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Monday, January 15, 2007

An Interview with Joseph Stiglitz

Here are parts of an interview with Joseph Stiglitz from AlterNet:

Globalization Has Increased the Wealth Gap, by Terrence McNally, AlterNet: ...

You write, "...Economists believe incentives matter. There are strong incentives -- and enormous opportunities -- to shape political processes and the economic system in ways that generate profits for some at the expense of the many." Not news to a lot of us, but can you say a few words about that?

JS: ...[E]conomic globalization has outpaced political globalization. Because we are more interdependent, there's a greater need to take collective action and work together. But our political institutions and our mindsets have not really kept pace. We do have certain international political institutions, but they are very removed from democratic processes.

The World Trade Organization and the like --?

JS: Exactly. There's been a heavy engagement in these institutions by the multinational corporations who know how to shape the policies in ways that benefit themselves.

The WTO was basically created by them, wasn't it?

JS: Not really. The idea that you would have a rule of law in international trade is a very old idea, and actually ...

-- not the notion perhaps, but it's always seemed to me that the system of secret tribunals, for instance, in which a corporation is basically able to take a government to court, was set up to serve the multinationals.

JS: Very much so. But I want to point out that this is not inherent in globalization. The idea that a rule of law would govern international trade relations is a very important idea that many idealists thought was good. Back in the '20s one of the factors that contributed to the Great Recession was a series of trade wars, and one of the ideas behind the establishment of the WTO was to try to prevent that from ever happening again.

But you're exactly right; the agenda got seized. ...

If a multinational's agreements within the WTO don't play out as planned, then they switch to bilateral ones, right?

JS: Exactly, and there the imbalance of power is even greater than in the multilateral context. So the United States is making agreements with small countries like Qatar or Chile. The good news is that none of them have involved a significant fraction of global trade. But for the people of these particular countries, these agreements have potentially been a disaster.

I was having dinner the other night with one of the main trade negotiators of the Morocco agreement. He was opposed to it, and pointed out it was hardly a negotiation. The United States made demands, which Morocco had to either accept or reject. Morocco was hopeful that signing it would at least lead to a burst of new growth, but it hasn't. All it did was reduce access to AIDS medicines.

Changing subjects, what is your take on the potential economic crisis facing the United States at this time -- the enormous amount of debt we carry as households and as a nation, our trade and budget deficits, the extent to which we're in hock to China and a few other countries? Some of your peers, Paul Krugman among them, are alarmed, but it seems under the radar to most Americans. How serious do you think this is, and if you have to guess, how do you think it's going to play out?

JS: I'm very strongly in agreement with Paul Krugman's analysis. I think we are in a precarious position. We might be lucky and wander our way through this mess. There is a significant probability, however, that global interest rates could rise. If that happened, households with a large amount of debt would find it very difficult to meet their mortgage payments, and home prices would go down, which would lead to a reduction in consumption. Last year Americans consumed more than their income, something that is obviously not sustainable. The only way they could get away with it was by taking out money from their houses. But if home prices go down, they won't be able to do that any more. So there is a significant risk of a large economic slowdown. And government, by piling on so much debt and having such a large deficit, does not have much room to maneuver.

In terms of housing, an awful lot of people bought or refinanced with innovative mortgages over the last few years. Some of their five-year balloon payments or rate changes are going to happen in 2007.

JS: That's what I'm worrying about too. When it comes to refinance, if interest rates are high, they're going to be in a difficult squeeze. They could almost pray for a global slowdown to keep interest rates low, but that's not good for the American economy either.

Though some numbers say the economy is healthy, growth has not been shared...

JS: I would emphasize that the growth is not widely shared. The income of the median American household -- half the people are richer, half are poorer -- is lower today than it was five years ago. More broadly, for 30 years people at the bottom have seen their real wages not only stagnate but actually fall. Part of that has to do with globalization, but only part of it. ...

You're not only saying globalization is not the problem, but also that market forces are not the problem. It's really comes down to their wise use.

JS: Exactly. The primary lesson of economics is that incentives are important. Markets don't always provide the right incentives, so in those cases you have to reshape them. ...

Finally, how would you deal with the enormous power of multinational corporations?

JS: Corporations have brought forth many of the benefits of globalization, and I should make clear that there have been benefits. Some of the countries of the world, China and India, for example, have been growing very rapidly. ... Millions of people have moved out of poverty as a result.

Corporations have been an important vehicle for the transfer of technology and access to global markets that have improved the lives of people in these countries. The corporations also are a source of a lot of the problems. When they take natural resources out of countries, they often leave environmental devastation behind. They're often associated with bribing governments and contributing to corruption.

Here again, one of the simple ideas is to try to make incentives work better. Right now the only incentive for corporations is the bottom line, and that means if bribing a government official will get the natural resource at a lower price, that's what they're going to do.

I could argue that political forces also have to have the right incentives. There needs to be more understanding of these issues and more citizen engagement, in order to put pressure on our government officials to do the right thing. Because it will take government action to alter the incentives structures corporations face.

And I can't imagine that happening until we change how we finance political campaigns.

JS: Once again it comes down to incentives.

    Posted by on Monday, January 15, 2007 at 01:58 PM in Economics, International Trade, Market Failure, Unemployment | Permalink  TrackBack (0)  Comments (8)


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