Joseph Stiglitz: It WAS the economists, stupid!
Economist Joseph Stiglitz seems a politician’s economist. Unlike those economists that President Harry Truman had so famously railed against with his cry, “For God’s sake, will someone please send me a one-handed economist!” after he had heard one too many of those “well, on the one hand, but on the other hand” formulations, Joseph Stiglitz seems never to have been afraid to say exactly what he thinks about things – and his presentation at the Discovery Leadership Summit in Johannesburg was no exception. J. BROOKS SPECTOR listened to the lecture and then spoke with him afterwards.
Speaking to a full room, Stiglitz examined why the world’s economies are still, for the most part, mired in a long, painfully slow glide path out of the financial crisis of 2008. As a economic critic and policy advisor, Stiglitz has become something of a favourite in places like South Africa, partly from his continued advocacy in support of structural reforms of the big international financial organisations.
In Wednesday’s presentation, he asks why, five years after the collapse of Lehman Brothers, do global prospects still seem precarious? Stiglitz argues that at the core of it is that economic policy makers don’t know how long this condition will last because they don’t know what policies will help.
Stiglitz has been at this game for a while at the very top levels within the US and internationally. He was chairman of the Council of Economic Advisors for Bill Clinton and then he later became a famously contentious chief economist at the World Bank. Together with two colleagues, he won the 2001 Nobel Memorial Prize in economics on issues related to information asymmetries in the economy. Individually and with others, Stiglitz has authored a long list of scholarly as well as more popular articles and studies, as well as a whole shelf of books on political economic and econometric topics, including his most recent book, The Price of Inequality. Inequality is a topic that has become a really serious, even central, issue for him in recent years.
In reviewing the after-effects of the 2008 financial crisis, Stiglitz notes that in the US, growth has been occurring at levels just barely sufficient to cope with the volume of new labour force entrants. But, the long-term unemployed are still there. But what is worse, some 95% of the post-crisis gains have actually accrued to the top one per cent - median income, in fact, remains below 1989 levels. This means the country has effectively endured some two decades’ worth of economic stagnation.
It gets worse still, however. Stiglitz says median income for males is now actually lower than it was four decades earlier, and the level of labour force participation is now down to the levels that pertained some thirty years ago. Years earlier, workers in their fifties used to begin to retire from their jobs at around that point, but the problem has now grown in seriousness due to the changed demographics of the aging society. This man does not pull his punches – with both hands.
Despite this being an economy with relatively low energy prices that should have helped encourage growth, there have actually been weak performances across many sectors, despite the rather better results of the IT sector. But even there, to take one example like Apple, despite that company’s enormous capitalisation, there are actually only about nineteen thousand good, middle class jobs within that company. The rest of the employees are actually to be found in lower-level sales positions. Beyond this, Stiglitz noted wryly, while Apple is also extremely clever with its products, it seems to be even better at finding its way around some clever tax avoidance mechanisms.
Going deeper into the America’s economic circumstances, Stiglitz pointed out that its economy is suffering from this low growth, despite record low interest rates – and thus a situation where borrowing money for company expansion (and job creation) could be seen as virtually costless. As a result, the globe’s number one economy remains “about 15 percent below trend and there is little prospect of catching up any time soon”. Noting that the movement for austerity policies has taken hold in both some European nations as well as in the US, Stiglitz points out that since the financial crisis, the US public sector has actually lost half a million jobs rather than shown growth as a result of government stimulus policies.
Still, things could be even worse in America, Stiglitz argues. Many of Europe’s big nations are showing barely positive growth - and several are still in recession. Such countries are heading into a territory where they have 25% unemployment, and with 50% youth unemployment. Other things being equal, that could be seen as rather fertile ground for revolution. Even Germany’s average growth has only been about 1% per year over the period, and income among the people in Germany in the bottom three deciles has actually been declining.
Turning his sights on the EU, Stiglitz argues that the crux of the problem for them has two parts. It is both the structural arrangements of the euro zone as well as some seriously deficient policy choices. The biggest problem was a political one as austerity policies were advocated for Europe, despite such a choice’s track record of failure over the years. The urgent task, now, is to raise wages and public expenditures. Many of the countries concerned have been pushing export growth, but this growth has been something of chimera. Improvements in trade balances came from cutting imports, rather than improving exports (and, therefore, production growth and with it employment growth).
One specific measure Stiglitz advocates as a structural reform for the euro zone is a banking union that would have the heft to help deal with future credit crunches. There is also a need to mutualise debt. Sadly, Stiglitz says, the European Central Bank now focuses on inflation, even as deflation is the actual disease right now. The real pressing need is for a growth strategy, not the control of non-existent inflation.
Considering the circumstances of emerging markets around the globe, Stiglitz notes that rather than the globe’s big, established economies, the emerging markets have been the world’s main source of strength in the post-2008 world, so far. This has been true in part because China has carried out a serious countercyclical policy. However, the economies of the emerging markets are now slowing down, primarily due to a slowing down of growth in China. Admittedly this is a fall to around 7% per year – a level economic policy-makers in most other economies around the globe would probably sell their collective souls to be able to achieve. However, there will obviously be further repercussions in the future as China has determined to aim for domestic demand, a more equal distribution of the country’s economic gains, and a response to the nation’s growing environmental concerns. Stormy weather, perhaps.
Another element feeding uncertainty about the future, Stiglitz says, is the gradual easing of the US Federal Reserve Bank’s quantitative easing policy. In fact, he says, the Fed has done other things that seem strange, if it had been interested in encouraging lending so as to increase productive capacity that leads to increases in employment. As far as quantitative easing’s impact more broadly, while much of the money did find its way to the emerging market economies, that is now slowing down, as a result of the Fed being focused so strongly on US domestic conditions.
Stiglitz, sometimes a bit of a contrarian vis-à-vis many other mainstream economists, argues that while it is true that market economies are supposed to be efficient because of their markets, in the case of dealing with the economic crisis of 2008 onward, the government wasted its resources in trying to deal with it. The idea was that shipping money to the banks and creating a temporary stimulus package for the economy would do the trick after about eighteen months. Five years later, all is not yet well, however.
In fact, the economy actually was not healthy more than a year before the crisis broke; but the growing housing bubble weaknesses effectively masked the brewing crisis. One thing that should have tipped policymakers off, however, was the fact that the bottom 89% of the nation’s families was consuming 110% of its incomes – something that is clearly not sustainable in the long term.
Now we are sitting with the problem – globally - of large needs that are unmet, but where idle resources are not being put to work. Giant global imbalances are yielding asymmetric responses, thereby producing an insufficiency of demand. Put another way, funds surpluses are not being recycled effectively. Thus, this is actually not a savings glut. Rather, it is a situation where savings are not being put to use for investments for the future. In passing, Stiglitz gave an approving nod to the idea of the proposed Brics bank as a mechanism that could contribute to this.
Of course there is also the problem of the structural transformation of industry as productivity exceeds demand, thereby driving employment down. Further, there is a growing inequality in income distribution in many economies. At one level, this is a moral issue – it undermines democratic politics and leads to a more divided society. But it also weakens an economy. Inequality leads to weak demand and economic bubbles that are only temporary solutions with serious problems of their own.
As an aside, Stiglitz noted this view about inequality is, increasingly, becoming a mainstream view – even within the IMF of all places, he chuckles. Still, Stiglitz notes, some countries are relatively successful in both lowering the inequality of incomes within their borders, even as they are also managing to increase opportunity within their societies. As a conclusion, Stiglitz argues, is that what really matters are both the policies and the politics. It takes both. By contrast, those austerity policies have eviscerated global demand.
Turning to a consideration of South Africa – although he has only been here a few hours, he has been a frequent visitor over the years and clearly stays in touch with people here – Stiglitz says the country is suffering from high unemployment, high inequality, many economic sectors with only limited competition, slow, limited growth in SMMEs, and a weak skills base. On a positive note, however, he noted that it does have a relatively high level of political stability to provide the basis for coping with these important issues.
Nevertheless, as far as policies are concerned, and despite a range of effective policies, the increasingly discredited effort of inflation targeting is still being actively pursued. As Stiglitz says, “Raising rates can raise your exchange rate, it makes your goods less competitive and your exports go down, and imports can flood in and the result of that is jobs get destroyed.” Moreover, he asked whether increases in interest rates will actually even help, especially if the inflation that is being worried about largely derives from external factors like higher global food and oil prices. He says, “Does increasing interest rates do anything about the global price of oil?” (Were you listening, SARB head Gill Marcus?)
Turning his gaze to the African continent as a whole, Stiglitz said it has, on the whole, benefited from the globalised economy. On the up side, there is a new, growing African middle class that comes equipped with growing demands for the goods and services of growing economies. Still, there are risks too. Unless properly addressed, the youth bulge, threats from climate change and the possibilities of deteriorating global conditions now that Africa is becoming ever more open to the world economy presents both opportunities – but also new vulnerabilities.
And so then it is on to prescriptions for turning things around. Stiglitz argued that what is needed now is aggressive use of fiscal policy. Despite the reluctance for this in both the US and the EU nations, it would easily be possible to stimulate these economies to push up demand. And, importantly, it would not even be an expensive proposition right now. For example, in the US the effective borrowing rate is minus 2% for sovereign borrowing.
But macro-economic policies are not enough. Structural policy changes like effective implementation of industrial policy should be considered as an essential part of the picture as well. Stiglitz makes the point that, in effect, all nations already have some form of industrial policy – it might just be the wrong one for the situation they find themselves in. (There is even some off-hand praise for Japanese Prime Minister Shinzo Abe’s new industrial policy efforts on that score to reignite his country’s economy.) In sum, much of the real problem facing many of the globe’s nations, Stiglitz argues, is political in nature. It is a problem of will. And then, hammering away at those central bankers one last time, Stiglitz takes a last shot, arguing that when they focus so ferociously on inflation targeting, they are doing nothing for increasing demand or for addressing the import costs of poor consumers.
After his presentation, the writer caught with him for some further discussion. Asked if his morning’s lecture could be summed up as: “There is no growth; growth is good; and the politicians screwed up.” Stiglitz chuckles and says there’s a bit more to it than that but, in general, “yes, you got it.”
Going to one of the key areas of his work during his long career, Stiglitz is asked whether the Internet has heightened or lessened information asymmetry. Stiglitz responds that, yes, the Internet has been very good for delivering efficient price information for uniform, homogeneous products (basic commodities, for example). However, it has not been very good at delivering more complex, qualitative information such as what is the nature of a job or what is the fit of a particular person for a job. This is something not known until it happens – it represents detailed but qualitative, tacit information. “Our realisation that the Internet wouldn’t be able to convey that information has been important insight. The Internet can do some things well, but it can’t do other things very well.” Perhaps it has even made the asymmetry worse? He adds, “Access to knowledge is changed in ways that are both increasing and decreasing divides. Somebody in Nairobi can have access to a library of the world that they never would have been able to have [in the past]. On the other hand, someone in a Navajo reservation who can’t afford an Internet connection is out of luck in America.”
As far as the idea of the developmental state is concerned, Stiglitz understands that the South African government has embraced that concept – if not yet in practice. Is South Africa able to do that effectively, he is asked? He is, interestingly, very positive on this. “Yes, yes I really do. Partly they have a more sophisticated group of policy makers – here - than East Asia had when they were doing what they were doing. And there’s been forty years more experience. So they are coming to the task [in a] much more sophisticated [way] and with a greater wealth of understanding of what can lead to success and what can lead to failure.” It is easier to fly when you are not the first duck in a V-shaped flock in flight, perhaps. “One of the lessons is that if you have political economy problems, you shape your industrial policy differently” than in Japan. “They will change the modalities…but they will be more aware of the pitfalls.”
As to whether there is sufficient skill among the political class and the technocrats, and the competence to make it stick, Stiglitz argues “There is a lot of political will, a broad consensus, over the basic framework of a developmental state… and they have begun to create layers beneath them that would have the capability of implementing it…. But, no, it is not pre-ordained…. But I have looked at other cases where there has been a modicum of success, Ethiopia, where the state apparatus is much less developed than here…. The government is not trying to replace the business sector, but it is saying, ‘are there some things we could help promote.’ ”
Finally, just before we go back into to the conference, we discuss the question of the dichotomy between proponents of supporting economic growth (and productive efficiencies) versus employment growth as the best way forward. Stiglitz responds that this precise debate is now being joined increasingly in the US as well. He notes, “It had been assumed, until a few years ago, that growth in GDP would lead to growth in employment and standards of living.” Some people would lose jobs, but the economy would instantaneously create new jobs, “That’s the marvel of the market. Today there is growing skepticism about that… and even techno-optimists are beginning to not be so confident…. That’s been the mental model, but now they’re asking whether that isn’t true any longer.” Maybe today’s equivalents of buggy-whip makers are no longer getting jobs in the high-tech equivalents of automobile manufacturing. “And that is where employment-focused growth becomes a re-articulation of what we want to do,” Stiglitz says.
And then both of us go back into the conference to listen to former Governor of the US Federal Reserve Bank Ben Bernanke defend his record, his policy choices, and any doubts or regrets he has from his tenure at the Fed. There aren’t too many, it seems. Instead, Bernanke’s mantra is that they did the best they could with the tools they had, at that dangerous, even precarious moment of the financial crisis. And just as clearly, Stiglitz does not entirely concur with that high mark. DM
- Joseph E. Stiglitz University Professor at Stiglitz’ own website
- No Signs U.S. Catching Up With Growth Trend, Stiglitz Says at Bloomberg
Photo: Nobel Laureate in economics and former World Bank chief Joseph Stiglitz speaks to the media after his lecture "The Price of Inequality" at the Center for The New Economy Annual Conference at a hotel in San Juan, February 21, 2014. REUTERS/Ana Martinez