"We Need Longer Term Solutions"

Joseph Stiglitz:

Drink-driving on the US's road to recovery, by Joseph Stiglitz, Project Syndicate: A consensus now exists that America's recession – already a year old – is likely to be long and deep, and that almost all countries will be affected. ...

The United States Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends – by flooding the economy with liquidity... In some ways, the Fed resembles a drunk driver who, suddenly realising that he is heading off the road starts careening from side to side. When the economy starts recovering,... will ...America face a bout of inflation? Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud? ...

I am not sure that there is sufficient appreciation of some of the underlying problems facing the global economy... For a long time,... without American profligacy, there would have been insufficient global aggregate demand. In the past, developing countries filled this role, running trade and fiscal deficits. But they paid a high price, and fiscal responsibility and conservative monetary policies are now the fashion.

Indeed, many developing countries, fearful of losing their economic sovereignty to the IMF – as occurred during the 1997 Asian financial crisis – accumulated hundreds of billions of dollars in reserves. Money put into reserves is income not spent.

Moreover, growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can't spend it all. ...

America's government will, for a time, partly make up for the increasing savings of US consumers. But if America's consumers go from their near-zero savings to a modest 4% or 5% of GDP, then the depressing effect on demand ... will not be fully offset by even the largest government expenditure programmes. In two years, governments, mindful of the huge increases in the debt burden..., will be under pressure to run primary surpluses...

We need not just temporary stimuli, but longer-term solutions. ...

First, we need to reverse the worrying trends of growing inequality. More progressive income taxation will also help stabilise the economy, through what economists call "automatic stabilisers". It would also help if the advanced developed countries fulfilled their commitments to helping the world's poorest by increasing their foreign-aid budgets to 0.7% of GDP.

Second, the world needs enormous investments if it is to respond to the challenges of global warming. Transportation systems and living patterns must be changed dramatically.

Third, a global reserve system is needed. It makes little sense for the world's poorest countries to lend money to the richest at low interest rates. The system is unstable. The dollar reserve system is fraying, but is likely to be replaced with a dollar/euro or dollar/euro/yen system that is even more unstable. Annual emissions of a global reserve currency (what Keynes called Bancor, the IMF calls SDRs) could help fuel global aggregate demand and be used to promote development and address the problems of global warming.

This year will be bleak. The question we need to be asking now is, how can we enhance the likelihood that we will eventually emerge into a robust recovery?

Comments

[paine]

stig
has gall

not only is he
trying to order up
a new
post uncle hegemonic
world order
he wants the damn thing
to have a global central bank
able to issue "world money "
independent of any one or even any small group
of "mighty" national central banks

hell the Security council don't even operate like that

ahh
but wouldn't it be luverly

[Julio]

paine,

"ahh
but wouldn't it be luverly"

If we apply

"First, we need to reverse the worrying trends of growing inequality. More progressive income taxation will also help stabilise the economy"...

to this new world order, doesn't that mean the redistribution has to operate across national borders?

Are we seeing your true colors (red) showing ;-)?

[kthomas]

paine, I agree, but Stiglitz does address problem Numero Uno:

"First, we need to reverse the worrying trends of growing inequality."

[S Brennan]

The best Idea, that could be put in place in a matter of weeks, is to lower the Medicare age 15 years.

This will put money in the hands of people who will spend it...

Why?

Because, suddenly millions [40,000,000.00 without insurance & 80,000,000.00 under insured or about 40%] of Americans will have erased one of their greatest fears with 300-1200 more a month in their pocket to spend.

[Beezer]

Not to be flip, but Stiglitz' description of American consumers fueling the world's economies sounds like the dollar's been a global currency and its flows, so far, have helped the developing countries. The world's a dangerous place afterall, and in crisis, wealth runs to the safest haven it can find. That would be America.

As for reversing growing income disparity trends, America will tackle this problem going forward as a democracy. Good luck with the non-democratic world. They're not really big on sharing power or wealth with the peasants. More inclined to shoot them when they get too uppity. Giving them foreign aide is usually wasted.

Do need major infrastructure investments globally. Hope Stiglitz doesn't mind if we start right here at home before we resume sending our debt overseas because of consumption.

As America gets its economy on sounder footing, and reduces its addiction to oil, its economy will recover and that will help the globe more than any other effort America could make.

The cold started here and the cure will be here first.

[kthomas]

#1 and #2 have my approval.

#3, I have to agree with paine.

[calmo]

Deep pink...Julio...take it from me (neva first off the stop-lights...why are all those people behind me honking?...me and my wheels so collectable prolly.)
I don't know whether I like Felix today wondering aloud why the market is up so far this year or Stiglitz who thinks that we can just change our breakfast cereal now that it's clear it is just sooooo bad for usall...will General Mills expand the menu? "Why-O-Why not" to muss with BDL's line.

[Markel]

More progressive income taxation will also help stabilise the economy, through what economists call "automatic stabilisers".

Progressive taxation in the US could turbo demand. One of the absurdities of the current picture is large aggregations of capital vainly searching for high-return investments that don't exist because the very existence of these aggregations have deprived promising ventures of their potential markets. Hoocodanode?

However, the political forces arrayed against progressive taxes are flat out insurmountable, encompassing federal and state governments, all major media outlets, armies of think-tanks, and much of the academy. Barring collapse, of course.

[lark]

The 'global reserve system' seems to fudge the profound differences in national interest that have given rise to Asian mercantilism and currency pegs.

China didn't accumulate reserves simply to avoid the difficulties exemplified by the 1998 Asian financial crisis.

It accumulated reserves to attract jobs and develop manufacturing. How would a 'global reserve system' change that picture? Would it simply make it harder to 'game the system' via mercantilism and currency pegs? If so, why would it be attractive?

[ken melvin]

Dawning that something's been amiss long afore now.

[robertdfeinman]

Apparently savers can never be on the right side of the economists. When the savings rate dropped to zero this was a bad thing because there wasn't enough being set aside for development.

Now the idea that savings might go up slightly if people get a tax break or other enhancements to their income is a bad thing because it will inhibit development. Which is it?

I still don't understand the artificial distinction between savings and spending. As long as I don't put the money under the mattress I'm spending it on something. I lend it to a bank. Now even if the bank sits on it, as currently seems to be the case, this still cuts down on they amount they would need to borrow from the fed and indirectly increases the amount that the government can spend elsewhere.

Money moves in a circle, there is no such thing as savings, except for dead storage like gold.

Personally I think it would be a good thing to encourage traditional savings, people have been living too close to the edge and have been falling over more frequently recently as they lose their jobs, or homes, or get sick. Putting some aside for a rainy day is prudent.

If one is afraid of the banks hoarding then the response is to change the regulations on banks, not demand the consumers resume risky behavior.

[kthomas]

"If one is afraid of the banks hoarding then the response is to change the regulations on banks, not demand the consumers resume risky behavior."

Hear hear. Not enough people have suffered in this country for the political will necessary for such change. But I whole-heartedly concur.

[Bruce Wilder]

The two big sources of imbalance are:

1.) America's determination to fuel the expansion of its sprawleconomy with imported oil;
2.) America's determination to debt-finance its Wal-Mart shopping, importing manufactured goods from China.

There are links between the real economy and what drives the imbalance in financial flows.

If the U.S. decides that it is going to restructure the economy, and largely stop importing oil (something that will take an enormous effort over something like a 10-year horizon), that would be a big step forward. If America does that, partly out of concern about global warming, I'm fine with that.

The issue of forex values, China's savings rate and export-driven manufacturing investment is going to be harder to tackle, because of the tie to income inequality. The ability of American corporations to engage in labor arbitrage with China, enhanced by overvaluing the dollar, has been subversive of American democracy.

And, China has its own elite, who have benefitted from the dynamic as well, even though, from a global perspective, it has been highly disadvantageous to China. China needs a New Deal even more than the U.S. needs a New New Deal.

[mmckinl]

We need to raise taxes and to close loop holes on the well to do and business. This would also help with the inflation on the other end of the Fed's fire hose liquidity.

Then we could start paying for the two wars and garrisoning of the planet. Until Iraq every war meant tax increases ... Better lat than never.

[kthomas]

"And, China has its own elite, who have benefitted from the dynamic as well, even though, from a global perspective, it has been highly disadvantageous to China. China needs a New Deal even more than the U.S. needs a New New Deal."

Inflamitory! Where's Ms anne?

[Larry]

I agree about the need to think past the crisis, but I wouldn't go where Stiglitz goes.

The old balance was that US consumers bought the world's output, financed by the world loaning money on our houses.

What will the new balance be? Could it be that Chinese consumers will pick up the job, bringing their reserves back down? Will the US have to figure out a bunch of new stuff to export? Will each country have to move to a nearly neutral current account? Something else?

[Stuart Ullman]

"We need to raise taxes and to close loop holes on the well to do and business. This would also help with the inflation on the other end of the Fed's fire hose liquidity." --mmckinl

Raise taxes on the well to do, yes, and make the tax structure more progressive, also very much yes. How about making the FICA taxes progressive? Social Security was supposed to be a "compact between generations", not a retirement savings account. Let's finally admit that completely: remove the earnings cap altogether, and provide a personal exemption so that low income workers pay little or nothing until their incomes rise. According to Mark Zandi's numbers, a payroll tax "holiday" has one of the higher fiscal bangs for the federal buck, so why stop with a holiday? Make it permanent.

But I don't agree that we should raise corporate taxes. I've suggested this in comments on other blogs, and gotten no traction at all on it from my end of the political spectrum. I don't expect to get any here either, but what the heck, I'll boldly go where few liberals have gone before. So as a good liberal, I think we should eliminate corporate taxes. To corporations taxes are just costs like any other, and they are passed through to customers (probably with a mark-up to maintain profit margins), or to employees or input providers. You don't think corporate executives pay those taxes do you? Or corporate board members? Do you think stockholders pay them? The corporate executives decide how to raise money to pay the tax, and they have a personal interest in protecting themselves and the shareholders.

So my feeling is that if we want to tax the wealthy, we should tax them directly. Treat capital gains as ordinary income. Let the Bush tax cuts lapse at the top end. Make SS taxes progressive. But eliminate corporate taxes.

Just a thought.

[Stuart Ullman]

Oh...and I guess I should add that I'm suggesting the elimination of corporate taxes as a part of making the final incidence of taxation more progressive, that is, as part of a long run resolution of our current problems, rather than as a part of the stimulus package. Once again resorting to Mark Zandi's numbers, the fiscal bang for the buck, dollars of GDP increase for each dollar of govenment expense, for reductions of corporate taxes is very small: for a payroll tax holiday, the "Bang for the Buck" number is 1.29; for corporate tax reduction, it's 0.30.

I don't know the ultimate source of Zandi's numbers, but if he's right, the short run stimulus should be heavy on infrastructure spending (1.59), increase in food stamps (1.73), extension of unemployment benefits (1.64), and general aid to State governments (1.36).

Cuts in capital gains (0.37) or corporate taxes (0.30) are pretty limp as short term stimulants.

[don]

Stuart Ullman - you are exactly right - in the long run, owners of capital are unlikely to bear much of the burden of the corporate income tax. However, there is the problem of deferred income to worry about. If you eliminate the corporate income tax, I will incorporate and defer tax on my income by holding it in the corporation. There are ways around this, but it is not as simple as just setting the statutory corporate income tax to zero.
I think that we may see that the income inequality Stiglitz worries about has become smaller when new data comes out.

[Patricia ShannonP]

The problem with exempting companies from taxation is that they often buy, and charge off as business expenses, stuff for their high-paid executives that most of us have to spend our own money for, like computers, expensive lunches and dinners, country club memberships, ball park boxes, etc. Some companies even provide expensive housing for their CEO.

[MattYoung]

The challenge of global warming is easier than we think.

Two things are needed, separate interstate freight from the personal automobile. Second, allow automated delivery from robots cruising residential streets. Then we can stat using ulta-lite automobiles.

If Stiglitz is advocating far reaching investment in automated robots, then we have a winner.

[Larry]

@Stuart - Great idea to kill those corporate taxes! At the same time, eliminate the special treatment of dividends and capital gains, leveling the playing field for all kinds of income.

On FICA, what I think you mean is that we should eliminate FICA as a separate category altogether and just raise the regular income tax rates to compensate (making them more progressive along the way, natch!)

@Patricia - they're already doing exactly what you say, and if you raise corporate taxes higher, they're more likely to do it, because you're talking about "expenses", which corporations already deduct, on the basis of much expensive lobbying, and associated corruption. Let the shareholder pay those taxes directly, based on their individual circmstances.

[Larry]

@Stuart - Great idea to kill those corporate taxes! At the same time, eliminate the special treatment of dividends and capital gains, leveling the playing field for all kinds of income.

On FICA, what I think you mean is that we should eliminate FICA as a separate category altogether and just raise the regular income tax rates to compensate (making them more progressive along the way, natch!)

@Patricia - they're already doing exactly what you say, and if you raise corporate taxes higher, they're more likely to do it, because you're talking about "expenses", which corporations already deduct, on the basis of much expensive lobbying, and associated corruption. Let the shareholder pay those taxes directly, based on their individual circumstances.

[roger]

Robert Heilbron was also for eliminating the corporate tax, I believe. Myself, I think it has its coercive usefulness. I would like the corporate tax become punitive for those corporations, for instance, that continue on paying their upper management 100 to 400 times what the lowest paid employee gets. I'd love to see this malign fixture given the one two approach - much higher margins on individual income tax, and a corporate tax rate that gets higher and higher after the spread between CEO and secretary goes past 20x. This could counter-vail the labor market lock which has so swung the balance of bargaining power to the exec class.

[stunney]

Why are people so scared that 'monetizing the debt' will lead to very high inflation?

Is it because they think that will lead to very big increases in the money supply?

But why should anyone think that increasing the supply of money causes inflation? Some people called monetarists said so and they proved to be wrong, as the 1980s saw an increasing divergence between rates of monetary expansion and rates of inflation.

In any case, increasing the supply of money is quite compatible with falling demand for existing output. The increased cash balances can be used to fund repayment of old debts that were taken on to buy old outputs---the car or vacation you bought last year---and/or to fund the repayment of maturing government securities. That is, increasing the supply of money need not be inflationary if the demand for money (or quasi-money such as Treasury bonds) increases by just as much.

Furthermore, if the relevant debt that is being monetized is owed to foreigners and the supply of money in their own countries is increasing just as much, there is no reason to think that handing them new money to retire the debt will result in them bidding up prices for real output in either our country or theirs, since even when the real rate of return on productive investments was higher than Greenspanized interest rates, these foreign holders of US Treasury securities had chosen to purchase those rather than purchase real outputs.

[paine]

"First, we need to reverse the worrying trends of growing inequality."

here in amerika
inter class inequality yes
intra class..... not so much

[paine]

S Brennan says...
"The best Idea, that could be put in place in a matter of weeks, is to lower the Medicare age 15 years."

i like it !!!!!

[paine]

"If the U.S. decides that it is going to restructure the economy, and largely stop importing oil (something that will take an enormous effort over something like a 10-year horizon), that would be a big step forward"

i agree bruce completely 10 years to
100 % clean self sufficient
norte americano energy production

[paine]

"The ability of American corporations to engage in labor arbitrage with China, enhanced by overvaluing the dollar, has been subversive of American democracy"

bingo

[paine]

"I think we should eliminate corporate taxes"
if you mean the cporporate income tax ...i agree
i'd suggest we convert the apparatus that now collects that tax into a vat tax collector
to replace our present payroll robbery system system

and as to nailing big human wealth
nail it when it is big wealth
and at its ultimo basin
ie
on the strictly up close and personal level

[paine]

don of course is right
we gotta tap the accumulation
ie
a wealth tax on all property and securities
rate and net worth lower limit ???

some combo with enough yield to service our federal debt

[paine]

"If Stiglitz is advocating far reaching investment in automated robots, then we have a winner."

my kinda gizzzzzzmo guy

[paine]

stunney
u got a tiger by the tail

hang on
its a fun ride
if you take it all the way around the track

[hapa]

@bruce wilder: i think, debt-financing and "shopping" are too closely related in loose talk. it's other consumer costs (medical, schooling, taxes, rent, etc) -- services -- and non-living (zombie?) wages that push shopping onto the credit card. shopping could be cut and could be cleaner but wal-mart and china shouldn't take their licks PLUS the FIRE sector's.

[don]

Paine: "we gotta tap the accumulation"
A good start would be to reinstate the inheritance tax, and do so with a will, not the mamby-pamby way we did before, effectively making it a tax on the tax-planning-challenged. I hope we could do it more efffectively than when we tried to tax the 'Economic Benedict Arnolds' - those who expatriated to avoid U.S. income tax. One would think these people would be sitting ducks for Congress - they don't even have a vote. Think again. In a lesson about how much big bucks count, when the dust cleared, we were left with a weak and often ineffectual law.
But I am not hopeful, not with an electorate that was persuaded to accept the elimination of the old inheritance tax.
The U.S. under the Bush Administration also eviscerated international attempts to end tax havens and attendant illegal tax avoidance.

[Winslow R.]

rf wrote: "I still don't understand the artificial distinction between savings and spending. As long as I don't put the money under the mattress I'm spending it on something. I lend it to a bank.

**Bank lending is not savings constrained. Remember leverage ratios hitting 50x? 1000x or 10000000x are possible as long as unregulated hedgefunds and SIVs are allowed to exist.

"Now even if the bank sits on it, as currently seems to be the case, this still cuts down on they amount they would need to borrow from the fed and indirectly increases the amount that the government can spend elsewhere."

**The Fed/Government is not savings constrained either. This gold standard style thinking, not valid in today's day and age. Mr. Feineman you have a large hole in your framework that should be filled.

Read this piece written in 1994:

http://www.moslereconomics.com/mandatory-readings/soft-currency-economics/

says...

"For a long time,... without American profligacy, there would have been insufficient global aggregate demand. In the past, developing countries filled this role, running trade and fiscal deficits. But they paid a high price..."

Now the US is paying a high price. Maybe producing items that can only be loaned, not sold, makes no real economic sense.

[reason]

Winslow R.
Looking at financial flows without considering the underlying real economy (or vice-versa) is often misleading, even thought it is commonly done. It matters of lot, if resources are scarce or not, if the economy is near full capacity or not. I have frequently stated that I think the correct solution to the current debt deflation is to print money and spread it as widely as possible. That doesn't mean I think the same thing makes sense in a full-employment economy where crowding out will be a problem.

[reason]

Larry,
the answer to your question is yes, but what can be done about neo-mercantilism?

[Larry]

@reason - It wasn't a yes/no question!

Neo-mercantilism, just like paleo-mercantilism will always be with us. We just have to keep smacking it down.