« Crime and Economy | Main | "Karl Rove’s Factually Challenged Housing Revisionism" »

Thursday, January 08, 2009

"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?

    Posted by on Thursday, January 8, 2009 at 11:07 AM in Economics | Permalink  TrackBack (0)  Comments (40)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference "We Need Longer Term Solutions":


    Feed You can follow this conversation by subscribing to the comment feed for this post.