Joseph Stiglitz says the US can save its broken economic system from itself (so what about NZ?)

An article headed “Progressive capitalism is not an oxymoron” based on a conversation with a respected American economist should be welcomed at the Treasury, where officials will be tidying up the government’s first wellbeing budget.

We must wait for the budget to see how wellbeing is being translated into fiscal policy and the extent to which capitalism will be constrained or nurtured.

In the meantime we can savour the ideas of Joseph Stiglitz, a Nobel laureate in economics.

He is discussing the American economy, of course – but at least some of the issues he raises are relevant to this country, which followed the US and UK with economic reforms in the 1980s to liberalise an array of markets..

His diagnosis:

Despite the lowest unemployment rates since the late 1960s, the American economy is failing its citizens. Some 90 percent have seen their incomes stagnate or decline in the past 30 years. This is not surprising, given that the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity — with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.

But things don’t have to be that way, Stiglitz insists.

There is an alternative: progressive capitalism. Progressive capitalism is not an oxymoron; we can indeed channel the power of the market to serve society.

Stiglitz goes back to the 1980s, when Ronald Reagan’s regulatory “reforms,” which reduced the ability of government to curb the excesses of the market, were sold as great energisers of the economy.

But just the opposite happened: Growth slowed, and weirder still, this happened in the innovation capital of the world.

The sugar rush produced by President Trump’s largess to corporations in the 2017 tax law didn’t deal with any of these long-run problems, and is already fading. Growth is expected to be a little under 2 percent next year.

This is where we’ve descended to, but not where we have to stay. A progressive capitalism based on an understanding of what gives rise to growth and societal well-being gives us a way out of this quagmire and a way up for our living standards.

Among Siglitz’s observations:

America created the first truly middle-class society; now, a middle-class life is increasingly out of reach for its citizens.

America arrived at this sorry state of affairs because we forgot that the true source of the wealth of a nation is the creativity and innovation of its people. One can get rich either by adding to the nation’s economic pie or by grabbing a larger share of the pie by exploiting others — abusing, for instance, market power or informational advantages.

We confused the hard work of wealth creation with wealth-grabbing (or, as economists call it, rent-seeking), and too many of our talented young people followed the siren call of getting rich quickly.

Beginning with the Reagan era, Stiglitz contends, economic policy played a key role in this dystopia:

Just as forces of globalization and technological change were contributing to growing inequality, we adopted policies that worsened societal inequities. Even as economic theories like information economics (dealing with the ever-present situation where information is imperfect), behavioral economics and game theory arose to explain why markets on their own are often not efficient, fair, stable or seemingly rational, we relied more on markets and scaled back social protections.

The result is an economy with more exploitation — whether it’s abusive practices in the financial sector or the technology sector using our own data to take advantage of us at the cost of our privacy. The weakening of antitrust enforcement, and the failure of regulation to keep up with changes in our economy and the innovations in creating and leveraging market power, meant that markets became more concentrated and less competitive.

Politics has played a big role in the increase in corporate rent-seeking and the accompanying inequality. Markets don’t exist in a vacuum; they have to be structured by rules and regulations, and those rules and regulations must be enforced. Deregulation of the financial sector allowed bankers to engage in both excessively risky activities and more exploitive ones. 

Many economists understood that trade with developing countries would drive down American wages, especially for those with limited skills, and destroy jobs. We could and should have provided more assistance to affected workers (just as we should provide assistance to workers who lose their jobs as a result of technological change), but corporate interests opposed it. A weaker labor market conveniently meant lower labor costs at home to complement the cheap labor businesses employed abroad.

We are now in a vicious cycle: Greater economic inequality is leading, in our money-driven political system, to more political inequality, with weaker rules and deregulation causing still more economic inequality.

If policy-makers don’t change course, matters will likely worsen, as machines (artificial intelligence and robots) replace workers.

Stiglitz’s remedy begins by recognising the vital role the state plays in making markets serve society.

We need regulations that ensure strong competition without abusive exploitation, realigning the relationship between corporations and the workers they employ and the customers they are supposed to serve. We must be as resolute in combating market power as the corporate sector is in increasing it.

If we had curbed exploitation in all of its forms and encouraged wealth creation, we would have had a more dynamic economy with less inequality. We might have curbed the opioid crisis and avoided the 2008 financial crisis. If we had done more to blunt the power of oligopolies and strengthen the power of workers, and if we had held our banks accountable, the sense of powerlessness might not be so pervasive and Americans might have greater trust in our institutions.

Stiglitz identifies many other areas in which government action is required.

Markets on their own won’t provide insurance against some of the most important risks we face, such as unemployment and disability. They won’t efficiently provide pensions with low administrative costs and insurance against inflation. And they won’t provide an adequate infrastructure or a decent education for everyone or engage in sufficient basic research.

Then Stiglitz explains that “progressive capitalism” is based on a new social contract between voters and elected officials, between workers and corporations, between rich and poor, and between those with jobs and those who are un- or underemployed.

Part of this new social contract is an expanded public option for many programs now provided by private entities or not at all. It was a mistake not to include the public option in Obamacare: It would have enriched choice and enhanced competition, lowering prices. But one can design public options in other arenas as well, for instance for retirement and mortgages. This new social contract will enable most Americans to once again have a middle-class life.

But can the US afford to provide this middle-class life for most, let alone all, Americans?

He responds:

Somehow, we did when we were a much poorer country in the years after World War II. In our politics, in our labor-market participation, and in our health we are already paying the price for our failures.

Above all, Stiglitz argues “the neoliberal fantasy that unfettered markets will deliver prosperity to everyone” should be put to rest.

It is as fatally flawed as the notion after the fall of the Iron Curtain that we were seeing “the end of history” and that we would all soon be liberal democracies with capitalist economies.

Most important, our exploitive capitalism has shaped who we are as individuals and as a society. The rampant dishonesty we’ve seen from Wells Fargo and Volkswagen or from members of the Sackler family as they promoted drugs they knew were addictive — this is what is to be expected in a society that lauds the pursuit of profits as leading, to quote Adam Smith, “as if by an invisible hand,” to the well-being of society, with no regard to whether those profits derive from exploitation or wealth creation.

Stiglitz shared his thoughts in conversation with Andrew Ross Sorkin.

 

2 thoughts on “Joseph Stiglitz says the US can save its broken economic system from itself (so what about NZ?)

  1. There is limited to zero evidence of unfettered capitalism anywhere – quite the opposite. At best the US economy is a mixed system – some freedom of choice offset by large and larger (coercive) interventions. New Zealand is little different. A local example – coercing rental home owners to provide additional insulation, ventilation and heating is causing either the cost of a rental to increase as the landlord recovers their investment or the landlord to exit the market by either selling the house or sitting on it and letting land supply inefficiencies increase the house value. The net effect is reduced rental supply and rents increase.

    These coercive interventions of regulation, taxation, and subsidisation are what causes the inequality; it certainly doesn’t solve it.

    Firstly what is capitalism? Capitalism is a social system of individual rights, including property rights, in which all property is privately owned; it upholds the rule of law and equality before the law, forbids government favours to any person or group (including businesses), and entails the separation of state and economics. This leaves each individual free to act on his own judgment for his own sake. Nowhere is that test met in declaring capitalism a failure and its daft uncle socialism a sure bet for a better world.

    Rent seekers are every where you look and they are protected by the law makers – often misguidedly and perhaps well intentioned – however these interventions have a cost. Lobbyists are there to represent and protect their rent seeker client – by making ex parte suggestions on how the law should be changed – albeit in language couched to protect their agenda. It’s an insidious spiral.

    Crony capitalism and state intervention has grown for most of the past century with the State assuming competence and capacity for a larger role in the economy. Fannie Mae and Freddie Mac are two good examples. The rot started when President Clinton decided everyone needed to be a homeowner and banks were mandated under the threat of criminal charges to provide home loans to all comers – whether or not they had the assets or income to service a loan. To encourage the banks to advance these dodgy home loans the federal government instructed and funded federal agencies like Fannie Mae and Freddie Mac to effectively guarantee these mortgages by buying them off the banks. Banks were operating under penalty if they did not boost their volumes of these dodgy loans – having the feds in line to buy them was manna from heaven. Everyone was a winner – until the inevitable loan default rates caused losses at the banks who restricted their lending so house prices declined and home equity was destroyed leading to more defaults and before too long a a crisis arose causing systemic losses in the banking system.

    In 30 years Fannie Mae and Freddie Mac displaced private savings institutions in mortgages. When the (inevitable) economic downturn came Fannie Mae and Freddie Mac (the Government subsidised corporations) could not contain their losses and the mighty muscle of the federal government (as GW Bush described it) was found to to be wanting. In 2007 Fannie Mae and Freddie Mac and the other federal government mortgage guarantee agencies held mortgage assets of $6trillion but had capital less than 2% of that sum. They were insolvent. It is worth noting that several private (public) companies became promoters of these loans as a way to increase home ownership as a social right and a way of “closing the gaps” of inequality. When these firms went bust as well the government response was to force a a successful bank, like Bank of America, to buy toxic loan portfolios – inevitably weakening B of A.

    Essentially banks were forced to ignore the preservation of their own capital / equity through ignoring self interest and doing something in the “greater good”, as expressly told by the government.

    Once central banks were able to issue currency un-connected to an objective standard of value (eg the gold standard) politicians had a tame bank to issue cheques (fiat money) to finance projects that could not be financed by direct taxation. This has provided unimaginable capacity to politicians to fund their dreams. It is difficult to find a good decision that has stood the test of time.

    Believing the intervention of the state through subsidy, inadequately priced risk and regulatory control will lead to innovation and better products and outcomes seems quaintly bizarre.

    The two examples of corporate greed – VW and Sackler family drugs are excellent examples of industries protected by regulatory frameworks that make it impossible for new entrants to arise and this encourages bad behaviour.

    Liked by 2 people

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