Transcript Participation, Growth, and Equity: the Global Economy in a Time of

PARTICIPATION, GROWTH,
AND EQUITY:
THE GLOBAL ECONOMY IN A TIME
OF CRISIS AND CHANGE
Joseph E.
Stiglitz
Oaxaca
Oct 27, 2011
FROM TUNISIA TO THE INDIGNADOS TO
OCCUPY WALL STREET
 Protests are no surprise
 Real surprise is they didn’t come sooner
 OWS numbers may be small, but many share their views
 The market is unfair
 “We are the 99%”
 Inequalities not justified by relative contributions (old fashioned theory of
“marginal productivity theory”)
 Inequities major complaint in each of the protests
 The political system is unfair, has been captured by the 1%
THE MARKET HASN’T WORKED
LIKE IT SHOULD
 Competitive theory:
 Profits are supposed to be zero
 Supply is supposed to equal demand
 In practice
 High unemployment
 Credit not available, even for good borrowers
 Banks make large profits, use market power over the payments
system, engage in predatory lending
 In crisis, we socialized losses while allowing the
privatization of gains
THE MARKET HASN’T WORKED
LIKE IT SHOULD
 We have homeless people and empty homes
 Millions of Americans have lost their homes
 We have vast unmet needs and underutilized resources
 Retrofitting the global economy for global warming
 Investments in infrastructure
 Needs for development
 Understandable why young people in Spain were indignant
 Youth unemployment rate more than 40%
OVERREGULATION IS NOT THE PROBLEM
 Rather, we don’t have the right regulations
 In any society, individuals can take actions that harm others
 Preventing such harm (externalities) is one of the main objectives of
regulation
 In the US protest, megaphones prohibited
 But corporations have unbridled spending to amplify political views
 Banking system is underregulated, which allowed the banks to
impose huge costs on the rest of society
THE POLITICAL SYSTEM HASN’T WORKED
 Banks and their shareholders, bondholders, and bankers were
bailed out
 Those who caused crisis have done well, the rest of society
has suf fered
 Banks bailed out without conditions
 But assistance to ordinary citizens comes with many conditions
 Banks were supposed to use the money to restart lending
 Hasn’t happened -- used the money for bonuses, dividends
 No one held accountable for what went wrong
 Culprits seem to have been rewarded —by the victims
 This was not just an accident—it was a manmade event
BANKS HAVEN’T CHANGED BEHAVIOR
 Predatory lending
 Credit card practices
 Foreclosures—even on people who owe nothing on their homes
 Standard of justice—most of the people thrown out of their homes did
owe money—not acceptable
 Burden of proof changed—guilty until proven innocent
 Robo-signing epitomizes fraudulent and near-fraudulent practices
 Political influence used to stop ef fective reforms
INCOMPLETE REFORM
 Problem of too-big-to-fail worse
 Non-transparent CDS’s continue
 Derivatives continue to be underwritten by US taxpayer
 Capital is still inadequate
 Accounting practices still deficient
 Explains fragility of global credit markets
 Banks know that they can’t trust anyone else —risk of credit markets
freezing
NOT THE WAY DEMOCRACY
IS SUPPOSED TO WORK
 Example: the debate on reform of bank regulation
 Most Americans want banks to be regulated
 But political influence of few banks roughly balanced that of
350 million Americans
 Theory: “median voter” is supposed to be decisive
 In practice, doesn’t seem to be the case
EXPLAINING THE POLITICAL PROCESS
 Campaign contributions
 Lobbying
 Revolving door
 American process: “best government that money can buy”
KEY PROBLEMS
 Persuading voters to vote
 They feel participation won’t make a difference
 Self-fulfilling prophecy
 In 2010 election—youth voter turnout almost same as youth
unemployment rate: a dismal ~20%
 Informing voters on complex issues
 Confusion between household and government finance
 Belief that austerity is the solution
 But public skeptical of experts
 Not surprising: economic experts brought on the recession, and financial
experts couldn’t manage risk
AGENCY ISSUE
 Ensuring that government of ficials act on behalf of citizens
 Information is key—which is why transparency, right-to-know laws are
so important
 Incentives are important—which is why revolving doors are so
dangerous and why campaign finance reform is so important
DESIGNING SYSTEMS OF ACCOUNTABILIT Y
 Always dif ficult
 But especially in areas of “expertise”
 Is independent central bank “right” system?
 Political independence  easier to be “captured” by financial market
 Less independent central banks (like those of India and Brazil)
performed better
 If independent, still could/should be representative
 US Fed was not representative, not transparent —major flaws in governance
which have inflamed popular reaction
DYSFUNCTIONAL DYNAMICS
 Large inequalities can undermine social cohesion
 Which In turn may undermine the political process
 Worry that state will engage in redistributions
 And wealthy are less dependent on public provision of services
 Result: constraints on spending, weakening of government
 Impairing crucial investments in education, infrastructure, technology
 Decaying education, social protection  more inequality
 Contrast with successes in Scandinavia
 GDP is a bad measure, but even on that measure they perform well
 Even the successful East Asian countries had low inequality
 Key to their success
THE WORLD AT THE BRINK
 Unemployment in Europe and America still unacceptably high
 Even 4 years after bubble burst, hundreds of billions spent on banks
 Risk of another financial crisis and another downturn
 2008—US exported toxic mortgages and crisis
 Now Europe is returning the favor
 Europe’s political problems worse than those of the US
 European project was “top down”
 Inadequate participation from citizenry
 Lack of support for “European solution” not surprising
 Evidence that we didn’t do what was needed to be done
 If another financial crisis occurs, won’t be able to take same actions as
last time
 And global coordination that marked last response will be missing
UNDERLYING CRISIS IS ANOTHER
REDISTRIBUTIVE BATTLE
 Resources (human, physical, intellectual, and natural capital)
same as before the crisis
 Though management of crisis may have undermined social capital
 Real output after the crisis—after we eliminate distortions associated
with the bubble—should be even higher than before the crisis
 Key problem—claims on resources exceed resources
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Battle over whose claims are honored
In that battle, all will lose, as wealth gets destroyed
Debt restructuring can make everyone better off
Inflation is a slow process of writing down the “real” debt
But in current environment, neither is likely to happen
Implying extended period of malaise
LONG-RUN PROSPERIT Y REQUIRES
BALANCE OF MARKET AND GOVERNMENT
 Restoring social cohesion
 Creating a “fairer” society
 Necessary to make our economy function better, more stably
 Increasing recognition of link between instability and inequality
(IMF)
 But also necessary to make our politics function better, more stably
 We need to create a more responsive politics, with more inclusive
participation
CREATING A MORE RESPONSIVE AND
INCLUSIVE POLITICAL PROCESS
 Changes in technology have given us new tools
 Changes in technology/information make failures even more
apparent
 Political reforms can change current unfavorable dynamic
 Campaign contributions, mandatory voting, more effective right -toknow laws
 “Reinventing government” to make it more responsive and
accountable
 Public support of media, restrictions on media concentration
POLITICS AND ECONOMICS:
INSEPARABLE
 Politics sets the rules of the game
 Unless the rules are set right, the game is neither ef ficient
nor fair
 And such a political/economic system will not be sustainable