The Price of Inequality

Derivatives are defined in a footnote as “a financial instrument the return to which is derived on the basis of something else, e.g., the performance of a stock or the price of oil or the value of a bond” (313). Stiglitz argues that the Great Recession was caused in part banks’ inappropriate and in some cases fraudulent practices, like investing in derivatives.

Stiglitz defines externalities as situations “where one party’s actions can have large negative or positive effects on others for which [she or] he does not pay or reap the benefit” (34). This term is used to help explain how the 1 percent become wealthy and how they take the wealth of the 99 percent.

Fiscal policy is how the government shapes the economy. Policymakers can alter the economy by adjusting taxes and spending (expenditures), which is important to Stiglitz’s argument that regressive taxes are a key contributor to economic inequality.

Macroeconomic policy is the branch of economics that deals with the economy’s output, usually measured in gross domestic product (GDP). Macroeconomic policy is important because it determines how income is distributed, so it can further inequality.

Monetary policy is a means of controlling the money supply. The Federal Reserve Bank controls the money supply, and one way it does that is by controlling the interest rates on short-term borrowing (the loans that the Fed gives to banks). Stiglitz argues that monetary policy, along with macroeconomic policy, is critical because it can determine inequality.

Multipliers are factors that cause changes in other variables, such as when each dollar spent generates more than one dollar in GDP. Some government programs have large multipliers, and Stiglitz argues that those should be saved, while others have lower multipliers.