Wednesday, November 26, 2014

American Delusions Down Under

NEW YORK – For better or worse, economic-policy debates in the United States are often echoed elsewhere, regardless of whether they are relevant. Australian Prime Minister Tony Abbott’s recently elected government provides a case in point.

As in many other countries, conservative governments are arguing for cutbacks in government spending, on the grounds that fiscal deficits imperil their future. In the case of Australia, however, such assertions ring particularly hollow – though that has not stopped Abbott’s government from trafficking in them.

Even if one accepts the claim of the Harvard economists Carmen Reinhart and Kenneth Rogoff that very high public debt levels mean lower growth – a view that they never really established and that has subsequently been discredited – Australia is nowhere near that threshold. Its debt/GDP ratio is only a fraction of that of the US, and one of the lowest among the OECD countries.

What matters more for long-term growth are investments in the future – including crucial public investments in education, technology, and infrastructure. Such investments ensure that all citizens, no matter how poor their parents, can live up to their potential.

There is something deeply ironic about Abbott’s reverence for the American model in defending many of his government’s proposed “reforms.” After all, America’s economic model has not been working for most Americans. Median income in the US is lower today than it was a quarter-century ago – not because productivity has been stagnating, but because wages have.

The Australian model has performed far better. Indeed, Australia is one of the few commodity-based economies that has not suffered from the natural-resource curse. Prosperity has been relatively widely shared. Median household income has grown at an average annual rate above 3% in the last decades – almost twice the OECD average.

To be sure, given its abundance of natural resources, Australia should have far greater equality than it does. After all, a country’s natural resources should belong to all of its people, and the “rents” that they generate provide a source of revenue that could be used to reduce inequality. And taxing natural-resource rents at high rates does not cause the adverse consequences that follow from taxing savings or work (reserves of iron ore and natural gas cannot move to another country to avoid taxation). But Australia’s Gini coefficient, a standard measure of inequality, is one-third higher than that of Norway, a resource-rich country that has done a particularly good job of managing its wealth for the benefit of all citizens.

One wonders whether Abbott and his government really understand what has happened in the US? Does he realize that since the era of deregulation and liberalization began in the late 1970s, GDP growth has slowed markedly, and that what growth has occurred has primarily benefited those at the top? Does he know that prior to these “reforms,” the US had not had a financial crisis – now a regular occurrence around the world – for a half-century, and that deregulation led to a bloated financial sector that attracted many talented young people who otherwise might have devoted their careers to more productive activities? Their financial innovations made them extremely rich but brought America and the global economy to the brink of ruin.

Australia’s public services are the envy of the world. Its health-care system delivers better outcomes than the US, at a fraction of the cost. It has an income-contingent education-loan program that permits borrowers to spread their repayments over more years if necessary, and in which, if their income turns out to be particularly low (perhaps because they chose important but low-paying jobs, say, in education or religion), the government forgives some of the debt.

The contrast with the US is striking. In the US, student debt, now in excess of $1.2 trillion (more than all credit-card debt), is becoming a burden for graduates and the economy. America’s failed financial model for higher education is one of the reasons that, among the advanced countries, America now has the least equality of opportunity, with the life prospects of a young American more dependent on his or her parents’ income and education than in other advanced countries.

Abbott’s notions about higher education also suggest that he clearly does not understand why America’s best universities succeed. It is not price competition or the drive for profit that has made Harvard, Yale, or Stanford great. None of America’s great universities are for-profit-institutions. They are all not-for-profit institutions, either public or supported by large endowments, contributed largely by alumni and foundations.

There is competition, but of a different sort. They strive for inclusiveness and diversity. They compete for government research grants. America’s under-regulated for-profit universities excel in two dimensions: the ability to exploit young people from poor backgrounds, charging them high fees without delivering anything of value, and the ability to lobby for government money without regulation and to continue their exploitative practices.

Australia should be proud of its successes, from which the rest of the world can learn a great deal. It would be a shame if a misunderstanding of what has happened in the US, combined with a strong dose of ideology, caused its leaders to fix what is not broken.

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    1. CommentedZsolt Hermann

      The article suggest the Australians are "choosing" to follow the US economic example.
      And indeed Australia is the new America, Western Australia with its mining boom is like the "old" California.

      But are they really choosing? Do we have free choice?

      In truth we are simply instinctively driven by our inherently self-calculating, egocentric human nature, and the previous American and current Australian examples are the peak examples of this nature working at full force, maximally exploiting the "maximum profit/minimum investment" principle, regardless of any collateral damage to human or natural resources, regardless of problems in the natural environment, longevity, sustainability or tensions in the human society.

      We are like alcoholics or drug users who simply cannot stop even when the end is nigh. I have just been to Australia in the region of the Great Barrier Reef, where those working on the Reef are seemingly resigned to the fact that the Reef is dying.
      They mention "doom and gloom" with a strange smile on their face as if there was nothing we could do, and simply we should just enjoy what we have as long as it lasts.

      And this is how the whole, global human society feels and behaves nowadays.
      But we have a capability that no other living creature has, critical self-assessment and conscious self-change.

      And this is where our only "free choice" starts to play part, the only thing we can change is ourselves, the only choice we have is to build and maintain such a human society, environment that directs our insatiable desire for pleasure, for profit in a positive, mutual direction, for sustaining the whole, common, global "ship", based on the understanding that either we all sail together in a natural system we help in maintaining its balance and homeostasis, or we all drown.

    2. CommentedFrank Manheim

      Era of deregulation and liberalization in the late 1970's? While some deregulation took place in specific industries such airlines and the Postal service by far the largest and most significant regulation - in environmental laws - burgeoned. The 70s laws had iron teeth and made rapid inroads on pollution, but they also drove a rift into U.S. society between environmentalists and industry, and their adversarial structure and costs caused migration of business to other minimally affected economic sectors - banking and finance, real estate, entertainment, imports. Look at almost any chronological set of statistics and you'll find a knife-like divide at 1970.

        CommentedBruce Wayne

        "Look at almost any chronological set of statistics and you'll find a knife-like divide at 1970."

        1971: Nixon removes the gold standard.

    3. CommentedGeorge Kailis

      The association made between Australian inequality and potential resource rents is a little too simplistic. The Commonwealth of Australia, like the Unites States of America, is a constitutional federation. The Australian Federal government does apply resource rent taxes to those resources under its direct control, principally offshore oil and gas. Other minerals are principally under control of the states of Australia. The states charge less efficient, but still substantial, royalties on production. Through a set of complex intergovernmental arrangements these state based royalties are shared with states that have fewer natural endowments. These arrangements cause perverse incentives, for donor and recipient states, but are intended to ensure that each state has the capacity to ‘provide services and their associated infrastructure at the same standard’ (See Commonwealth Grants Commission ).

    4. CommentedFrank Beck

      Ishmael, why is it that people posting messages like yours never feel the need to support their argument in any way. You haven't suggested the reason for any connection between the gold standard and income inequality. As for your last sentence, it doesn't even make sense syntactically.

    5. CommentedIshmael Whale

      Professor Stiglitz, like his fellow Keynesians, always forget that the seminal economic event of the 70s was disconnecting the US dollar from he gold standard. That's what separated the savers from the investors and has created the divide between the 1%ers and the rest. Every other analytical observation is nothing more than rehashed socialism/communism.

    6. CommentedD. V. Gendre

      It is very unprofessional to compare one country with another. You can not compare Norway with Australia and claim that these countries should be similar in development. Mr. Stiglitz is ignoring too many facts by doing so and shows his ideological economic point of view. No one clear in mind would compare Australia with Venezuela or Afghanistan, other resource rich countries.
      Then GDP growth slowed in the US in the 1970s when it went bankrupt back then. And for 100 years now the US tries to inflate its debt burden constantly away. This not only destroys most wage increases but also destroyed every pension plan so far. Since the bankruptcy of the US in 1971 this process has gained momentum of course.
      Student debt is not at all a burden of the economy since most debt is held by the government. If things are going out of control the central bank will just take over that burden as it always does. Student debt will be inflated away.
      And I'm not quite sure if the US has the least equality of opportunity. With high youth unemployment in Spain, Greece, France, Portugal, Italy and so forth the US seems still to be the best of the worst.
      The blind faith of Mr. Stiglitz in government regulations is also an ideological view point as the laissez-faire view of an anarchist. Mr. Stiglitz constantly ignores the fact that government regulations and bad central bank policy led to the financial crisis.

    7. Commentedsteve from virginia

      Let's get this straight:

      - If economies expand -- growth -- resources are depleted. This includes credit and waste carrying capacity. The outcome of depletion = crash.

      - If economies DON'T expand, there is a credit shortage = crash.

      Damned if you do, damned if you don't. Maybe we need a better economy, one that offers more choices such as an economy that rewards conservation rather than squander.

      Current approach leaves us no choice but ... crash.

    8. CommentedROBERT BAESEMANN

      For me, this article is especially important because of what it says about inequality and economic growth. To varying degrees, Stiglitz shows that tax policies can affect income distribution, and those influences on income distribution have salutary effects on GDP growth. For example, as discussed here, Australia, Norway, and the United States have much in common, but Australia has a superior record for growth in GDP per capita, and Norway has become one of the world leaders in GDP per capita having surpassed the United States. Both Australia and Norway also have less inequality than the United States.

      These sorts of observations cause me to wonder about a systematic relationship between Gini coefficients and growth rates for GDP per capita. There seems to be good reason to think that perfect inequality and perfect equality would be less than optimal arrangements, which seems to suggest that the best combination of Gini Coefficient and growth rate in GDP per capita would be somewhere in the middle. Could it be that there is a Stiglitz curve out there waiting to be drawn? Probably not. But there might be a powerful argument, based on empirical results, for reduced inequality and improved growth. I have the sense that we might find out that the Austerians have been biting our noses off to spite our faces while doing the same thing to all but the very wealthiest people in the history of the world. That is the sort of thing that could help us sort out the ongoing debate over how to escape the liquidity trap.

    9. CommentedProcyon Mukherjee

      U.S. Bureau of Economic Analysis summarizes the predicament succinctly: "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased 2.6 percent." But more importantly the drivers of negative growth are Exports, Residential and Non-Residential Fixed Investments.

      The Equity Markets on the other hand had been soaring into new highs throughout the first quarter; the disconnect between income and capital growth is complete.

    10. CommentedRobert REYNOLDS

      I suspect that I may possibly be replying to an arrogant Australian writer. Joseph Stiglitz is obviously a perspicuous and knowledgeable economist. But much more than that, Joseph Stiglitz argues for decency, fairness and a humane approach. This is of course, not a popular stand with neo-liberal free-marketeers.

      My view on Duncan's remarks that those changes to economic policy that were forced upon us in the 1970’ by the disciples of Ayn Rand and the followers of Margaret Thatcher and Ronald Reagan, have clearly resulted in the formation of a much wider chasm between the rich and the poor in any country that you care to look at around the world. This is obviously something that that current Australian Prime Minister, Mr Tony Abbott favors. Incidentally, it should be clearly stated for the benefit of overseas readers that the raison d'etre of Mr Abbott and his Liberal Party is nothing less than the transfer of wealth from the poor to the rich. Americans in particular, please note very carefully that this party is anything but liberal in the sense that you folks use the word. Mr Abbott would stand tall in the Tea Party. The use of the term 'liberal' by the Liberal Party here in Australia is a perversion of the word and is something that George Orwell has dealt with extensively.

      Duncan's comment that “The previous Australian government created circumstances that would have eventually led to our own economic collapse…” conveniently overlooks the fact that the Rudd government was, like other governments around the world, dealing with the latest crisis for capitalism in 2008. We here in Australia seemed to manage to come out of that crisis relatively unscathed compared to other countries, thanks mainly to the resources boom.

      Thank you Joseph Stiglitz for an insightful and instructive article. If you ever decide to leave the United States then you would be most welcome to come to Australia as we need more people like you (and Paul Krugman) here.

    11. Commentedrobert mcdowell

      A few more caveats:
      1. Australia's GDP & debt are also externally influenced - especially by E.Asian trade & private sector capital flows. Australia economic & credit cycle are no longer as tied to the Anglo-saxon cycle as in the past.
      2. Government debt should be considered net, not gross, and while public debt is a low ratio to GDP private foreign and domestic debt is high. Private sector business and household debt is high, and combined they are at E.Asian high levels with the main difference being the far greater mortgage debt weight and proportionately much small business debt.
      4. Does this matter? There are bubbles and they will busrt as China's must also - but recovery should be swift in both.
      5. Generally, when private debt is high government debt is low and vice versa.

    12. CommentedRon Chandler

      Kudos to Dr Stiglitz, whose grace was exemplary during his recent visit, while he was subjected to the barbs of Australia's lowbrow talking head bizoids and half-baked 'technocrat' neoliberals.
      I recommend bilbo's economic outlook re the polished t**d budget
      Abbot's sabotage is likely to crash Australia due to high PRIVATE debt on top of credit drained into the speculators' real estate sector. It is as if the Liberal Party of Australia is LOOKING to destroy us.

    13. CommentedSimon Winchester

      Simon Winchester, University of New England, Australia
      I saw the 'debate' with yourself and the ill-formed neoliberal elements of Australian society on our ABC television. My apologies for the some of the rudeness they showed a guest to our country.
      Hanly is right, Abbott knows only too well that the benefits will flow to the rich. Indeed his Budget costs the $200,000+ earner about $500 and the single mother on welfare about $2,500.
      Abbott plays to a meaner, crueler (and dumber) voter in Australia. Our nation has lost the sense of its humanity created during Bretton Woods. Narcissism reigns supreme. Australian elites, mining, media and banking seem to control the debate, and control it for their own interests. Yet the more interesting is how has our society been so hoodwinked into believing that the rich getting richer will benefit the greater society? How does a $100,000 + education bill (more for woman as when they take time off to raise a family their bill compounds) make us the clever country? How does cutting jobs in manufacturing build our nation? How dose sending refugees to their death make us better people? How does restricting legitimate dissent improve our democracy?
      The mining industry spent $17 m in advertising against a mining tax (the minerals are the peoples anyway!) and effectively had it removed (when the opposition were in power). The elites surely do control government and Abbott already has shown his true colours.

    14. CommentedPaul Hanly

      Abbott knows what has happened in the US (the very rich becoming even richer) he just doesn't want the Australian electorate to find out. His first budget shows that when Mr Abbott lied to the middle class/income Australians who elected him when hesaid on the night before the 2013 election: “No cuts to education, no cuts to health, no change to pensions, no change to the GST and no cuts to the ABC or SBS.”
      His budget is designed to bring about exactly the income distribution changes that have occurred in the US. The levy on the highest income earners are repealed after 3 years. The increased burdens of the lowest 60% remain in place foreever. The bottom quintile has the highest cut in net incomes on percentage terms, the middle quinile has the highest cut in net incomes in dollar terms.
      Abbot is a tool of the very rich of Australia.

    15. CommentedFernando Quiroga

      Interesting article by Stiglitz. However, I feel compelled to address several points. It should be noted that the previous labour government left the Abbot government with a net debt of $189 billion, when it had inherited a positive position of $44 billion from a previous conservative government. As it stands, Australia has a net debt of close to $300 billion. Interest on this alone could improve the fiscal position of education easily.
      I have heard many economists argue that Australia's debt isn't so bad compared to other developed nations. But the point they're all missing is that these developed countries with higher debt level than Australia are not looking after their citizens as well.

      I believe its the debt that is crippling the US, furthermore, the net debt level in the US are higher than Spain and are getting close to those of Italy.

      Norway which Stiglitz points out has a 30% better Gini Coefficient than Australia, has a net debt position far better than Australia's. This does not mean that a Gini Coefficient is a result of net debt, however, it would be feasible to consider that if governments have surplus funds, then they would be in a better position to provide services to their citizens.

      I don't believe a country can go on borrowing in order to facilitate growth in an economy. It appears that this is what Stiglitz may be advocating. My question is, to what point can any country continue to borrow money before it reaches the point where it can no longer afford to repay its loans? And when it reaches this point [Greece], drastic government spending cutbacks will often affect its citizens far more harshly.

        CommentedSimon Winchester

        Dear Fernando
        I believe the issue of debt is about the quantum rather than its existence or not. The Howard government with its surplus, that boosted share prices, capital markets that benefited the most well off in Australia, also saw a reduction in health services and education.
        That said, Australia managed to avoid a recession that the rest of the world endured. It did this by plain old-fashioned Keynesian economic policies. This kept people spending on houses, reduced their private debt, commensurables purchasing. It kept me in a job! Stiglitz note our debt is the smallest in the OECD. Talk of Australia being another Greece, Italy or Spain is just wrong.
        Little debt, no recession. It seems a great outcome.
        It seems only that those of the rich seem to believe that putting people out of work, crippling the poor, making education prohibitively expensive and sending the old to il-equipped hospitals, is good public policy. Do not be hoodwinked. Australia's little debt kept people in jobs, and taxed! Cutting growth will increase unemployment, recurrent government expenses and cut revenue. This will not repay debt. The current neoliberal rhetoric merely clouds the interests of the rich - simple as that.

    16. Commentedphilip meguire

      "America’s economic model has not been working for most Americans."
      Neither has Japan's or southern Europe's. Australia, Canada and New Zealand, have done well over the past 15 years, but suffer from overpriced houses. I trust you agree that UK and Ireland are not to be imitated. That leaves Scandinavia, Germany, Austria and the Netherlands.

      I agree that the American financial sector has been bipolar for 35 years, and that this fact compels deep reflection.

      I do not believe that data claiming that median real household income in the USA has not risen since the 1970s. Those data are based on the Current Population Survey, which interviews 60,000 households every month, and takes their answers at face value. Between 1981 and 2007, real compensation per hour in the USA rose by 1.5% per annum. This calculatipon uses the NIPA deflator for personal consumption expenditures, not the CPI. I eagerly await the data for 2013, so as to calculate the growth rate for 2008-13.

      I suspect that there is some truth to the claim that most of the rise in real wages during the past 35 years, has accrued to white collar workers. But I know of no standard public data set that speaks to that claim.

      The USA could learn something from the Australian and New Zealand student loan schemes. New Zealand student loans are not "loans," but an agreement that, in exchange for no tuition fees, the student agrees to a higher rate of income tax until the loan is paid off. New Zealand student "loans" accrue no interest as long as the "borrower" resides in New Zealand.

    17. CommentedJohn A Werneken

      LOL. Crises were absent due to dominance on the one hand and monopoly and subsidy on the other, both thankfully eroded. PLUS the biggie: whilst Breton Woods was fundamentally untrustworthy, reliance being placed on sanity in over 100 governments, but at least some responsibility was enforced internationally, and, to a lesser degree, within countries.

      Individual and public debt; currency devaluation; and expanding spending through tax loopholes and through rampant regulation - all policy attempting to prop up jobs and incomes rather than to enforce discipline - are responsible for both the instability and the slower growth.

    18. CommentedNathan Weatherdon

      At Australian debt levels, public debt does more to ensure a large and liquid financial system which benefits almost everyone, and does not mortgage the future, especially when debt is held domestically.

      I think the Australian approach to regulating labour, in particular, is an area where Americans should look to Australian expertise and experience. (But not once immigration enters the picture. They both have very poor ways to deal with this at present.)

      I think a fundamental underlying respect for hard work regardless of whether it's smart work, underlies the sensible Australian approach to labour policy. None of this insulting people who work hard in low skill jobs - they work hard, they earn their payscheque.

    19. Commentedjim bridgeman

      Median income in the US is lower today than it was a quarter-century ago
      because the author has viciously cherry picked the data, comparing a cyclical peak year 25 years ago with today's cyclical trough year. When an economists does this, how can one believe anything else he says?

    20. Commentedstanton braverman

      I see the problems with the US economy is a different light. Monetary and fiscal policy tools have been played out and over used. The problem is that there is a serious need to make the economy more competitive which during times of recession is supposed to happen but has not taken place. The key issue is that healthcare spending in the US is clearly far too expensive with the result that about 10% of the GDP is wasted.. If the US brought down the cost of healthcare to reasonable levels it would create its own economic stimulus that we need. For example, if we gave every university student $20,000 a year for tuition it would cost about one third of the total waste in the healthcare sector. That would be end of student loans as we know it and would allow many graduates to go on with their lives in a more meaningful manner. Until the cost of healthcare is controlled and is reasonable then the economy will continue to go one step forward and the two steps backward.

    21. CommentedPaul Daley

      The issue is who pays for the recovery. A debt-financed fiscal expansion would tend to eventually burden taxpayers while austerity programs hit workers first and foremost. Capital interests are touched only if some form of wealth taxation is used to fund the expansion, as Rogoff urges in the article below.

    22. CommentedDuncan Graham

      This is an arrogant American writer. The economic woes of today are made from debt and the current Australian government has an overall objective to pay off debt and have a stable surplus. The previous Australian government created circumstances that would have eventually led to our own economic collapse such as the USA and Europe have had. The changes made to policy from the 70's throughout the Western world were made because changes were required and for the most part were positive in their outcomes. Now we see there are problems and changes need to be brought about again however going backwards is not the solution, innovation not nostalgia is required.

    23. CommentedG. A. Pakela

      Dr. Stiglitz is arguing from an alternate reality when he talks about the lack of growth since the deregulation of the late 1970s. The real reality is that once the U.S. lost its immediate post-war status monopoly producer status, it began losing ground and experiencing a negative balance of payments to Europe and Japan, to the point where it brought down the post-war Bretton Woods system. Then there was the stagflation and the brutal inflation and energy shock induced recessions of the 1970s and early 1980s. Of course for someone of Stiglitz's (and his academic peers') age and superior capabilities it must have been a halcyon era. The social welfare society that Dr. Stiglitz envisions cannot financially sustain itself.