Nobel-prize winning economist Joseph Stiglitz says the prospects for economic recovery in the U.S. and Europe “remain bleak,” and blames lack of reform in the financial industry. “Governments have failed to address the underlying problems of financial regulation,” Stiglitz asserted during a recent panel discussion at Columbia University, where he has taught since 2001. As a consequence, “We are nowhere near a real recovery this year or next.”
Stiglitz, a former chief economist at the World Bank and chief economic advisor to Bill Clinton, offered a wide-ranging critique of U.S. policy responses to the financial crisis that started in Sept. 2008. The Federal Reserve’s so-called quantitative easing has given the U.S. economy no boost because the resulting liquidity flowed to faster growing markets in the developing world, “or at least tried to,” he said.
Emerging markets have actually been impeding capital inflows for fear of “hot money” that could rush out again when the mood of New York or London investors changes. So the net result of “QE2” has been new barriers to the global flow of capital, reversing decades of increased market access that the U.S. pushed hard for, Stiglitz said. “It’s ironic that the people who have always advocated market integration have become a major source of market disintegration,” he said. Stiglitz shared the Nobel with two other American academics in 2001 for research on how information asymmetries can warp markets.
The economist also criticized Washington’s fiscal policy as too tilted toward moneyed interests. The stimulus package backed by President Obama in 2009 “worked, but was too small,” Stiglitz argued. The president and Congress currently have an option that could simultaneously shrink the government deficit and spur economic growth. This would be to increase taxes for higher earners and lower them for poorer taxpayers who would be most likely to spend any windfall. He lamented the fact that such redistribution “is not a major priority for either party.”
But Stiglitz reserved his harshest words for the financial industry, which has failed to convert capital into investment in “socially useful ways.” He said the current debt crises in Europe have the same roots as U.S. economic sluggishness: Unrestrained real estate speculation abetted by innovative derivatives that devastated the national banking systems. “Ireland and Spain both had budget surpluses before the crisis,“ Stiglitz noted. “But they made the same mistake America did, deregulating financial markets.”
Stiglitz shared the panel with Jacob Frenkel, former governor of the Bank of Israel and current chairman of JP Morgan Chase International. He offered a very different analysis of the crisis, tracing it back to decades of low national savings and growing debt in the U.S. and other afflicted countries. “When you look at the growing imbalances in a country like Greece, you can’t help thinking that the writing was already on the wall before 2008,” he observed.
One thing the two economists agreed on was the lackluster outlook for America and other developed economies. Europe‘s share of global output already shrank from 27 to 20 percent between 1990 and 2010, while China‘s soared from 4 to 14 percent, Frenkel observed. “Asia is where the action is and Africa is the great new challenge,” he said. “A Martian coming back to visit earth 20 years from now will definitely be going to Africa.”
