Stiglitz warns Europe: don't mimic USComments
A new work by Joseph Stiglitz, ‘The Price of Inequality’, is bad news. We interviewed the Columbia University Professor and Nobel Economics laureate about his latest book, in Paris. Stiglitz is a former senior vice-president and chief economist of the World Bank.
Gianni Magi, euronews:
“In your book you showed how expensive inequality is for American society. What could happen if this trend of increasing inequality is not stopped?”
“We’re clearly going to wind up with a more divided society. We will also wind up with a less productive economy, because one of the important aspects of the inequality in America today is inequality of opportunity, which means that young people, if there are born to poor parents, do not get a chance to live up to their potential, so you’re wasting one of the most valuable resources.
“When you have a very divided society, like we have today in the United States, it means that it’s very hard to have political consensus. So, there is a breakdown of the politics, of the democratic process. And that means you’re aren’t going to get the kinds of consensus behind investments – in infrastructure, technology, education – that are necessary to make a productive economy.”
“Do you think that, from this point of view of inequality, Europe is in the same condition as America?”
“No, Europe is better. What is so striking, that I point out in my book, is that the United States is the country with the greatest inequality in market incomes, does less to remedy those inequalities so, after tax and transfer, inequality is greater than in any other country of the advanced industrial countries, and America is the country with the least equality of opportunity of any of the advanced countries. But what worries me is that, increasingly, some countries in Europe are imitating the American way.
“So, it already happened in the UK, where 30 years ago the UK was just average in the degree of inequality among the OECD advanced industrial countries. Today it is number two behind the United States. You still have a group of countries, the Scandinavian, the Nordic countries which [have] very strong economies but [which also have] much more equal societies and societies with much more equality of opportunity. But countries in the European continent are drifting more towards the American style, and I think that it’s a concern.”
Do the austerity policies implemented by some countries in Europe increase social inequality?
“Very much so. The reason inequality, austerity, is particularly bad in the current context is that the underlying problem is the lack of demand, lack of total demand.
“So, when you have austerity, demand goes down; when demand goes down, growth lowers, unemployment increases. When unemployment increases, wages get driven down as people compete for jobs; social services get cut back. So, every aspect of inequality gets exacerbated.”
“What should European governments do to tackle the euro zone crisis?”
“First, you have to remember that the major source of the deficit is the weak economy, not the other way around. It wasn’t the deficit that created the weak economy; it was the weak economy that created the deficit.
“So, the first focus should be on: how do we restore growth? There are a number of things that one can do, including expanding government investments in infrastructure, technology, education, expanding the European Investment Bank, mutualisation of the debt, so [that] interest rates can come down, which will give more money to spend in productive ways rather than sending large checks to the bankers.”
“So, you are in favour of an increased role for the European Central Bank in the management of the euro zone crisis?”
“Yes. It’s one of the institutions that has the capacity, already, to make a big difference. But one has to make sure that it follows the right policies. Recently they said they are willing to buy [an] unlimited number of bonds. But they said: we’ll impose conditions. They haven’t said what those conditions are, but if they’re like the conditions they have imposed in the past, they will be conditions of austerity.
“So, with one hand you hold out a life raft; you hold out a medicine that can help them and then you take it away; you give them poison. You tell them: ‘you have to go into depression… To save you, I will kill you’. It doesn’t make any sense. So, the ECB has the capacity to help. The question is: will it?”
“Recently, some banks have been accused of making up the Libor, the primary benchmark for short-term interest rates around the world. What lesson should we draw from this scandal?”
“The banks really don’t have a command over what they’re doing. And they have propagated financial products that are unsound, manipulable, in some sense putting at risk the whole financial system.
“The problem is there is such an overhang of this: of contracts, derivatives, bonds that are specified in terms of the Libor rate, Libor rate plus one, Libro rate plus two, Libor rate plus a half percent; all predicated on a number that is manipulable, a fiction. What are we going to do about this huge financial market that has been created on something that makes absolutely no sense?”
“You wrote about the difference between what politicians should do for the economy and what they actually do. Is this a criticism of Barack Obama, too?”
“Yes, unfortunately. You know, every politician has constraints. I may know what the right thing is but other people have different views, and the job of the political process is to weigh different views, make compromise between different interests.
“So, I understand that it is in some sense the role of the politician to take in all those forces; but, in the end, they are also supposed to stand above all those forces and to make a judgement of what is in the best interest of the country as a whole. Unfortunately, they have listened too much to the one interest: the banks.”