closer to $3 trillion. Mutual funds in the US had $1.6 trillion in assets in 1992. Today, it’s more than $16 trillion. And that means that an asset manager today can get paid far better than an asset manager was twenty years ago, even without doing a better job.
.. More important, probably, has been the rise of ideological assumptions about the indispensability of CEOs, and changes in social norms that made it seem like executives should take whatever they could get.