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by Jean-Paul Fitoussi and Joseph Stiglitz
Wednesday, Jan. 27, 2010 at 2:33 PM
"Concepts must be developed against the global demand-deficit. Repairing the financial system is not enough. The economic-political prescriptions of the past - flexible wages and restricted social benefits - would worsen the situation."
to read the 12-page pdf file “WAYS OUT OF THE CRISIS AND BUILDING A MORE COHESIVE WORLD,” the Chair’s Summary by Jean-Paul Fitoussi and Joseph Stiglitz, July 2009, click on
FROM INEQUALITY TO DEBT OVERLOAD
Nobel Prize winner Joseph Stiglitz analyzes the linked economic malformations that preceded the financial crisis/
[This short article published on: BocklerImpuls 14/2009 is translated from the German on the Internet, www.boecklerimpuls.de.]
The growing gulf between poor and rich, dollar-hoarding Chinese, heavily-indebted private households and deregulated monetary policy – all this is often cited to explain the current economic crisis. Did too much accidentally go wrong at the same time or did one failure follow another? That is an interesting question. US economist and former chief-economist at the World Bank, Joseph Stiglitz tries to put together the pieces of the puzzle.
Stiglitz’ argument begins with income distribution. In the last thirty years, inequality has increased in the US – and beyond the US. As a result, we have redistributed money from the poor to the rich, from people who would spend the money to people who did not need to spend the money.” A very weak aggregate economic demand resulted. But the US had a solution. They kept the world economy going with an expansive monetary policy and heavy debts made possible by an uncontrolled deregulated financial system. This functioned until the bubble bu9rst.
According to Stiglitz, the trillions of dollars in reserves of East Asian states are also a reason for the worldwide demand weakness that Americans could only level out for a limited time. Much revenue of Asian exporters did not return into the economic circulation. “This is like burying money in the ground.” But why have Asian and other developing countries hoarded currency to such an extent? In Stiglitz’ explanation, many countries depended on the assistance of the International Monetary Fund (IMF) after the 1997 Asian crisis. As a reaction to the financial assistance, they had to deregulate their financial- and economic systems, which drove countries like Indonesia into a deep recession. The governments learned from this and established reserves to avoid falling into dependence on the IMF in the future.
With view to 2010, concepts must be developed against the global demand-deficit, the economist writes. Repairing the financial system is not enough. The economic-political prescriptions of the past – flexible wages and restricted social benefits – would worsen the situation.
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