Unconventional Economic Wisdom
The Perils of 2012
Joseph E. Stiglitz
|
|
|
|
KOLKATA – The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.
In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labor force – meant little to the 50 year olds with little hope of ever holding a job again.
Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than seven million American families have lost their homes.
The dark underbelly of the previous decade’s financial boom has been fully exposed in Europe as well. Dithering over Greece and key national governments’ devotion to austerity began to exact a heavy toll last year. Contagion spread to Italy. Spain’s unemployment, which had been near 20% since the beginning of the recession, crept even higher. The unthinkable – the end of the euro – began to seem like a real possibility.
This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.
Moreover, the major emerging-market countries, which steered successfully through the storms of 2008 and 2009, may not cope as well with the problems looming on the horizon. Brazil’s growth has already stalled, fueling anxiety among its neighbors in Latin America.
Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.
The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth, and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.
Even without widening the fiscal deficit, such “balanced budget” increases in taxes and spending would lower unemployment and increase output. The worry, however, is that politics and ideology on both sides of the Atlantic, but especially in the US, will not allow any of this to occur. Fixation on the deficit will induce cutbacks in social spending, worsening inequality. Likewise, the enduring attraction of supply-side economics, despite all of the evidence against it (especially in a period in which there is high unemployment), will prevent raising taxes at the top.
Even before the crisis, there was a rebalancing of economic power – in fact, a correction of a 200-year historical anomaly, in which Asia’s share of global GDP fell from nearly 50% to, at one point, below 10%. The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow.
As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions. With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.
Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.
Copyright: Project Syndicate, 2012.
www.project-syndicate.org
You might also like to read more from Joseph E. Stiglitz or return to our home page.
|
|
GDP 05:10 13 Jan 12
Had we, in the panic of Sept.08, borrowed 12trillion to pay off every first mortgage in America, at least we would own our homes. As it is, we will have borrowed that much anyway, and to what good end? A financial industry that examines its own navel while the people are dying. A pox on all you pirates, with special contempt to those who KNEW ....Nobel or no Nobel.. Revolution is in the air...and you Tory apologists will feel the tang of Mao...
lukehlee 08:30 13 Jan 12
@Prof. Stiglitz,
You said, “It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for).”
I simply do not agree with you. Because it will be almost impossible to sustainably bring down the unemployment rate under the existing outdated and too much efficiency-oriented real market or supply chain process, no matter how powerful stimulus measures are adopted.
Please see this article as a reference: “The Real Cause of the Current Economic Crisis and a Suggested Solution” http://goo.gl/9y8Uf.
I hope you seriously consider this in your ruminations about the economy.
William_Bjornson 11:55 13 Jan 12
Twice this guy cites "ideology" as a problem when what he means is greed-based "corruption". The one thing I have yet to see addressed is TO WHOM, exactly, is all of this debt owed? Does anyone here have a breakdown or even a general idea?
I believe that this is important for one reason. There will eventually be a major war to settle this debt. Care to bet? My suggestion is that we embrace this 'fact' and get on with it, but do it slightly differently than we have in the past. Instead of the peoples of our various countries, as in the past, acting as proxies and shields for the real protagonists, the rich elites, we simply kill the rich to whom most of this debt is owed as 'casualties of war' and the debt is fully repaid on all sides, many fewer people are killed, maimed, twisted, and our cities and possibly our entire civilization are not destroyed. William of Occam would have liked this solution and his namesake tool would be handy in its execution, so to speak. Certainly this would be a reasonable 'sacrifice' to the realities of human history, and these people would hardly be missed by the rest of us, at least not nearly as much as we will miss our own children if conventional historical solutions prevail.
JacobScherr 10:20 14 Jan 12
It was encouraged by Professor Sitglitz's "good news" that addressing long-term climate change and other environmental and equity challenges could help to solve our short-term problems. Getting the world back onto a more sustainable path through speeding the transition to a low-carbon green economy will be the subject of next June's Un Rio+20 Earth Summit. The big challenge 2012 is whether the presidents, prime ministers, and other leaders will really come to Rio prepared to really do something. For more, see my blog - http://switchboard.nrdc.org/blogs/jscherr/the_greatest_challenge_of_2012.html
christnr 02:55 15 Jan 12
To qualify for a multi-trillion dollar loan, the borrower would need to be in good credit standing and propose to invest the loan in a way to make return on the investment. But needy western nations already have highly distressed balance sheets. Moreover, it's unlikely that such borrowing would be invested in growth generating platforms, but would instead be directed toward uses that are politically beneficial, but have very low macro-economic growth effects.
Nor can western economies adopt the formulas of Asian economies and Korea. These are powered by manufacturing export engines combined with corresponding import barriers. Brittain in 1850 and the US in 1920 were there. But that stage is past.
The growth platforms that western economies need are not investment intensive. They require, instead, revolutionary change in insitutional structures, and the fortitude to tackle entrenched combinations of politiclal and industry interests.
Education effectiveness, Health care effectiveness, Financial system transparency, Countering terrorism without a $500B (US) defense expediture, Building global protections of intellectual property rights that are western economies' most valuble economic output. There should be more.
None of these require massive investment. In fact, more money may do more harm by supporting existing ineffective models. They require the jarring loose of of existing systems, innovation, and commitment to success by governments. True recovery lies in getting to the next stage of economic evolution, not borroing from it to prop up the last one.
myerscpa 07:35 15 Jan 12
No more of this confusing talk about "stimulus." It didn't work. We know that since the problem is still here. Let's do something different. How about a $1 trillion public works program to rebuild tangible infrastructure. We would finance this program with new bonds called "Build American Bonds." Holders would be able to exempt up to $5,000 in interest income from these bonds as long as they are part of the 99 percent.
The Congress in turn would demand that the President certify that all proceeds are going to public infrastructure projects and none of the "Build America Bond" proceeds are going to wasteful government spending or failed stimulus projects.
The President should go around the country and ask the people if they want to build our way out of our problems or goof off on wasteful government spending. I am sure the people will return the correct answer.
pshakkottai 09:32 15 Jan 12
re: myerscpa 07:35 15 Jan 12 Govt spending is not wasteful! Govt spending supports the WHOLE economy
. Governments are not constrained by the amount of money they collect to spend.The gold standard does not exist anymore for sovereign money governments which create money.
Public schools, public libraries, public transportation, public hospitals, public parks, public museums, public recreation, public universities, etc are national investments and are entirely affordable. The debt problem is a red herring. For example, if a person owes a mortgage of $350,000 on an annual income of $70,000 should he worry about his mortgage to income ratio = 500%? The US debt( Cumulative from 1800 to2011) to GDP(per year) is at 100% (meaning one year).
Income taxes play a minor role in macroeconomics. It has a role in income equality and inflation control.
Govt "debt" is the same as private wealth. This is a fact: Two key equations in economics which apply to any system of govt, socialism, capitalism or communism,...:
a) Federal Deficits – Net Imports = Net Private Savings.
b) Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports.
The states of USA and individuals have to live within their means. They do have a debt problem because they are users of currency and can't create any and not stray too far from balanced budgets.
All banks create money every time a loan is made. This is the fractional reserve (uncontrolled at the moment) banking. California is in the austerity mode because it does not have monetary sovereignty, does not have a state bank and can spend only what it collects if federal govt enforces austerity on it.
USA has no problem creating more dollars and solving the problem except for the dysfunctional congress and their economic ignorance and incessant "debt hysteria." The GDP is equal to 5 times govt spending.
. For numerical proof see
http://pshakkottai.wordpress.com/2012/01/14/debtgdp-yr-and-govt-spendingtax/
http://pshakkottai.wordpress.com/2011/10/16/us-gdp-vs-govt-spending-2/
myerscpa 10:32 15 Jan 12
re: pshakkotai. I think you missed the scaffolding of sarcasm upon which my comment was based. I am advocating more government debt to finance more government spending. But the terms you use to advocate this program can either attract or repel public support.
However, I would make a point that borrowing a trillion dollars to build a trillion dollars worth of public assets is different than funding a trillion dollars of public consumption. If you build public assets, then you increase over time the marginal productivity of labor everywhere in the economy -- both public and private productivity. This would help turn around the long-term decline in median real wages -- that is the squeeze that Mr and Mrs Middle Class have found themselves in for the past decade or longer.
I would answer the question: how many trillions of dollars should we spend upon public infrastructure by saying as many trillions of dollars as it takes to get that median marginal productivity increasing again. I suspect one trillion dollars simply won't do it.
The public debate is backwards: people complain about too much public debt, but they really should be complaining about too little public investment.
pshakkottai 12:06 16 Jan 12
re: myerscpa 10:32 15 Jan 12
Sorry I missed the sarcasm. I agree with you.
PROCYON 03:30 16 Jan 12
The erstwhile semblance of balance in institutions that had built the world order and its aesthetic principles have long been marauded by the self-delusion that the pursuit of self-interest can aggregate to a greater common good; like envy it has not and as stakes have grown so has the loss of balance that societies need to prosper. Common good has suffered.
Procyon Mukherjee
rebentisch 07:25 18 Jan 12
I don't see a real problem here. The crisis would be useful to tighten the economic governance of the European Union.
gamesmith94134 07:08 20 Jan 12
Gamesmith94134: Does Austerity Promote Economic Growth?
In answering the question of “Does austerity promote growth? Of course, it does not. There is no abstract theory that can predict how people will react to an austerity program; and I agree with Guarjardo and others on the results that governments adopted the austerity program tended to be followed by hard times. What does the austerity program mean? It is only the atmospheric perception on the search of the bottom of what or how people lives; it does not promote growth but it show more of the competitiveness in mere opened grounds.
When the story my friend told me of the donation to a college was a bad idea, because the college would engage programs available for its infrastructures, students and professors. It demands perpetuity to fit their budgets in growing. Often, the crisis situation arrives after the expansion of the donor’s buildings or library, or if the donors stopped their offerings; the fee will go up and a budget crisis will arise, especially more of the millionaire professors arrive with their BMW, and the student are going the other way with heavy debts. It is all psychological and economical under the spells of human behavior since most of the administrators and the budgets are not seasonally adjusted or commercially leveraged. It is why most our politicians are reluctant to follow well with the austerity program or obey to cutting the budget because they are not disciplined with the business cycle based on the competitiveness to growth; and they may not understand how the zigzags make the world goes around.
I can understand Mr. Robert J. Shiller may scales the growth on the projective on the economy; since the present austerity programs are not servicing the growth. However, the austerity program enforced to search the bottom line of productivity, the reactions of the politicians and its populace will make a distinguished level of tolerance for the excessiveness and suffering within the system or its governance allows. In addition, such deleverage reestablishes the essences of the missing elements on normalcy of the business cycle or risk factors like interest rates, currency exchanges. When the sovereignty debts created the imbalance crisis by liquidity and solvency; and they indicate the budgetary measures is derailing from the business cycle and becoming political at a sovereignty level. Economy may not grow under the budgetary enhancement as much of the Keynesians believe. It is because growth comes after the business cycle and not even at the level of monetary liquidity or solvency that ECB or FED can project at its continuance of growth. Zigzag make a better search on the bottom line, and growth only comes after.
May the Buddha bless you?
reddog 09:58 20 Jan 12
Prof. Stiglitz,
Your gentle phrase "we will be lucky if..." is a paraphrase of President Obama's statement to the bankers when he said he was the only thing standing between them and the pitchforks. Karl Marx said he supported 'free trade' because that would result in the ‘workers revolution’ even sooner. It's here. When the Kochs meet the vets, they’ll pray for the return of the silly street people. Civility is always optional in civil disobedience.
Adam Smith said Capitalism "wrapped all the vices of mankind in the mantle of necessity". The Keno runner in Vegas never heard of Smith and didn't care. She owned a million dollars worth of town houses. They were increasing in value so fast the salesman was selling her a new one every week based on her increased equity in the one she bought last week.
The salesman was raising the price because he and his friends made a fixed percentage on a rising value and Countrywide was screaming at the salesman for more paper because Goldman was bundling junk and selling it for gold because the debt was collateralized and the value of the collateral was increasing while the debt was fixed and the interest rate was floating based on a formula of hidden variables.
The Vegas salesmen were looking askance at one other while Goldman’s bond salesmen were exchanging black-humored e-mails. Meanwhile, the Deutsche Bank salesman was begging for another billion dollars so he could short everything his boss and Blankfein were buying but no one would loan him any money because during a press conference, W had just said “lots of people can’t buy a house because they don’t have any money so we’re going to loan them the money for the down payment”.
Hearing that, the salesmen and brokers all shrugged their shoulders and went back to selling. What could go wrong?
The Vegas salesman called the Keno runner.
What’s GDP right now? Not 14 trillion probably but still pretty good. So your statment about resuming growth is not going to be ‘normal growth’, linear growth, but ‘exponential growth’. We all know about that. We also have known since the invention of chess that it will take all the wheat in the world to fill up a chess board so maybe during this crisis we might have a good chance to start in a new direction; ‘sustainable growth’.
Since everything is about people and the various techniques to circulate money through everyone’s hands, maybe we should start a little experiment here and there to try out different types of ‘service industries’. That’s what ‘sustainable growth’ is, isn’t it?
Manufacturing will certainly become two parts of ‘recycle’ and ‘replace’ so there’s not much growth there.
A lot of people could work in the 3 E’s of ‘Entertainment’, ‘Education’, and ‘Enformation’, no? Would they fill the requirements of ‘sustainable growth’?
Keynes said Capitalism was a ‘necessary evil’ until we had generated a ‘sufficiency of goods’ to eliminate the grinding poverty of 19th century London. This latest bust has certainly fit Adam Smith's description of a nation involved in all Mankind’s vices.
Maybe we could start back in a new direction? Maybe we should dump Capitalism before we lose Democracy.
GDP 02:22 20 Jan 12
...repeating one of the earlier respondents:....austerity is stimulus?...NO...yet these Hayekians persist in this illusion, willfully ignoring facts that counter this meme.... My advice.....in defense of liberty......don't be so extreme.....Burma Shave
bukdow 06:18 20 Jan 12
Mr. Stiglitz,
Generally I find your assessments to be fair and realistic. However, I think (hope) you are painting a picture in this article that contains too much doom and gloom.
Certainly, there are people who have been permanently damaged by the recent economic activities due to utter stupidity and piggishness on the part rapacious capitalists that are completely disconnected from the reality of the average person. And, unbelievably, the Republicans trot out Mitt Romney as their nominee. However, I don't think everything is going down the tubes. Frankly, for thos e of us lucky enough to be gainfully employed (Thank God), the economy may very well start looking up, at least the stock market, that is.
America has finally changed. The blue-collar manufacturing jobs are all but gone. Moving forward, America will consist of educated professionals and those employed in the service industry. It is sad. A country that led the world, mainly due to gainfully employed citizens who saw a bright future for themselves, has been gutted by a few who place profits above all lese and rationalize destroying peoples' lives as if the stepped on an ant.
janelasdedeus 10:21 24 Jan 12
Why is it that no one needs to actually read articles by Professor Stiglitz because we all know exactly what he will have to say? I always give it a try anyway... just because I am a psychological optimist. Sigh! Maybe someday he will have an epiphany and realise that a society can never prosper if an ever increasing majority of its citizens are living off the production of an ever decreaing minority. Maybe the old "stimulus" strategy had some beneficial effect back in the days before most of our consumer goods were made in China, but throwing lots of cash at public service workers in today's world only stimulates the foreign economies who produce the goods we all consume. Somehow, we must become more competitive in the global economy by decreasing the cost of our productive labor. Until we do, any stimulous is just pouring money down a rat hole.
Josh2082 07:17 30 Jan 12
My idealist side agrees almost 100% with Mr. Stiglitz.
My pragmatic side laments the difficulties surrounding how to get there.
As long as political parties in the US focus more on retaining power and less on governing, as long as parties in Europe flail about casting blame anywhere but inwards, as long as those individuals and nations still managing to profit off of the current system maintain positions that allow them to influence policy change I don't see a path out of this current tangle.
William_Bjornson 01:34 31 Jan 12
William_Bjornson 01:46 31 Jan 12
Excellent analysis by MSNBC Business of Barron's analysis of Ron Paul's "highly successful" long term investment strategy: money.msn.com/investing/latest.aspx?post=d5620789-668c-47ad-8ff0-0d915c45c0de
lukelea 04:57 03 Feb 12
Apart from the problem of climate change I agree with everything you say. I also worry about the stability of China and what she might do if her export led growth strategy falters.
AnumakondaJ 02:40 07 Feb 12
Excellent article on global economic rebalancing.
Dr.A.Jagadeesh Nellore(AP),India
E-mail: anumakonda.jagadeesh@gmail.com
failureofreality 05:08 13 Jan 12
Although the analysis by Dr. Stiglitz of the economic problems facing us is correct, his proposed remedies are very unlikely. No one changes their behavior unless forced to do so.
The people responsible for the economic calamity remain in power. They will not voluntarily go away. After all, they are successful. Why would they want to change?
It will take a depression and many years of suffering to remove them from power. The solutions to our problems will be found by a younger generation that is not responsible for the current calamity. The generation in power is incapable of solving our problems. They are part of the problem, not part of the solution.