The Price of Inequality: How Today's Divided Society Endangers Our Future (50 page)

35.
One of Netscape’s founders, Marc Andreessen, was part of the team at the University of Illinois at Urbana-Champaign that developed Mosaic, the first widely used web browser, which was a project of the university’s National Center for Supercomputing Applications (one of the original sites of the National Science Foundation’s Supercomputer Centers Program). See the website of the NCSA,
http://www.ncsa.illinois.edu/Projects/mosaic.html
(accessed March 3, 2012); and John Markoff, “New Venture in Cyberspace by Silicon Graphics Founder,”
New York Times,
May 7, 1994, available at
http://www.nytimes.com/1994/05/07/business/new-venture-in-cyberspace-by-silicon-graphics-founder.html?ref=marcandreessen
(accessed March 3, 2012).

36.
For an overview of the Microsoft case, see Geisst,
Monopolies in America
.

37.
See Steven C. Salop and R. Craig Romaine, “Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft,”
George Mason Law Revie
w 4, no. 7 (1999): 617–1055.

38.
See Microsoft’s annual report.

39.
As the late Oxford professor and Nobel Prize winner John Hicks said, “The best of all monopoly profits is a quiet life.” J. R. Hicks, “Annual Survey of Economic Theory: The Theory of Monopoly,”
Econometrica
1, no. 8 (1935). Kenneth Arrow pointed out that because monopolists restrict production, the saving they get from reducing costs is diminished. See Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in
The Rate and Direction of Inventive Activity: Economic and Social Factors
(Princeton: Princeton University Press, 1962), pp. 609–26. Monopolies, of course, don’t last forever: new technologies and the open-source movement are already beginning to challenge Microsoft’s dominance.

40.
Calculated by total assets of commercial banks, as of September 3, 2011. See FDIC Statistics on Banking, available at
http://www2.fdic.gov/SDI/SOB/index.asp
; and Federal Reserve Statistical Release Large Commercial Banks, available at
http://www.federalreserve.gov/releases/lbr/current/default.htm
.

41.
Moreover, banks don’t compete on price for the services they offer. If you want to do a merger or acquisition, every major bank charges the same percentage fee. When takeovers were hundreds of millions of dollars, the resulting charges were large; when they became billions, charges became astronomical, for essentially the same amount of work by the same number of people.

42.
From 2010 Q4 to 2011 Q3 (the most recently available year), FDIC-insured institutions made an aggregate profit of $115 billion. See
FDIC Quarterly
, available at
http://www.fdic.gov/bank/analytical/quarterly/index.html
. But these numbers don’t really capture the magnitude of bank profits, since they are the profits after paying out the mega-bonuses to the executives, which can push compensation at some firms above 50 percent of revenues after other costs have been taken out, i.e., the “true” profits may be as much as double the above number. The
profits and bonuses
of the banking sector exceed 1 percent of the country’s entire national output. Such numbers lead many to conclude that the financial sector, which is supposed to be the servant of the rest of the economy, has become its master.

43.
Microsoft tried to exert political influence through a variety of channels. It has made campaign contributions of $13,516,304 from 1999 to present. See
campaignmoney.com
, compiled from campaign finance reports and data disclosed by Federal Election Commission, lists of contribution available at
http://www.campaignmoney.com/Microsoft.asp?pg=88
(accessed March 6, 2012). The remedies put forward by President Bush’s Justice Department in response to Microsofts conviction on anticompetitive behavior were mild and did not effectively curtail its market power. See, e.g., Andrew Chin’s account of the outcome of
United States v. Microsoft Corp.
: “Decoding Microsoft: A First Principles Approach,”
Wake Forest Law Review
40, no. 1 (2005):1–157. In the case of antitrust laws, there’s a partial remedy for the absence of effective public enforcement: private antitrust action (which was introduced because of worries about the willingness of public authorities to take enforcement action).

44.
The late Nobel Prize–winning economist George Stigler wrote extensively about this. See, e.g., Stigler, “The Economic Theory of Regulation,”
Bell Journal of Economics
11 (1971): 3–21.

45.
Data from the
OpenSectrets.org
, a website of the Center for Responsive Politics, counting lobbyists for commercial banks, finance, and credit companies. When all lobbyists are counted in the finance, insurance, and real estate industries, the number balloons to nearly five per congressman. See
http://www.opensecrets.org/lobby/indus.php?id=F&year=a
(accessed March 24, 2012).

46.
The latest instance was the veto by the Senate Banking Committee chairman of the nomination of Nobel Prize–winning economist Peter Diamond. Diamond would have provided a critical voice on some of the doctrines that prevail among some of the governors. (Diamond was first nominated to the Fed by President Obama in April 2010; he was renominated in September and again in January 2011, after Senate Republicans blocked a floor vote on his confirmation. On June 5, 2011, Diamond withdrew his nomination, ending a fourteen-month nomination effort resisted by Senator Richard Shelby of Alabama, who, with party colleagues repeatedly criticized Diamond for supporting the central bank’s monetary stimulus. Diamond responded that his opponents failed to appreciate that understanding the determinants of unemployment is essential to effective monetary policy.)

47.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

48.
The economist Dean Baker’s research shows that $332 billion could be saved between 2006 and 2013 (around $50 billion a year) in the most conservative high-cost scenario, if Medicare were allowed to negotiate prices; in the middle-cost scenario, $563 billion could be saved for the same budget window. See Baker,
The Savings from an Efficient Medicare Prescription Drug Plan
(Washington, DC: Center for Economic and Policy Research, January 2006).

49.
It is estimated that four banks in the United States take home a windfall of some $20 billion a year in derivatives.

50.
The market for ethanol was distorted in other ways—such as ethanol requirements and subsidies for gasoline refiners who blended gasoline with ethanol—most of which came from America’s corn producers. See the 2010 CBO study “Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals,” available at
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/114xx/doc11477/07-14-biofuels.pdf
(accessed March 2, 2012); and “The Global Dynamics of Biofuel,” Brazil Institute Special Report, April 2007, issue no. 3, available at
http://www.wilsoncenter.org/sites/default/files/Brazil_SR_e3.pdf
(accessed March 2, 2012).

51.
Congress finally allowed the subsidy to expire at the end of 2011.

52.
Famously, ADM was fined a then record $100 million for lysine price fixing in 1997, a result of a lengthy federal investigation that also led to convictions and prison time for three executives. (This became a book by Kurt Eichenwald and then a 2009 movie starring Matt Damon,
The Informant
.)

53.
In the early days of corn-based ethanol, this was flatly wrong: the demand for corn by ethanol producers was so low that the corn farmers received almost no benefit from the subsidy. Because usage of corn for ethanol production was such a small fraction of global supply, it had a neglible effect on corn prices. ADM and other ethanol producers were the true beneficiaries.

54.
The U.S. government paid a total of $261.9 billion for agriculture subsidies from 1995 to 2010. According to USDA, 63 percent of farms do not receive any payments. Among those payments, a large chunk (62 percent in 2009) goes to large-scale commercial farms (with gross annual sales of $250,000 or more). Between 1995 and 2010, the top 10 percent of farms received $30,751 average per year, while the bottom 80 percent of farms received $587 average per year. See USDA Economic Research Service, “Farm Income and Cost: Farms Receiving Government Payments,” available at
http://farm=.ewg.org/region.php?fips=00000®
name=UnitedStatesFarmSubsidySummary
.

55.
And indeed, many books have been written on the subject. See, e.g., Glenn Parker,
Congress and the Rent-Seeking Society
(Ann Arbor: University of Michigan Press, 1996).

Chapter Three
M
ARKETS AND
I
NEQUALITY

1.
More precisely, if the demand curve shifts more than the supply curve.

2.
Employment in manufacturing dropped from 18 million in 1988 to less than 12 million now. See Department of Labor, Bureau of Labor Statistics.

3.
For an excellent discussion of these issues, see David H. Autor, Lawrence F. Katz, and Melissa S. Kearney, “Measuring and Interpreting Trends in Inequality,”
American Economic Review
96 (May 2006): 189–94; and Claudia Goldin and Lawrence F. Katz, “Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing,”
Brookings Papers on Econoic Activity
2 (2007): 135–64, and the references cited there.

4.
David H. Autor, Lawrence F. Katz, and Alan B. Krueger, “Computing Inequality: Have Computers Changed the Labor Market?,”
Quarterly Journal of Economics
113 (November 1998): 1169–213; and L. F. Katz, “Technological Change, Computerization, and the Wage Structure,” in
Understanding the Digital Economy
, ed. E. Brynjolfsson and B. Kahin (Cambridge: MIT Press, 2000), 217–44.

5.
Goldin and Katz, “Long-Run Changes in the Wage Structure,” 153. They attribute most of the difference to the decline in educational attainment of native-born Americans.

6.
See OECD, Education at a Glance: OECD Indicators, 2011, p. 54, available at
http://www.oecd.org/dataoecd/61/2/48631582.pdf
(accessed March 2, 2012).

7.
Ibid., p. 68.

8.
For data, see the
OECD Programme for International Student Assessment (PISA)
2009 results.

9.
Even by 1998, college graduate wages had risen to 1.75 times that of high school graduate wages (up from 1.59 in 1970).

10.
See, e.g., David H. Autor, Frank Levy, and Richard J. Murnane, “The Skill Content of Recent Technological Change: An Empirical Exploration,”
Quarterly Journal of Economics
118
(2003): 1279–333.

11.
According to Autor et al., “Measuring and Interpreting Trends in Inequality,”
since 1988 the most rapid rise in wages has occurred at the top, and the slowest growth in the middle two quartiles.

12.
See Domenico Delli Gatti, Mauro Gallegati, Bruce C. Greenwald, Alberto Russo, and Joseph E. Stiglitz, “Sectoral Imbalances and Long Run Crises” (forthcoming 2012); and J. E. Stigltiz, “The Book of Jobs,”
Vanity Fair
, January 2012,
available at
http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
(accessed February 15, 2012).

13.
See Bill Vlasic, “Detroit Sets Its Future on a Foundation of Two-Tier Wages,”
New York Times
,
September 12, 2011, available at
http://www.nytimes.com/2011/09/13/business/in-detroit-two-wage-levels-are-the-new-way-of-work.html?pagewanted=all
(accessed March 6, 2012). The 2007 GM annual report confirms some of the details on wages, available at
http://bigthreeauto.procon.org/sourcefiles/GM_AR_2007.pdf
(accessed March 6, 2012), see pp. 62–63. For a longer discussion of wages, see Bruce C. Greenwald and Judd Kahn,
Globalization: The Irrational Fear That Someone in China Will Take Your Job
(Hoboken, NJ: John Wiley, 2009).

14.
Some on the right compare wages in public-sector jobs to those in private-sector jobs
unadjusted for education
—that is, not taking account of differences in the level of education between the public and private sectors—and complain that public-sector wages are too high. But education-adjusted public sector pay (that is, taking into account differences in education between the two sectors) is lower than private. Some contend that more generous (and less risky) pensions and other benefits in the public sector compensate for this differential. Munnell et al. find instead that private sector workers enjoy a “modest” 4 percent premium even net of benefits. A. Munnell, J.-P. Aubry, J. Hurwitz, and L. Quimby, “Comparing Compensation: State-Local versus Private Sector Workers,” Center for Retirement Research at Boston College, no. 20, September 2011.

15.
Traditionally many economists have been uncomfortable in dealing with these distributive changes, because of the difficulties of making interpersonal comparisons. Economists often focus on “Pareto efficient” equilibria—where no one can be made better-off without making someone else worse-off; or on “Pareto improvements,” where someone is made better-off, but no one is harmed. But few policy changes are of that sort. Generally, some gain and some lose. A Pareto efficient equilibrium, as is learned in elementary economics courses (and then perhaps forgotten), might be very undesirable because it left many people at bare subsistence.

16.
Several hundred years ago, in England and Scotland, the large landowners enclosed the common land. Some economists have argued that this was desirable, because it avoided the problem of overgrazing, a problem that was called the “tragedy of the commons.” But far larger than the efficiency effect were the distributive effects: large numbers lost their livelihood and became impoverished. As the Nobel Prize–winning economist/political scientist Elinor Ostrom has pointed out, there are other ways to avoid the tragedy of the commons and to ensure that the resources are well managed—such as simply regulating the number of sheep that can graze. These can do just as well in attaining efficiency, but with far better social consequences. The true tragedy of the commons was that with the privatization of the commons by the lords, thousands became destitute and had to migrate either to the cities of Britain or abroad. A system of use rights—allowing each family to graze, say, ten sheep—would have prevented the problem of overgrazing as well as the further immiseration of the peasants. Virtually every society in which water is very scarce (such as the indigenous people of the Atacama Desert) or which relies on irrigation has developed complex regulatory schemes for allocating water, balancing out equity and efficiency—and with only limited use of prices. For a more extensive discussion of some of these issues, see Stigltiz,
Making Globalization Work
,
chap. 4.