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by James Galbraith and Joseph Stiglitz
Monday, Apr. 07, 2014 at 10:10 AM
Economics is not an immutable unchangeable fate but a human system where changing rules changes outcomes. James Galbraith and Joseph Stiglitz are two well-known economists who question the myths of conventional economics, the self-healing, efficient and deregulated market
LIBERATING THE ECONOMY FROM PREJUDICES
By James Galbraith
End Neoliberal Dogmas. One of the best known US economists outlines necessary measures for politics and the economy
[This article published on 3/10/2012 is translated from the German on the Internet, http://www.handelsblatt.com. A photograph documents the melting of glaciers in Greenland. James Galbraith is one of the best known US economists and teaches in Austin, Texas. His new book “Inequality and Instability: A Study of the World Economy before the Great Crisis.” The Texan economics professor demands an end of “delusions” in dealing with climate change.]
Austin, Texas. Twenty years after the collapse of communism in Eastern Europe, the question is raised whether a comparable fate is in store for capitalism in the West. Inability to change can have catastrophic consequences. But can we calmly assume worldwide capitalism will somehow overcome the present crisis? Then the question is posed: What are the challenges for the next 20 years? What can we hope for? What must we demand? Energy turn and climate change are the most important points. The attempt to contain the emission of CO2 cannot remain the delusion that it is right now – with markets and prices but hardly any real progress. The rising costs for energy and raw materials threaten to force down profits in the whole economy. This means low growth and reductions in the living standard – unless we carry out counter-measures and avoid and reuse wastes. This task will be the greatest challenge for the next years.
CONTROL THE FINANCIAL SECTOR: Bankers today expect excessive bonuses – far more than is economically tolerable in the long run. We have seen what the most unbridled greed can wreak in this area. The large-scale fraud with real estate backed securities in the US infected the European financial system. The only remedy is aggressively punishing fraud. We must restore the moral standards here.
STOP THE DIGITAL DESTRUCTION: Technology, it was once said, creates more jobs than it destroys. However that is no longer true today. The IT-revolution has brought a wide-ranging “creative destruction” of jobs to industry, commerce and many service branches. Rebuilding the social life is vital. New jobs must be created – in areas like education, health care, nursing, culture, environment, entertainment and leisure time – with reasonable pay and with the inclusion of public authorities and the non-commercial sector.
AGING IN DIGNITY: The great number of persons who reach their advanced years is the great progress of civilization. This also involves conflicts – and as a consequence we now demand that seniors work longer and manage with lower pensions. That does not make any sense! We should make the transition into retirement easier. There are very simple means of making a happy life possible for seniors – above all public pensions, health care and nursing. Obviously the costs mount up when the population on average becomes older. But there are only political reasons for ignoring these needs in an age of surplus.
CUT THE MILITARY: The nonsense of wars in the present time was proven by the experiences of Americans in Iraq and Afghanistan. There is almost nothing meaningful for soldiers to do except maintain the peace, secure the sea routes and in exceptional cases as in Libya intervene directly. Therefore enormous resources could be saved by renouncing on nuclear weapons, battleships, military tanks and supersonic jets. Germany should make a beginning here with a severe blow against the superfluous armaments business and cancel the sale of tanks to Greece.
LIVE WITH CHINA: The rise of this country is an unparalleled challenge for the West. Unlike the countries of the former Soviet Union, China has become integrated in the global structures of commerce and finance. On the other side, the model there is different than ours. It has its roots in revolution and reform and is driven by the pressure to accommodate a massive population from the countryside into cities and raise the living standards with the help of western technology. The West must adjust to the fact that this country is powerful and will do what it wants.
RETHINKING IN POLITICS
REEDUCATE THE POLITICAL CLASS: Today the top politicians of rich countries are dominated by a destructive neoliberal attitude. They are worried about deficits and public indebtedness because they compare public debts in a simple way with private debts. Outwardly they are mercantilists as before Adam Smit6h, unable to understand that trade surpluses in one country cause corresponding deficits elsewhere. In addition they nurse a reflexive contempt for the public sector combined with a fetishist belief in the wisdom of central bankers. Reeducating these politicians is a good challenge for economists for the next 20 years – assuming they manage to reeducate themselves.
RESTORE DEMOCRACY: Today Europe trusts “technocratic governments” that work detached from national politics and are regarded as illegitimate by many of the voters. This leads to social unrest because the politics of these governments entail ever greater burdens for the population. Part of the way back must be restoring the primacy of politics over the markets or reintroducing a partnership between the two forces instead of dominance by bankers and the ultra-rich.
The examples from South America, above all Brazil, Argentina, Ecuador and Bolivia, give us hope. The hegemony of neo9liberalism was broken there in the last 20 years. South America took a hard way there. Europeans and North Americans should consider his – even though established economists tell different stories. Every important idea does not come from Cambridge/ Massachusetts or the University of Chicago.
THE FAILURE OF OUR ELITES AT THE EXPENSE OF THE MAJORITY
By Joseph Stiglitz
[This article published in March 2014 is translated from the German on the Internet, http://www.blaetter.de. Joseph Stiglitz was awarded a Nobel Prize for economics in 2001 and is a professor of economics at Columbia University in New York City.]
The gross domestic product (GDP) may increase more intensely in 2014 than 2013 on both sides of the Atlantic. However before the political leaders who decided after 2008 for the austerity policy open the champagne bottles and raise their glasses to each other, they should examine where they stand now – and recall the nearly irreparable damages inflicted by their policy. Logically every downswing will come to an end some time or other. The characteristic of good policy is that it successfully makes the downswing shorter and less deep than it otherwise would have been. On the other hand, the mark of the austerity policy pursued by many governments is that it clearly deepens and extends the downswing with long lasting consequences.
Just after the eruption of the global financial crisis, I warned a malaise of the Japanese style could occur – with low growth and stagnating incomes for years – if the right strategies were not implemented. However the political leaders on both sides of the Atlantic promptly made some of the same mistakes although they claimed they learned from the case of Japan. In the meantime, a former top representative of the US government, the economist Larry Summers, warns of a long-term stagnation.
The essential point that I addressed five years ago was that the US economy in a fundamental sense was already sick before the crisis. It was merely an asset-price bubble defined by lax regulation and low interest rates that allowed the economy to appear healthy. Many problems are seething below the surface: growing inequality and delayed structural reforms. Change from a manufacturing-based economy to a service-economy and adaptation to the changing global competitive landscape, continuing global imbalances and a financial system geared more to speculation than to investments than create jobs, increase productivity and distribute surpluses maximizing the general social benefits occur.
In its reaction to the crisis, politics has neglected to tackle these problems. Even worse, politics intensified some of them and created additional new problems – not only in the US. The results were mounting debts in many countries since the slump in the GDP made state revenues shrivel. In addition the investment deficiency in the public and private sectors gave rise to a generation of young people who for years were inactive and in increasing estrangement at a point of their lives where they should refine their skills and raise their productivity.
The real (inflation-adjusted) GDP per capita is lower than in 2007 in most parts of the North Atlantic area. The Greek economy has shriveled 23 percent. During the last six years, Germany, the European country with the best economic development, showed a miserable growth of 0.7 percent per year on average. The US economy is around 15 percent smaller than it would have been if the modest growth before the crisis had been maintained.
These numbers do not tell how bad it is because the GDP is not a good measure of success. The development of household income is much more relevant. The average real income in the US today is below the level of 1989, a quarter of a century ago, and the average incomes of full time employed male employees today are less than over 40 years ago. Some like the economist Robert Gordon have proposed we adjust to a new reality whose long-term productivity growth is clearly below the growth of the last century. No one should put much trust in a crystal ball that predicts with a time horizon of decades given the miserable list of successes of economists in their predictions three years ago – as reflected in the time before the crisis. Nevertheless one thing seems clear: a long phase of disappointment is in store without a fundamentally changed government policy.
Markets do not correct themselves. The basic problems sketched above could intensify. Inequality leads to a weak demand. Increasing inequality further reduces demand. In most countries (including the US), the crisis has only intensified the inequality.
While Chinese trade surpluses have diminished, they increased in Northern Europe. The markets were never good at quickly getting on top of a structural change from their own strength. The transition from agriculture to the manufacturing economy was not carried out smoothly. On the contrary, this transition went along with considerable social dislocations and the Great Depression.
The sectors that should grow corresponding to the needs and desires of citizens are services like education and health care which traditionally (for good reason) are financed by the authorities. However the state hampers change through its austerity policy instead of supporting change.
A malaise is better than a recession and a recession is better than a depression. The problems facing us now are not the results of the inexorable law of the economy to which we must adapt as in a natural disaster like an earthquake or tsunami. They are not a kind of penance that we must pay for past sins – although the neoliberal policy predominant during the last three decades has much to do with our current dilemma.
Rather our present problems are results of a misguided policy. There are alternatives. But we will not find them in the complacency of the elites whose incomes and stock portfolios are growing steeply. Only certain people have to become accustomed to a constantly lower living standard, it seems. Unfortunately they are the majority.
Gustav Horn: The Great Failure: How Economics Must Change published in “Restoring Shared Prosperity” edited by Thomas Palley and Gustav Horn, December 2013, pp 23-28
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