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Saturday, December 20, 2014


Stiglitz, Prosperity, and Labor Union

Based on The Price of Inequality by Joseph Stiglitz
             Looking for an alternative view on why such great inequality exists within the world I turned to Nobel Prize winner in economics Joseph Stiglitz and his progressive views on why nations fail. Stiglitz asserts that the incomes of the top 1% have been steadily rising, doubling since 1980. This has led to a "hollowing out of the middle class," which has increased poverty throughout our nation. Offering us a starting point for government predation, Stiglitz argues that our troubles began during the Reagan administration in the 1980s. The deregulation of the financial sector coupled with tax cuts has allowed the top 400 earners in the United States to pay an average tax rate of just below 20%. This has led to the U.S. having the most inequality and the worst equality of opportunity among advanced nations. One reason is due to the decline of unions in America. 
            Stiglitz argues that Reagan deregulation in the 80s has had a negative impact on our economy. Stiglitz claims that between 1980 and 2000 one reason why inequality has risen in America is because unions in the U.S. declined from 20.1% to 11.9%. This has had significant impact on the earnings of Americans and created an imbalance of power in the workforce, with power being diverted from the employee to the employer. This together with capture theory (industry being captured by the agency that is supposed to regulate it) has allowed for corporate managers to seize greater portions of wealth regardless of profit, therefore widening the inequality gap.
            The problem with this argument is unions don't create jobs within the industries they monopolize. They effectively contribute in lowering the number of jobs. When the worker receives wages above equilibrium this implies an increase in productivity for the worker. Without there would be no way to support the inflated wages demanded by unions. When productivity doesn't increase and even decreases, the direct result is layoffs within the industry or a rise in the price of outputs. This gives incentive to create entry barriers to the industry, thus artificially lowering the number of jobs that it can support. Further, because it's important to retain jobs, any move towards efficiency technology is vetoed. Combined, this implies that the above market wages unions secure for workers allows for an artificial entry barrier into the labor market. This leads to unemployment, a rise in prices, and less innovation.
            Because Stiglitz believes that markets are neither stable nor efficient and will cause wealth to be distributed from the many to the few when left alone. He concludes that free and competitive markets can only be attained through government intervention. Like all progressives, Stiglitz believes that interventionism in the market fosters prosperity. This is why he supports labor unions, government involvement, and other predacious means of acquiring people's money like estate taxes. All these inhibit growth, not support it. This is also why he chooses a starting point like the Reagan administration. I might have chosen when the courts started supporting collective bargaining between these cartels instead of supporting contracts that already existed. While I agree with Stiglitz's assertions that excessive inequality slows down the mechanisms of capitalism, I disagree with his theory on how to attain prosperity. Simply put government should protect freedom of contract and outside force, no more.  


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