Monday, October 3, 2011

Stiglitz on the state of the global economy and possible solutions

Here is a link to Stiglitz's interesting presentation (video recording) held last week at the World Bank.

This is what he said (quoted at lenght from the World Bank's page):

"Stiglitz made no bones about the sobering message he came to deliver: government efforts to fix US and European banks are urgently needed, but won’t be enough to rekindle growth. Rising inequality, high oil prices, globalization and excessive savings in certain countries hint at structural problems that run much deeper.

But most importantly, the US and global economy are undergoing a massive transformation from manufacturing to services, said Stiglitz, and so long as Americans don’t have the skills needed in the new services-driven world, unemployment will persist.

Stiglitz pointed out that productivity gains in manufacturing have outpaced overall demand for labor in the sector, which means jobs will need to be shed and workers are facing long-term joblessness. The US no longer has a comparative advantage in manufacturing, said Stiglitz, so manufacturing jobs will certainly move to other countries.

“A similar thing happened during the Great Depression in the US,” said Stiglitz. “In the late 19th century, agricultural productivity increased, and so, a smaller percent of the population was needed to feed the rest of the country.” As a result by the 1930s, many agriculture workers were “trapped” in a declining sector. This triggered an economic downturn, and a massive banking and financial crisis soon followed.

More than the New Deal, the demand-inducing role of the US government during the Second World War ultimately pulled America out of the depression. During this period, the government stimulated the economy by spending massive amounts in numerous priority areas, including training workers and preparing service men and women for the workforce of the future through incentives like the GI Bill.

Since this stimulus was huge, and designed to tackle underlying structural problems, the impact on the economy was positive for the long-run.

Stiglitz believes a similar intervention by the government is needed now. Put simply, government needs to increase demand by tackling underlying structural issues. This includes raising taxes on the very rich (those who make over $1 million a year) and encouraging a shift within the labor force from manufacturing to services by increasing support for the health and education sectors.

Well-designed tax and expenditure programs that keep the US budget balanced could also drive economic growth, said Stiglitz. By encouraging, or “crowding in” private investment, public sector projects can provide an urgently needed boost at a time of sagging demand and the threat of recession.

This is particularly the case now, with the Federal Reserve committed to keeping interest rates at close to zero and US unemployment remaining persistently high. Today, one in six Americans can’t get a full time job.

Stiglitz laid out other proposals for designing an effective government-led stimulus plan:

Finish fixing the financial system by bringing it back to its core mission – lending rather than dealing with complex derivatives in secondary markets.

Promote investment in public sector projects.

Channel savings from East Asian and other “surplus” countries to those countries that need to undertake investment projects.

Pursue a green-growth strategy.

Despite this list of options, Stiglitz remained dubious about the likelihood of any of them being implemented.

“These are a few things I would do if I was running the government without a Congress, but what I am suggesting is what I think we could do, not something that is politically likely.”