Krugman v Stiglitz on what’s holding back the recovery

 

BBC Chief Business Correspondent Linda Yueh investigates claims that inequality is hampering growth

Two of the leading economists in the world disagree over whether inequality hampers the economic recovery.

It relates primarily to the US where the top 1% has captured 95% of the income gained since the financial crisis. Since 2009, the top 1% of incomes grew by 31.4% while the bottom 99% saw their incomes rise by only 0.4%, according to a study from the University of California at Berkeley.

The main cause of the slow recovery is certainly worth knowing.

I sat down with two of the most eminent economists in the world, Nobel Laureates Paul Krugman and Joseph Stiglitz, who disagree over the issue.

Stiglitz maintains that those sorts of inequality figures are the main impediments to economic growth. The rich pay less tax, so higher inequality depresses tax receipts. Also, most importantly, the poor consume more of their income than the rich.

This lower "marginal propensity to consume" of the rich was originally pointed out by John Maynard Keynes.

Rich v poor?

In other words, poorer people have less disposable income, and spend more of it on necessities such as food.

Richer people tend to spend proportionately less of their income since they have more money to spend.

It implies that raising incomes for the poor would generate proportionately more consumption.

But, Krugman says that he hasn't seen evidence that the rich "under-consume".

In one sense, of course, the rich spend more absolutely than the poor. If the poor spend 20% of, say, £10,000 of income, then that would add £2,000 to the economy. If the rich spend 3% of £100,000, then that would add £3,000.

Slow recovery

Krugman's point is that this comparison is a static one: if you took two people at a point in time with two different levels of income, then that's what they are doing.

But, if you were raise the income of, say, the poor person, then it's harder to know how their spending would change. Stiglitz maintains that there is a large body of evidence that supports his position.

Stiglitz and Krugman may disagree over how important inequality is to the slow recovery. But they agree that high levels of income inequality are clearly a problem for economic as well as social reasons.

They also agree that most governments have not got it right in terms of the balance of austerity and growth, and don't see the crisis-affected economies of the US, Britain and eurozone getting back to more normal rates of growth anytime soon.

For the rest of us trying to understand why this recovery is so slow five years on from the crisis, it's worth having these debates, since the answer could provide guidance on what needs to be done.

For the full interviews with Paul Krugman and Joseph Stiglitz, tune into Talking Business with Linda Yueh on Friday. Details of when to watch are at: www.bbc.co.uk/talkingbusiness.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

Scottish vote and uncertainty

Markets have reacted positively to the news that the UK will not be split after the Scottish referendum results.

Read full article

More on This Story

More from Linda

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    -1

    Comment number 46.

    Both of them are re-arranging deckchairs on the Titanic.

    They refuse to believe that it's govt intervention and liberal printing of money that is causing the ship to sink.

    Inequality is needed for investment: if we all had the same amount of money, who would provide the massive investment that certain projects need?

    And, anyway, its govt money printing that's exacerbating income inequality.

  • rate this
    +1

    Comment number 45.

    debt levels in western society are far too high. we will not return to healthy economic growth until most of the debt is purged from the system. central banks are doing everything they can to prevent a purge. so at this point central banks are part of the problem, not part of the solution.
    when it comes to this simple point, someone like krugman does not even understand the problem.

  • rate this
    +1

    Comment number 44.

    the top 5% have indeed got richer by robbing the other 95% in numerous scams eg all are failed financial products designed essentially to do just that. Its fair to say that the back heeling of all of the toxic debt from banks to governments and then on to consumers/taxpayers will weigh all of the western economies down years to come.
    Its true to say greed killed all of the western economies.

  • rate this
    +1

    Comment number 43.

    We humans consume, and the World provides.
    We are all consumers....some more than others.

    AUSTERITY is the evidence of finite resources...that trough is emptying...no growth...Austerity for some but not others...This will continue and the strong (or wealthiest) will take more and more of the less and less...causing the greater divide between the haves and the have nots.

    Answer....It's obvious.!

  • rate this
    -1

    Comment number 42.

    Money that is not spent is not somehow "wasted" it is normally invested in some way or another and therefore provides for future wealth generation.
    Few people who have money use it to light fires, Krugman is right that the distribution of income makes very little difference to the overall economy.

 

Comments 5 of 46

 

Features & Analysis

From BBC Capital

Programmes

  • Bitcoin logoClick Watch

    The developer behind the new Bitcoin tech on the fears it will hide criminal activity

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.