Unconventional Economic Wisdom
Alternatives to Austerity
Joseph E. Stiglitz
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NEW YORK – In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.
The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values. The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something. President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like.
Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.
In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:
· a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;
· growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession;
· underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and
· growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.
As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?
Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.
Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world.
An especially egregious form of corporate special treatment is that afforded to the drug companies. Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues – and costs to the government – approaching $1 trillion dollars over a decade.
Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation, and destroying the environment. Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies.
Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?
Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade.
A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.
There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.
Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese, and Spanish.
Copyright: Project Syndicate, 2010.
www.project-syndicate.org
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kingkorey 10:27 07 Dec 10
there is truly no hope, unfortunately
andrew15251 07:39 07 Dec 10
The only hope is that the next crash will be so bad and so deep that some populist measures will get passed, and the Rich will bear more of the burden.
hombre 01:05 08 Dec 10
I agree, but just a comment: deficit reduction and resuscitating the economy are two opposite issues. Why we don't wait until the economy gets on its feet and then we'll look at the long-term deficit reduction techniques? I know the answer: we are short of ideas on how to spur the economic growth and then we go to the next item on the To-Do list. But careful: we might cut actually the branch we are sitting on.
Short answer is: every economic lever that the government is pulling one at a time these days has (always) positive and negative effects on the sluggish economy (I wish there were only positive effects). The positive effects (low interest rates, incentives, tax cuts) are mostly absorbed by a group of already profitable businesses (see the S&P and NASDAQ listed companies how they are proudly listing growth) while the negative effects are seen at the unemployment offices.
Yes, it looks like there is no hope. Actually it might be - somebody might have a better idea but who gives them a chance? We are doomed to go through a downward economic spiral.
Anyway, watch and see how the unemployment rate will further increase early next year.
tshelton 07:53 11 Dec 10
Here is a hope - same hope that has brought the human race through everything else we have gone through: innovation that leads to productivity and more prosperity.
We need innovation in energy which leads to cheaper, ultimately free, energy. Free energy leads to more clean water, which leads to more food, healthier populace, etc.
We need innovation in health care which leads to longer, happier, more productive lives at a lower cost to society
We need innovation in education that improves the capabilities of our young people BUT ALSO helps older people retool for new kinds of work
We need innovation in information technology to create more collaboration, greater ability to analyze complex and high volume data streams, etc...
Personally, I'd rather get to work then whinge
Gdas 08:43 13 Dec 10
Real Alternatives To Austerity On Households
In developing partial solutions as alternatives to austerity, the problems at hand need to be defined and the best solution selected from alternatives. Wealth transfers in the financial sector are disguised as wealth creation within the same financial sector. In bad times facing households, wealth transfers from the household sector to the business or government sector should not be tolerated, even if they are overlooked by representatives of the people.
Transfers from households to business can occur without money and finance crossing over to the economic sectors as loans to create jobs. The problem facing society can be defined.
The incomes generated as a percentage of the gross value of production declined in mining and manufacturing, raising questions on the efficiency of taxpayer subsidies to these two sectors. The decreases translate into 76 and 53 billion dollars, hardly trifle amounts during portending times of austerity. In the finance and insurance sectors, income generation increased by 12 billion dollars reflecting the efficiency of financial services to make money by using other people’s money and through insuring fear of loss in society, all within the same financial sector and its interaction with households. Indeed, these gains are in part, no more than economic rents paid to so-called fixed economic agents of production in order to retain their services within the financial sector and in transferring incomes from individuals on account of fear of economic losses.
In the subsidies area, government transfers household incomes to companies in mining and energy. Such transfers stand out during times of austerity. The U.S. Tax Foundation in its November 22, 2010 publication reports some $40 billion are transferred from households to fossil fuel and green energy companies plus foreign governments. In finding alternatives to austerity, these amounts should be weighed against such options as eliminating mortgage interest deductions to middle class American families who are struggling to keep their homes, among other things.
There are other areas that the Government could seek to reduce the amounts of income and sheer capital transfers from households for an equitable redress of the problems brought on by Government expenditures, directly through the budget and indirectly through facilitating transfers as subsidies from households to the corporate sector.
First, building and construction decline could use incentives that raise investment and create jobs through empowering households in their capacity as owners of their own homes and rental properties. Existing subsidies to the business sector could be reduced and households could be granted a standard deduction for each property owned in order to maintain, repair, and make homes energy efficient as households see fit. A similar approach could be applied to commercial properties used to provide housing to households. These measures alone would generate private sector jobs at the local level, stimulate opportunities to learn new skills, and stimulate building and construction activities everywhere in society. A paradigm shift of this sort would be a real democracy improvement, voting with real dollars that households spend in the investment streams to keep America’s stock of housing from falling into disrepair.
Second, the problem of prolonged extraction of wealth transfers under the guise of wealth creation from households to the financial sector could be reversed now, if immediate steps are taken to shift taxes from middle class incomes to the transfer pricing mechanisms created by Wall Street. In this regard, Wall Street is not a jobs development agency. As a transfer mechanism, its transactions could be taxed along the lines of a Tobin’s Tax to reduce the government payment of interest on the national debt and spare middle class household incomes from already high tax burdens.
Yale University’s professor Tobin’s ideas could be implemented as an autonomous mechanism to reduce pressures on taxpayers coming through the Federal budget, inspired by special interests. The real value of the Tobin’s ideas to tax financial transactions and reduce the Federal deficit would be a healthier U.S. economy capable of reindustrializing and possessing a strong international reserve currency in the world economy.
lukehlee 12:28 14 Dec 10
Prof. Stiglitz,
I totally agree with you, and support your suggested deficit-reduction package. But, I think that's not enough. I believe we have missed something very important to consider.
I would refer to something called the ant death spiral, an event that takes place in the natural world.
The cause of this behavior is the technology ant societies use for ground navigation. They follow pheromone trails on the ground laid down by other ants, or they simply follow other ants visually. The system works well normally. A scout ant goes out and finds something. Other ants go back to get more by following the scent trail, or by following each other. However, if a loop gets created, the ants will march blindly, sometimes circling until they die.
Unfortunately, it seems that human beings sometimes exhibit similar behavior by blindly following the previous order. I strongly believe we have made a serious mistake in the market over the last 20 to 30 years of the Modern Information Age, and it created an economic death spiral in the market or economy.
I think it’s time to break down this cycle and explore a new order for survival. This time we may be saving the world economy.
I strongly suggest you to see this article: "Breaking Down the Economic Death Spiral – and Saving the World Economy" http://t.co/8pMwQh7
I hope it's not too late to save the world economy.
Sincerely,
Luke
Gdas 06:49 17 Dec 10
Ant Death Colony Story From Guyana, Weeding Out Old Ideas
Thank you Professor Stiglitz and Mr. Luke for illuminating our search for a solution to America’s slow processes of de-industrialization in an information age.
I like the reference to involuntary ant spiral death story in the Essequibo region of Guyana, South America, famed for gold and diamonds and where the world’s largest ant colonies were found and a subsequent micro colony of U.S. citizens took voluntary death. I agree with further reference to using information technology in manufacturing over space and time. Major shifts in our thinking about solutions and business applications with new infrastructures are needed to take advantage of new technologies and how to create jobs and a better socio-economic environment at the local levels as referenced in "Breaking Down the Economic Death Spiral – and Saving the World Economy." (http://t.co/8pMwQh7).
We must be mindful that changes take time and our present leaders give us what they know about and how to leverage other leaders’ ideas and their behavior. We might indeed be in an ant rut, and certainly not in a competitive race. Leaders show a duality in their behavior patterns. They lead and they mislead.
A second case using e-business models that made use of supply chains besides Zara, is Levi Jeans marketed by Walmart in many places in the U.S. The Michigan auto makers would be a third case.
Yet another case study in addition to Amazon and eBay that could make use of your article’s ideas of integrating information technology with production, distribution, and marketing would be the United States Parcel Post in its supply chain drivers illustrating—facilities, inventory, transportation, and information management, and customer delivery practices—the activities that lead to job creation, income growth and bountiful government revenues along with Clinton-like budget surpluses.
On the Levi Jean-Walmart example, a producing partner would have to use a central database; estimate the demand for jeans; produce and ship the jeans to Walmart stores, where selling takes place, with Walmart doing the accounting and distribution of net profits to partners, a classic joint venture partnering arrangement among capitalist economies.
Finally, the U.S. quality of investment could be improved and dove-tailed with its trading partners for new production and distribution entrepreneurial activities to be made visible to the local U.S. citizens. We should not look towards austerity as a final solution to the U.S. job creation processes.
Yours faithfully,
Ganga Ramdas, Georgetown, Guyana.
RalphMus 07:13 20 Dec 10
The problem with people who have acquired a household name, in economics or any other subject, is that can earn good money turning out articles which are low grade, meaningless waffle. This article by Joseph Stiglitz is an example.
He sets out five ways of reducing the deficit. The first is “spending on high-return public investments”. Well it’s pretty stark staring obvious that’s a desirable objective – regardless of whether we are trying to reduce the deficit or not! Come to that spending on high-return PRIVATE investments is ALSO desirable. And as to exactly how this idea actually does reduce the deficit, Stiglitz doesn’t tell us.
Items two and three simply consists of reduced expenditure on the military and corporate welfare.
Well I could list five hundred areas where public spending might be cut. Doubtless the average chicken could do likewise.
But the problem here is that these cuts (unless matched by tax reductions) would increase unemployment. So items two and three aren’t too clever.
Item four is to promote a fairer and simpler tax system. He completely fails to tell us WHY this should reduce the deficit. Plus a fairer tax system is desirable REGARDLESS of whether we are trying to reduce the deficit or not. I.e. it has NOTHING SPECIFICALLY to do with deficit reduction (like item one above).
As to his fifth item, taxing the rich, the above mentioned hypothetical chicken has doubtless worked out that this would reduce the deficit. The problem, as with items two and three, is that this item increases unemployment.
In the unlikely event of Stiglitz or anyone else being interested in a deficit reduction system that actually works, see here:
http://printingmoneyisgood.blogspot.com/
farmer 11:10 29 Dec 10
Well guess a new return to the dark ages is on the making.
Quite sad because we can do a lot better than accounting.
PerKurowski 10:20 03 Jan 11
At this precise moment banks cannot lend to small businesses or entrepreneurs because to do so they need a lot of bank capital which is very scarce; very scarce because so much of it was consumed when the investing of lending to whatever was perceived as having a low risk and for which the banks did not need a lot of capital turned out to be not so not risky.
If a bank wants to lend to a small businesses or entrepreneur then it needs 8 percent in capital but if the banks instead lends the money to the government so that a government bureaucrat lends or otherwise invents something to help small businesses and entrepreneurs then it needs to put up zero capital. This is sheer madness… but of course some have it as their political agenda to increase the decision making by public bureaucrats.
As I see it increasing public spending and indebtedness before revising what should be revised does not make any sense. While the banks build up their capital decrease the capital requirements for banks when investing or lending to something perceived as risky and which, by the way will never cause a bank crisis, precisely because they are perceived as risky. That is an alternative!
Bank regulations 101, first lesson, states… or should state: “The only risks that pose a real systemic risk are those perceived as low… and most specially when perceived as low by regulators and bankers alike.”
crankyactivist 04:29 27 Feb 11
Now that Tunisia and Egypt have led the way and Scott Walker has enlivened working people here in the US, we can see where hope lies. Unions and working people can stand up, and if need be, shut it down. Push back against corporate welfare can happen, and democracy is coming, to the USA!
jerryt 06:13 07 Dec 10
I do not disagree but is there truly no hope?