Wednesday, November 26, 2014

America’s Hope Against Hope

NEW YORK – After a hard-fought election campaign, costing well in excess of $2 billion, it seems to many observers that not much has changed in American politics: Barack Obama is still President, the Republicans still control the House of Representatives, and the Democrats still have a majority in the Senate. With America facing a “fiscal cliff” – automatic tax increases and spending cuts at the start of 2013 that will most likely drive the economy into recession unless bipartisan agreement on an alternative fiscal path is reached – could there be anything worse than continued political gridlock?

In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes in the United States may doom Republican extremism. The Republicans’ explicit campaign of disenfranchisement in some states – like Pennsylvania, where they tried to make it more difficult for African-Americans and Latinos to register to vote – backfired: those whose rights were threatened were motivated to turn out and exercise them. In Massachusetts, Elizabeth Warren, a Harvard law professor and tireless warrior for reforms to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate.

Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory: Wasn’t the election supposed to be about economics? They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and that voters had not noticed how their intransigence in Congress had prevented more effective policies from being pursued in the wake of the 2008 crisis. Voters, they assumed, would focus only on the current economic malaise.

The Republicans should not have been caught off-guard by Americans’ interest in issues like disenfranchisement and gender equality. While these issues strike at the core of a country’s values – of what we mean by democracy and limits on government intrusion into individuals’ lives – they are also economic issues. As I explain in my book The Price of Inequality, much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence –& and use that influence to entrench themselves. Obviously, issues like reproductive rights and gay marriage have large economic consequences as well.

In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans.

Beyond that, here is what Americans should hope for: a strong “jobs” bill – based on investments in education, health care, technology, and infrastructure – that would stimulate the economy, restore growth, reduce unemployment, and generate tax revenues far in excess of its costs, thus improving the country’s fiscal position. They might also hope for a housing program that finally addresses America’s foreclosure crisis.

A comprehensive program to increase economic opportunity and reduce inequality is also needed – its goal being to remove, within the next decade, America’s distinction as the advanced country with the highest inequality and the least social mobility. This implies, among other things, a fair tax system that is more progressive and eliminates the distortions and loopholes that allow speculators to pay taxes at a lower effective rate than those who work for a living, and that enable the rich to use the Cayman Islands to avoid paying their fair share.

America – and the world – would also benefit from a US energy policy that reduces reliance on imports not just by increasing domestic production, but also by cutting consumption, and that recognizes the risks posed by global warming. Moreover, America’s science and technology policy must reflect an understanding that long-term increases in living standards depend upon productivity growth, which reflects technological progress that assumes a solid foundation of basic research.

Finally, the US needs a financial system that serves all of society, rather than operating as if it were an end in itself. That means that the system’s focus must shift from speculative and proprietary trading to lending and job creation, which implies reforms of financial-sector regulation, and of anti-trust and corporate-governance laws, together with adequate enforcement to ensure that markets do not become rigged casinos.

Globalization has made all countries more interdependent, in turn requiring greater global cooperation. We might hopethat America will show more leadership in reforming the global financial system by advocating for stronger international regulation, a global reserve system, and better ways to restructure sovereign debt; in addressing global warming; in democratizing the international economic institutions; and in providing assistance to poorer countries.

Americans should hope for all of this, though I am not sanguine that they will get much of it.& More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming.

With the euro crisis likely to continue unabated, America’s continuing malaise does not bode well for global growth. Even worse, in the absence of strong American leadership, longstanding global problems – from climate change to urgently needed reforms of the international monetary system – will continue to fester. Nonetheless, we should be grateful: it is better to be standing still than it is to be heading in the wrong direction.

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    1. CommentedProcyon Mukherjee

      The extraordinary success of what America had built brick by brick, the foundations of a ubiquitous enterprise for profit and wealth building, cannot be so spitefully wished away by sententious posturing that mildly voices a trendy rhetoric on failures of ‘trickling’; the equity of this ensemble of enterprise is held by each and every American and the generations beyond and is solid, sound and on a footing of hope that has the wherewithal to weather storms, man-made or otherwise.

      I cannot but point out the gravity of this equity, which like in every successful company, is held by each and every stakeholder; whether big or small, the size of the individual portions of this equity only grows when the contributions of each stakeholder is directed to increase the whole, rather than each pie.

      Procyon Mukherjee

    2. CommentedLeo Arouet

      Siempre ha estado en debate el posible liderazgo de Estados Unidos para dirigir responsablemente las instituciones financieras internacionales, hecho que sólo ha quedado en deseo. Los datos más objetivos del tales planes, los encontramos en el Malestar de la Globalización, donde se muestra que los programas dirigidos por el gobierno no han sido direccionados para lograr una menor desigualdad económica en el mundo sino al contrario ha obedecido a los intereses económicos propios de los Estados Unidos. Hay mucho por trabajar en este aspecto; es necesario que este país tome de una vez en serio la dirección ética y responsable de las instituciones internacionales como el Banco Mundial y el FMI.

    3. CommentedWilfred Ruffian

      One wonders how a man of such remarkable academic career advancement could believe exactly the same things a 20 year old OWS protestor does.

      The sacrifice of truth to career is never pretty but yet more ugly when so overt.

    4. CommentedZsolt Hermann

      I apologize being a party spoiler but the election result is the worst thing that could have happened to the US and the world.
      It delayed any return to "normality" because it gave Americans another dose of sleeping pills, making them believe that things are OK, we can continue as before, we do not have to look into the mirror asking hard questions.
      A Romney victory could have shaken up Americans from this dream, even if it caused havoc, and all kinds of unsavory situations at least it would have forced people to ask questions, to start self-examinations, and thus there would have been more hope of finding the true causes and solutions of the crisis.
      The US together with the whole world is driving fast towards not a fiscal cliff but a cliff beyond which even our existence is in question. And because we are afraid of the full examination, full exploration of our state, we continue sinking deeper, like a cancer patient who delays going to the doctor fearing the diagnosis, thus when he finally decides to go it is too late.
      Our whole present lifestyle, attitude is like of a cancer, despite living in a closed and finite natural system as an interconnected and interdependent human network, we still behave fragmented, isolated, trying to exploit everything and everybody for our own pleasure, profit.
      And we cannot cheat the system any longer as the system is based on unbreakable, natural laws and humanity is against those laws.
      This fake normality, "celebration of the election results" pushes us back even further, sinking our heads into the sand.
      We do not need tranquility or normality we need uncomfortable, and sharp questions like the knife of a surgeon, the operation is painful but it leads to healing.

    5. CommentedRoman Bleifer

      U.S. presidential elections are over. Enough of the blame on Europe. Europe has its own problems, the U.S. has its own. And their problems are more than enough. Europe in an attempt to blame their own misfortunes counterproductive. Must be responsible for their own mistakes and inaction. For face-off in the economy trillions of empty money. The new wave of the global crisis will put everything in its place ( ). And it will happen in the near future.

    6. CommentedMark Pitts

      It is easy to deride middle class jobs created in the third world since they cannot provide Western-style luxuries for workers.
      However, the jobs are MUCH better than the jobs previously available under the socialist regimes.

    7. CommentedG. A. Pakela

      The term "trickle down" is an inappropriate metaphore that does not describe what happens in the process of capital formation. An active or passive investor takes on risk in exchange for a return that exceeds the risk free return on Treasuries or FDIC insured savings accounts. The risk for most passive investors is that they can lose up to the entire amount of their investment. Active investors - those who create new businesses, or invest in new business opportunities through an existing business, could be exposed to far greater risk if they mortgage their own assets in order to finance the new investment. In all cases, equity holders are the last to get paid if the revenues from the business are sufficient to provide a return. And in a bankruptcy, the are the ones most likely to be liquidated.

      So, in fact, the trickle down is reversed. Employees, suppliers and lenders aret the first to get paid. The equity owners are the last to get paid. However, the societal benefit to investment in new businesses or business opportunities is far greater than the returns achieved by the owners of equity, even though if successful, the ensuing profits may increase inequality. However, equity profits are like leverage in that the revenues devoted to paying employees alone dwarfs the amount of profits realized by the owners.

        Commenteddalai guevara

        Hi Solid State,

        I did not take out a loan. When the QE bonds mature, is it YOUR debt. I am amazed that you had not figured that one out yet.

        CommentedSOLID STATE

        I think you'll find QE is not intended to socialise losses as you seem to believe. QE is a (misguided) attempt to encourage fertile conditions for business growth and job creation in the real economy.

        However, I totally agree that if a business (of any type) takes risks and fails, it should go to the wall and losses shouldn't be socialised. For example, Obama should have let GM and Chrysler both go to the wall, as well as the weak Wall Street banks by way of some eventual liquidation.

        Commenteddalai guevara

        Yes, but why does other protagonists' investment gambling end up being your and my risk? Why are other peoples' losses MY losses? I don't play that game - if YOU lose, pay YOUR debts yourself or fold. Don't make me QE you out...

    8. CommentedSOLID STATE

      Another disingenuous piece from the Stig, which is a shame as it sullies a decent policy recipe he mentions - his so-called 'jobs' bill and other commendable ideas such as for America to lead by example.

      To be frank, it's all well-known soundbitery of blame and recrimination (Reinhart and Rogoff amongst others more pertinent) and I think this piece boils down to a simple plug for his new book.

      Moreover, he makes no difference in his tirade for equality of opportunity (or access) and equality of outcome (or success).

      Furthermore, he makes no suggestions regarding the acute actual problems facing America today, namely gaping budget deficits, government indebtedness and many times as many again off-balance sheet liabilities.

    9. CommentedGary Foxwell

      Trying to say that trickle down is a success by saying that jobs have been created to service the rich, is like saying unemployment could be solved by slavery.

    10. CommentedMark Pitts

      “Trickle Down” has been an extraordinary success for the poor:

      In the last 30-35 years almost a billion people have escaped poverty and entered the middle class. Most of this was due to jobs created to provide goods and services to the “rich” world – i.e. trickle down from the relatively wealthy.

      Never before has such a large portion of the world’s people escaped poverty in such a short period of time.

      Those who refuse to recognize this boom to the third world reveal their racial and ethnocentric prejudice.

        CommentedMark Pitts

        Mr. Haynie creates a tautological argument with which one can show that everything bad is Republican. Specifically, he asserts that foolish acts committed by Democrats are “inherently republican.”
        Extending that logic, pigs can fly -- provided of course that they are “inherently birds.”

        CommentedThomas Haynie

        Incredibly debatable. Trickledown was a failure more than once in this country. The effects we see now are an echo of the effects seen from previous attempts at this ideology. It failed bring wealth and upward mobility to the poor this time and under "oats and sparrows".

        You can point to a few instances but in the broad measure "trickledown" creates poverty and injustice. The data stares us in the face. Only those married to idology could refute it.

        Taking a global view.. yes. Some poor nations have been blessed with sweat shops and a flight to urban centers.

    11. CommentedMark Pitts

      The good professor once again seeks to deceive:

      Wasn’t it Clinton who insured that derivatives would not be regulated, and that commercial and investment banks could merge?

      How then was it “the Republicans’ deregulatory zeal that brought the economy to the brink of ruin”?

      Please professor, not all your readers are sheep.

        CommentedThomas Haynie

        I think the “good professor” is speaking through the perspective modern discourse. Clinton was a product of the thinking and his time. The greater issue and underlying mentality which are the Libertarian revolution. An inherently Republican ideology that for some time permeated much of economic thinking. While Clinton may have allowed the legislation that allows investment and commercial banks to merge and followed along with the wave of deregulation it will be found that the underlying ideology and lobbyists selling the dream of self regulation are inherently republican. Those who continue to defend it in the face of its failures are most definitely republican.

    12. CommentedFrank O'Callaghan

      The majority have been under a spell. They have believed that the increasing wealth of the rich would "trickle down". It has not done so and it never will or could.

      As the spell of delusion breaks the wiser of the world's wealthy are beginning to understand that the greatest threat to their continued well being is the vast gulf of inequality and the great miseries of the great majority.

      Their saviour in the 30s and 40s was FDR. Their hatred of him then mirrors their hatred of Obama now.

        Commenteddalai guevara


        We heard you the first time - 'in the last 30-35 years...' the world population increased by three billion. Only one billion escaped poverty? What about the other two?

        It is entirely unproven that 'trickle down' had anything to do with it. It could have been 'liberation' for all we know.

        Now, care to expand on your theory, so we can dissect it?

        CommentedMark Pitts

        “Trickle Down” has been an extraordinary success for the poor:

        In the last 30-35 years almost a billion people have escaped poverty and entered the middle class. Most of this was due to jobs created to provide goods and services to the “rich” world – i.e. trickle down from the relatively wealthy.

        Never before has such a large portion of the world’s people escaped poverty in such a short period of time.

    13. CommentedFrank O'Callaghan

      A lootocracy of the 0.001% (one in a hundred thousand) has crashed the global economy.

      The simultaneous existence of great poverty and unimaginable wealth is obscene. It did not come about by any "fair" means.

      We choose the world we live in. We can choose to change it.

    14. CommentedLee Hubbard

      100 people form a nation. One person is incredibly rich, by hard work, luck, somehow; the others earn and save various amounts of money. The 99 mismanage the nation such that it's heavily in debt, so heavily in debt, they can't pay it. To use your term, Prof Stiglitz, is it "fair" that the 99 now turn to the one to bail them out? What part of the "equal protection of the law" is that?

        CommentedPhilip Colin Richards

        I find this quasi-philosophical example quite strange; similarly you could argue that the financial firepower of the 1 "lucky" person allowed him/her to lobby Washington so effectively that the Bush Tax Cuts were introduced, a policy that boosted the deficit more than the Recovery Act.

        You should look at a graph of what policies actually added the most to the deficit in recent years; the Bush wars and the Bush tax cuts. And the Bush Administration was hardly representative of a government for "the 99".