The Price of Inequality

One of Stiglitz’s central arguments is that rent seeking, which is widespread in the US economy, causes inefficiency mostly because it causes poor allocation of resources. First, it leads to gaps between societal returns and private rewards. This gap is what sets up the wrong incentives. An example of market failure is when corporate governance allows leaders to do what is in their interest—to funnel money to themselves—instead of what is best for shareholders or society at large. This fuels the income gap and makes the economy even more inefficient. Also, with incentives, pay should be aligned with performance, but rent seeking has made that process inefficient: CEOs are paid bonuses whether their companies make money or make money fairly. CEOs are also allowed to take bonuses when their companies are involved with inappropriate practices like monopolies, restricting competition, or predatory lending. In short, incentives lead rent seekers to take the wealth from the 99 percent, not to create wealth.

Rent seeking also causes inefficiency because it leads to underutilized resources, especially labor. Because rent seekers take resources from the bottom 99 percent, they fail to pay their social contribution, and they make life harder for workers, who in turn are less productive, leading to an inefficient economy. Rent seekers also contribute to the misallocation of labor in sectors by teaming up with international capital under the framework of globalization. Rent seekers are quick to move their operations overseas, stranding workers without high-skill jobs, then team up the government to prevent collective bargaining or a social safety net, causing either high unemployment or lower wages and less job security. Rent seeking also contributes to worker anxiety over affording basic needs and raising their families without access to education, healthcare, and other government programs. Consequently, their productivity goes down, which contributes to an inefficient economy.