Friday 9 January 2009

Joseph Stiglitz and why inequality is at the root of the recession

The Today programme carried an interesting report yesterday morning on the news that the USA lost 500,000 jobs in December. Following it was an interview with Professor Joseph Stiglitz, a Nobel laureate and former chief economist at the World Bank – plus a famed critic of our management of globalisation and a neo-Keynesian to boot.

Unsurprisingly, Stiglitz backed the need for the US federal government to enact a massive fiscal stimulus – such as the package planned by Barack Obama, which could creep to near $800bn and is even giving even some Democrats jitters over its scale. But the Columbia University academic cautions that too large a portion of the Obama programme is set to go into tax cuts, meaning it fails to provide maximum “bang for your buck” as workers fearful of losing their jobs merely bank the extra cash. Stiglitz urges more support for the unemployed, who in the US face the extra blow of losing their health insurance along with their income and possibly their homes.

What particularly caught my ear was when Stiglitz made the case for inequality as a root cause of the crisis. Growing inequality means that “people who would spend the money do not have it”, he said. Consumption had been supported by “unsustainable” lending – immediately conjuring thoughts of the sub-prime fiasco that assumed its most virulent form across the Atlantic. Yet Stiglitz was clear that these problems were not confined to his home country, saying: “Unless we do something about the underlying inequalities both within our countries and across the world it may be difficult to restore the global economy to the kind of prosperity that we would hope.”

Stiglitz sets out these arguments in more detail here. He points to how concentrations of wealth have actually sapped overall demand for goods and services from the world economic system – what is known as global aggregate demand – leading to financiers indulging in increasingly risky schemes as they bid to make strong returns on their capital.

“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… We need not just temporary stimuli,
but longer-term solutions. It is not as if there was a shortage of needs; it is
only that those who might meet those needs have a shortage of funds.”

It is vital that progressives bang the drum for fairness even louder in the face of the recession – the theme of the latest Fabian Review and next weekend’s Fabian New Year Conference. Joseph Stiglitz makes a powerful case that imbalances of wealth pushed us into this crisis and so fairness must be at the heart of our long-term as well as short-term response.

1 comment:

Hilary Cottam said...

I too was struck by Stiglitz's comments, the implications of which run, in the short term, directly counter to the raft of government measures published yesterday.

Better to put government resources now in the hands of pensioners, low income families and those recently made redundant, who will spend. It seems that Obama will go in this direction.