AUSTERITY, AND A NEW RECESSION?
"Politics Is at the Root of the Problem"
by Joseph Stiglitz — 23.04.2012
Austerity policies are driving us towards a double-dip
recession, warns US economist Joseph Stiglitz. He sat down with Martin
Eiermann to discuss new economic thinking and the influence of money in
politics.
The European: Four years after the
beginning of the financial crisis, are you encouraged by the ways in
which economists have tried to make sense of it, and by the ways in
which those insights have been taken up by policy makers?
Stiglitz: Let me break this down in a slightly different way. Academic
economists played a big role in causing the crisis. Their models were
overly simplified, distorted, and left out the most important aspects.
Those faulty models then encouraged policy-makers to believe that the
markets would solve all the problems. Before the crisis, if I had been a
narrow-minded economist, I would have been very pleased to see that
academics had a big impact on policy. But unfortunately that was bad for
the world. After the crisis, you would have hoped that the academic
profession had changed and that policy-making had changed with it and
would become more skeptical and cautious. You would have expected that
after all the wrong predictions of the past, politics would have
demanded from academics a rethinking of their theories. I am broadly
disappointed on all accounts.
The European: Economists have seen the flaws of their models but have not worked to discard or improve them?
Stiglitz: Within academia, those who believed in free markets before the
crisis still do so today. A few people have shifted, and I want to give
credit to them for saying: “We were wrong. We underestimated this or
that aspect of our models.” But for the most part, the response was
different. Believers in the free market have not revised their beliefs.
The European: So let’s take a longer view. Do you think that
the crisis will have an effect on future generations of economists and
policy-makers, for example by changing the way that economic basics are
taught?
Stiglitz: I think that change is really occurring with the young people.
My young students overwhelmingly don’t understand how people could have
believed in the old models. That is good. But on the other hand, many
of them say that if you want to be an economist, you still have to deal
with all the old guys who believe in their wrong theories, who teach
those theories, and expect you to believe in them as well. So they
choose not to go into those branches of economics. But where I have been
even more disappointed is American policy-making. Ben Bernanke gives a
speech and says something like, there was nothing wrong with economic
theory, the problems were a few details in implementation. In fact,
there was a lot wrong with economic theory and with the basic policy
framework that was derived from theory. If your mindset is that nothing
was wrong, you will not demand new models. That’s a big disappointment.
The European: There seemed to have been quite a bit of
disagreement among Obama’s economic advisers about the right course of
action. And in Europe, fundamental economic principles like the absolute
focus on GDP growth have finally come under attack.
Stiglitz: Some American policy-makers have recognized the danger of “too
big to fail,” but they are a minority. In Europe, things are a bit
better on the rhetorical side. Influential economists like Derek Turner
and Mervyn King have recognized that something is wrong. The Vickers
Commission has thoughtfully re-examined economic policy. We have nothing
like that in the United States. In Germany and France, the financial
transactions tax and limits to executive compensation are on the table.
Sarkozy says that capitalism hasn’t worked, Merkel says that we were
saved by the European social model – and they are both conservative
politicians! The bankers still don’t understand this, which explains why
we still see the head of the European Central Bank, Mario Draghi,
arguing that we have to give up the welfare system at a time when Merkel
says the exact opposite: That the social model kept us going when the
central banks failed to do their regulatory job and used politics to
change the nature of our societies.
The European: How have your own convictions been affected by the crisis?
Stiglitz: I don’t think that there has been a fundamental change in my
thinking. The crisis has reinforced certain things I said before and
shown me how important they are. In 2003, I wrote about the risk of
interdependence, where the collapse of one bank can bring about the
collapse of other banks and increase the fragility of the banking
system. I thought it was important, but the idea wasn’t picked up at the
time. The same year we looked at agency problems in finance. Now we
recognize just how important those issues are. I argued that the real
issue in monetary economics is about credit, not money supply. Now
everybody recognizes that the collapse of the credit system brought down
the banks. So the crisis really validated and reinforced several
strands of theory that I had explored before. One topic that I now
consider much more important than I did previously is the question of
adjustment and the role of exchange rate systems like the Euro in
preventing economic adjustment. A related issues is the linkage between
structural adjustment and macroeconomic activity. The events of the
crisis have really induced me to think more about them.
The European: The financial transaction tax seems to have
died a political death in Europe. Now, economic policy in Europe seems
largely dominated by the logic of austerity, and by forcing other
European countries to become more like Germany.
Stiglitz: Austerity itself will almost surely be disastrous. It is
leading to a double-dip recession that could be quite serious. It will
probably make the Euro crisis worse. The short-term consequences are
going to be very bad for Europe. But the broader issue is about the
“German model.” There are many aspects to it – among them the social
model – that allow Germany to weather a very big dip in GDP
by offering high levels of social protection. The German model of
vocational training is also very successful. But there are other
characteristics that are not so good. Germany is an export economy, but
that cannot be true for all countries. If some countries have export
surpluses, they are forcing other countries to have export deficits.
Germany has taken a policy that other countries cannot imitate and tried
to apply it to Europe in a way that contributes to Europe’s problems.
The fact that some aspects of the German model are good does not mean
that all aspects can be applied across Europe.
The European: And it does not mean that economic growth satisfied the criteria of social fairness.
Stiglitz: Yes, so there is one other thing we have to take into account:
What is happening to most citizens in a country? When you look at
America, you have to concede that we have failed. Most Americans today
are worse off than they were fifteen years ago. A full-time worker in
the US is worse off today than he or she was 44 years ago. That is
astounding – half a century of stagnation. The economic system is not
delivering. It does not matter whether a few people at the top
benefitted tremendously – when the majority of citizens are not better
off, the economic system is not working. We also have to ask of the
German system whether it has been delivering. I haven’t studied all the
data, but my impression is no.
The European: What do you say to someone who argues thus:
Demographic change and the end of the industrial age have made the
welfare state financially unsustainable. We cannot expect to cut down on
our debt without fundamentally reducing welfare costs in the long run.
Stiglitz: That is absurd. The question of social protection does not
have to do with the structure of production. It has to do with social
cohesion or solidarity. That is why I am also very critical of Draghi’s
argument at the European Central Bank that social protection has to be
undone. There are no grounds upon which to base that argument. The
countries that are doing very well in Europe are the Scandinavian
countries. Denmark is different from Sweden, Sweden is different from
Norway – but they all have strong social protection and they are all
growing. The argument that the response to the current crisis has to be a
lessening of social protection is really an argument by the 1% to say:
“We have to grab a bigger share of the pie.” But if the majority of
people don’t benefit from the economic pie, the system is a failure. I
don’t want to talk about GDP anymore, I want to talk about what is happening to most citizens.
The European: Has the political Left been able to articulate that criticism?
Stiglitz: Paul Krugman has been very strong on articulating criticism of
the austerity arguments. The broader attack has been made, but I am not
sure whether it has been fully heard. The critical question right now
is how we grade economic systems. It hasn’t been fully articulated yet
but I think we will win this one. Even the Right is beginning to agree
that GDP is not a good measure of economic progress. The notion of the welfare of most citizens is almost a no-brainer.
The European: It seems to me that much of the discussion is still about statistical measurements – if we’re not measuring GDP,
we’re measuring something else, like happiness or income differences.
But is there an element to these discussions that cannot be put in
numerical terms – something about the values we implicitly bake into our
economic system?
Stiglitz: In the long run, we ought to have those ethical discussions.
But I am beginning from a much narrower base. We know that income
doesn’t reflect many things we care about. But even with an imperfect
indicator such as income, we should care about what happens to most
citizens. It’s nice that Bill Gates is doing well. But if all the money
went to Bill Gates, the system could not be graded as successful.
The European: If the political Left hasn’t been able to fully articulate that idea, has civil society been able to fill the gap?
Stiglitz: Yes, the Occupy movement has been very successful in bringing
those ideas to the forefront of political discussion. I wrote an article
for Vanity Fair in 2011 – “Of the 1%, by the 1%, for the 1%” – that
really resonated with a lot of people because it spoke to our worries.
Protests like the ones at Occupy Wall Street are only successful when
they pick up on these shared concerns. There was one newspaper article
that described the rough police tactics in Oakland. They interviewed
many people, including police officers, who said: “I agree with the
protesters.” If you ask about the message, the overwhelming response has
been supportive, and the big concern has been that the Occupy movement
hasn’t been effective enough in getting that message across.
The European: How do we move from talking about economic
inequality to tangible change? As you said earlier, the theoretical
recognition of economic problems has often not been translated into
policy.
Stiglitz: If my forecast about the consequences of austerity is correct,
you will see a new round of protest movements. We had a crisis in 2008.
We are now in the fifth year of crisis, and we haven’t solved it.
There’s not even a light at the end of the tunnel. When we come to that
conclusion, the discourse will change.
The European: The situation needs to be really bad before it will get better?
Stiglitz: Yes, I fear.
The European: You recently wrote about the “irreversible
decay” of the American Midwest. Is this crisis a sign that the US has
begun an irreversible economic decline, even while we still regard the
country as a potent political player?
Stiglitz: We are facing a very difficult transition from manufacturing
to a service economy. We have failed to manage that transition smoothly.
If we don’t correct that mistake, we will pay a very high price.
Already, the average American is suffering from the failed transition.
My concern is that we have set in motion an adverse economics and an
adverse politics. A lot of American inequality is caused by
rent-seeking: Monopolies, military spending, procurement, extractive
industries, drugs. We have some economic sectors that are very good, but
we also have a lot of parasites. The hopeful view is that the economy
can grow if we rid ourselves of the parasites and focus on the
productive sectors. But in any disease there is always the risk that the
parasites will devour the healthy body parts. The jury is still out on
that.
The European: Have we at least understood the disease well
enough to prescribe the correct therapy? Especially with regard to
policy-making and the Euro crisis, there seems to be a lot of shooting
into the dark.
Stiglitz: I think the problem is not a lack of understanding by
dispassionate social scientists. We know the basic dilemma, and we know
the effect of campaign contributions on policy-makers. So we are facing a
vicious circle: Because money matters in politics, that leads to
outcomes in which money matters in society, which increases the role of
money in politics. You have more gerrymandering and more disillusionment
with parliamentary politics.
The European: Has politics become too focused on outcomes,
and is it not sensitive enough to the processes that lead to those
outcomes? The bedrock of democracy seems to hinge on the avenues for
participation, not on the effectiveness of particular policies.
Stiglitz: Let me put it this way: Some people criticize by saying that
we have become too focused on inequality and are not concerned enough
about opportunity. But in the United States, we are also the country
with the biggest inequality of opportunity. Most Americans understand
that fraud political processes play in fraud outcomes. But we don’t know
how to break into that system. Our Supreme Court was appointed by
moneyed interests and – not surprisingly – concluded that moneyed
interests had unrestricted influence on politics. In the short run, we
are exacerbating the influence of money, with negative consequences for
the economy and for society.
The European: Where is change rooted? In parliament? In academia? In the streets?
Stiglitz: You look in the streets and a little bit in academia as well.
When I say that the major thrust of the economics profession has
disappointed me, I need to qualify that statement. There have been
groups that push new economic thinking and challenge the old models.
The European: You have written that the challenge is to
respond to bad ideas not with rejection but with better ideas. Where is
the longest and strongest lever to bring new economic thinking into the
realm of policy?
Stiglitz: The diagnosis is that politics is at the root of the problem:
That is where the rules of the game are made, that is where we decide on
policies that favor the rich and that have allowed the financial sector
to amass vast economic and political power. The first step has to be
political reform: Change campaign finance laws. Make it easier for
people to vote – in Australia, they even have compulsory voting. Address
the problem of gerrymandering. Gerrymandering makes it so that your
vote doesn’t count. If it does not count, you are leaving it to moneyed
interests to push their own agenda. Change the filibuster, which turned
from a barely used congressional tactic into a regular feature of
politics. It disempowers Americans. Even if you have a majority vote,
you cannot win.
The European: We’re looking at six months of presidential
campaigning. The role of money has been embraced by both parties.
Campaign finance reform seems rather unlikely.
Stiglitz: Even the Republicans have become more aware of the power of
money by seeing how it influenced and distorted the primaries. The
outcomes are not what the Republican party establishment had hoped for.
The disaster is becoming clear – but that will not lead to immediate
remedies. Those who become elected depend on that money. It will require
a strong third party or civil society to do something about this.
About the Author
Joseph Stiglitz won the Nobel Prize in economics in 2001 for his work on information asymmetry in financial markets. Stiglitz served as senior economist at the World Bank and, from 1993 until 1997, as economic adviser to President Clinton. In 2009, he co-founded the Institute for New Economic Thinking (INET). He teaches at Columbia University.
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