The Politics of Economic Stupidity
By Joseph Stiglitz
NEW
YORK – In 2014, the world economy remained stuck in the same rut that
it has been in since emerging from the 2008 global financial crisis.
Despite seemingly strong government action in Europe and the United
States, both economies suffered deep and prolonged downturns. The gap
between where they are and where they most likely would have been had
the crisis not erupted is huge. In Europe, it increased over the course
of the year.
Developing
countries fared better, but even there the news was grim. The most
successful of these economies, having based their growth on exports,
continued to expand in the wake of the financial crisis, even as their
export markets struggled. But their performance, too, began to diminish
significantly in 2014.
In
1992, Bill Clinton based his successful campaign for the US presidency
on a simple slogan: “It’s the economy, stupid.” From today’s
perspective, things then do not seem so bad; the typical American
household’s income is now lower. But we can take inspiration from
Clinton’s effort. The malaise afflicting today’s global economy might be
best reflected in two simple slogans: “It’s the politics, stupid” and
“Demand, demand, demand.”
The
near-global stagnation witnessed in 2014 is man-made. It is the result
of politics and policies in several major economies – politics and
policies that choked off demand. In the absence of demand, investment
and jobs will fail to materialize. It is that simple.
Nowhere
is this clearer than in the eurozone, which has officially adopted a
policy of austerity – cuts in government spending that augment
weaknesses in private spending. The eurozone’s structure is partly to
blame for impeding adjustment to the shock generated by the crisis; in
the absence of a banking union, it was no surprise that money fled the
hardest-hit countries, weakening their financial systems and
constraining lending and investment.
In
Japan, one of the three “arrows” of Prime Minister Shinzo Abe’s program
for economic revival was launched in the wrong direction. The fall in
GDP that followed the increase in the consumption tax in April provided
further evidence in support of Keynesian economics – as if there was not
enough already.
The
US introduced the smallest dose of austerity, and it has enjoyed the
best economic performance. But even in the US, there are roughly 650,000
fewer public-sector employees than there were before the crisis;
normally, we would have expected some two million more. As a result, the
US, too, is suffering, with growth so anemic that wages remain
basically stagnant.
Much
of the growth deceleration in emerging and developing countries
reflects China’s slowdown. China is now the world’s largest economy (in
terms of purchasing power parity), and it has long been the main
contributor to global growth. But China’s remarkable success has bred
its own problems, which should be addressed sooner rather than later.
The
Chinese economy’s shift from quantity to quality is welcome – almost
necessary. And, though President Xi Jinping’s fight against corruption
may cause economic growth to slow further, as paralysis grips public
contracting, there is no reason for Xi to let up. On the contrary, other
forces undermining trust in his government – widespread environmental
problems, high and rising levels of inequality, and private-sector fraud
– need to be addressed with equal vigor.
In
short, the world should not expect China to shore up global aggregate
demand in 2015. If anything, there will be an even bigger hole to fill.
Meanwhile,
in Russia, we can expect Western sanctions to slow growth, with adverse
effects on an already weakened Europe. (This is not an argument against
sanctions: The world had to respond to Russia’s invasion of Ukraine,
and Western CEOs who argue otherwise, seeking to protect their
investments, have demonstrated a disturbing lack of principle.)
For
the past six years, the West has believed that monetary policy can save
the day. The crisis led to huge budget deficits and rising debt, and
the need for deleveraging, the thinking goes, means that fiscal policy
must be shunted aside.
The
problem is that low interest rates will not motivate firms to invest if
there is no demand for their products. Nor will low rates inspire
individuals to borrow to consume if they are anxious about their future
(which they should be). What monetary policy can do is create
asset-price bubbles. It might even prop up the price of government bonds
in Europe, thereby forestalling a sovereign-debt crisis. But it is
important to be clear: the likelihood that loose monetary policies will
restore global prosperity is nil.
This
brings us back to politics and policies. Demand is what the world needs
most. The private sector – even with the generous support of monetary
authorities – will not supply it. But fiscal policy can. We have an
ample choice of public investments that would yield high returns – far
higher than the real cost of capital – and that would strengthen the
balance sheets of the countries undertaking them.
The
big problem facing the world in 2015 is not economic. We know how to
escape our current malaise. The problem is our stupid politics.