Nobel economist Joseph Stiglitz is misdiagnosing what’s behind the growing anger of the younger generation
Our economic culture is still upwardly mobile
Most economists agree society is becoming more divided and is passing this onto the next generation. But how we interpret and respond to the situation is far from agreed.
Professor Joseph Stiglitz, Nobel economist at Columbia and a left-leaning Democrat, recently addressed the problem. He focused on three main concerns: jobs, security, and homeownership. I will explore these, and why I think he generalises far too much.
First, Stiglitz claims the parents’ generation had well paying jobs waiting for them, unlike today’s youth. This is another way of saying inequality is rising over time. However, my explanation for this is the changing effects of human capital investment.
Technological advances have increasingly rewarded the better educated with higher incomes. The rate of return to schooling is higher today than it was for the parents’ generation.
This problem can be remedied if more individuals become better educated. In this case, rising income inequality can be seen as a failure of society and government’s human capital investment policy.
Broken families make the problem even more difficult because many born into lower and lower middle-income families are raised in single-parent households and bad neighbourhoods, with poor human capital investment and no good role models. Assortative mating further strengthens these effects as women have become better educated over time.
Stiglitz also claims the young generation think they are getting a worse deal than their parents because the economic game is rigged – an impression formed from seeing bankers, who brought on the financial crisis, walk away with mega-bonuses, with few being held accountable for their wrongdoing.
He links this to anger among the young, but the rise of angry politics is not restricted to the political left; it also comes from the right. Look at the Tea Party and the Donald Trump phenomenon in the U.S.
Second, Stiglitz claims while the parents’ generation have attained job security, bought a home, could expect to retire with reasonable security and have lived generally better than their parents, the young generation will face job insecurity throughout their lives.
There are a host of problems here. But the central issues are the ailing social pension systems, and the rising cost of medical care and urban housing.
The insolvency of the social pension systems is one basic reason why the young are right to be unhappy with their parents, who voted in generous social pensions.
Each generation has a responsibility to the next. In the rich nations the contract between the two generations has been violated. To restore the balance, two things have to be done: cut government outlays immediately and permanently by X per cent, and raise government taxes immediately and permanently by Y per cent. The amount of X and Y will differ from nation to nation but in each they will be in the double digits.
Unfortunately, the individuals responsible for such decisions are pursuing the opposite path – and the percentages required to restore the generational balance will rise every year.
Third, Stiglitz notes the generational divide has been exacerbated by the capital gains that the parents earned on their homes, at a time when most young people consider home ownership to be a distant, unattainable dream.
However, the rising cost of housing is not the result of a lucky windfall from speculative activities, as Stiglitz insinuates. Housing prices have been rising in all urban centres since the end of the last world war.
A voluminous body of recent research has shown the problem is in fact due to regulatory constraints that prevent markets from functioning properly.
Stiglitz argues that “if socialism means creating a society where shared concerns are not given short shrift – where people care about other people and the environment in which they live – so be it.”
It is understandable that almost eight years into a financial crisis of deep recession, lethargic growth, unaffordable housing, rising income inequality, poverty and lack of mobility among the disadvantaged, people are frustrated.
But I think the pessimism of young people is not only rooted in the intergenerational socioeconomic divide – it also comes from the cultural mood of the postmodern era they grew up in.
Young people are no longer convinced by the modernist promise that humanity can solve the world’s great problems, or even that their economic situation will surpass their parents’. They view life on Earth as fragile and believe the existence of humankind is dependent on a new attitude of community cooperation rather than individual competition.
Eighteen months ago in Hong Kong, many people found delightful community cooperation in Admiralty when they went there in the evening and escaped their daily work – a form of individual competition. They have become influenced by the postmodernist mindset.
Richard Wong Yue-chim is the Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong