Joseph Stiglitz

Rewriting the Rules

Stiglitz bloomberg
The euro crisis is not over, says Joseph Stiglitz.
  • Why it matters

    Why it matters

    Joseph Stiglitz says the neo-liberal policies adopted by centrist right and left parties have failed to generate growth and calls for new economic approaches.

  • Facts


    • Joseph Stiglitz, an advisor to former U.S. President Bill Clinton, won the Nobel Prize for Economics in 2001 for his work on the importance of information for markets.
    • His latest text, “Rewriting the Rules of the Economy,” was recently published in the United States.
    • The Federal Reserve begins a two-day meeting Wednesday and will announce Thursday whether it is raising interest rates from their record low.
  • Audio


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The world-famous economist has been busy. Joseph Stiglitz arrives for our interview in Berlin with two of his new books under one arm, and a 120-page text, “Rewriting the Rules of the American Economy,” under the other. The 73-year-old economist hopes the latter will serve as a blueprint for the next U.S. president.

Joseph Stiglitz is one of the the most vocal critics of austerity, and nothing he has seen in recent months has made him change his mind. A recent dinner meeting with German Finance Minister Wolfgang Schäuble, one of the world’s most vocal policymakers when it comes to pushing countries to balance their budgets and towing a hard line in the recent Greek crisis, left him unconvinced.

Mr. Stiglitz spoke with Handelsblatt about how the Troika of international creditors is not helping Greece, why unemployment in the United States is higher than many believe, and why the Federal Reserve shouldn’t raise interest rates this week.

Handelsblatt: Professor Stiglitz, recently after a dinner meeting with Wolfgang Schäuble, Germany’s finance minister, you said you felt sorry for the Greeks, especially after having met Mr. Schäuble. What went wrong?

Joseph Stiglitz: Nothing went wrong, it’s just that he’s not an economist so he doesn’t approach the problems in the way that an economist would. He thinks legalistically.

Is that a bad thing?

An economist would understand that austerity kills. Almost always. That the primary surplus they have scheduled for Greece will extend and deepen the depression.

Is that always the case?

Almost always. What I was hoping for is recognition that, no matter what Greece does, if it complies with everything, the macroeconomic package guarantees depression. A depression makes it all the more difficult to get social cohesion, and that means long-term growth is going to be slower, their ability to repay the debt is going to be less.

What did Mr. Schäuble say?

He emphasized that you have to obey the rules. It’s very legalistic. But if they’re the wrong rules, those rules can result in disastrous outcomes.

So what do you think is ahead for Greece? You don’t think the European crisis is over?

Clearly it’s not over. The situation in Greece is going to get worse; it’ll go deeper into depression. That’s my expectation. The Troika has been terrible in their forecasts; I’ve jokingly said that if my university students turned in forecasts like that, year after year, they would have failed.

Ireland, Spain and Portugal, are they not examples that in some circumstances, austerity can work?

I think they’re also failed examples. They may not have failed as dramatically, but GDP in each of those countries is below what it was in 2007.  What they are celebrating is they are finally beginning to grow, but it will be years and years before they’re back to where they were before the crisis.

All eyes are on the U.S. Federal Reserve this week. You recently wrote an op-ed called, “Fed up with the Fed.” Why are you so fed up?

In terms of the mandate of the Fed, which is broader than the mandate of the ECB, there’s no inflation and the true unemployment rate is actually much higher than the 5.1 percent that’s referred to.

How high is unemployment?

I think it’s well above 12 percent.

How did you reach that number?

You have to include the large number of people working part time involuntarily, people who have been discouraged from working, and the number on disability has skyrocketed. We pay better if you’re disabled than if you’re unemployed, so everybody who can gets a doctor’s note saying they have a back problem, which is almost everybody. And these are people who would work if the labor market were better and they could find a job which is consistent with their disabilities. It’s not a labor supply problem. It’s a labor demand problem.

Your colleague, the U.S. economist Robert Shiller, recently said stocks in the U.S. are overpriced right now, that there could be a bubble. Shouldn’t the Fed be steering against that?

His analysis is very compelling, the way he’s analyzed the likelihood of bubbles is the kind of thing I find very convincing. He is absolutely right that we should be concerned. It doesn’t mean they should raise the interest rate. The Fed should focus more on how to make sure more of the liquidity goes into economic activity and less into speculation.

How should they do that?

It has both carrots and sticks that it could use and hasn’t.  It could require bigger margin requirements that would dampen the bubbles. It could tell the banks, you cannot run to a hedge fund, you have to lend to SMEs [small and medium-sized businesses]. My response is, use the other tools at your disposal, not the blunt instrument.

There’s another argument mainly coming from the Bank for International Settlements in Basel about the effectiveness of monetary policy and the dangers that come with having low interest rates for a very long time. Their argument is that the side effects of loose monetary policy are so bad that they can cause instability.

It’s basically the same discussion, that if you don’t accompany (loose monetary policy) with regulatory measures, the risks are significant. And I agree with them that the first-best instruments are regulation, not by raising interest rates. The low rates are causing other problems.

What kind of problems?

Low interest rates encourage capital-intensive investment, which means you’re setting up the conditions for a jobless recovery. The way you see this most forcefully is that you have in the United States a high unskilled unemployment rate.

What about emerging markets? There’s a lot of worry that if the U.S. raises the interest rate, it could lead to a crisis in emerging markets.

I think it’s a real worry. It’s also evidence of market irrationality, because they’ve been on notice in a way for a long time. Given that, how could you not already have built in the reality that this is going to happen?

Is the fear that growth will slow in China also irrational?

The answer is, probably. I think there are likely to be more bumps in the process as China moves from being an investment and export-driven economy to a more consumer-oriented economy. The way they responded to the 2009 crisis…. It was probably the most effective Keynesian stimulus ever and it worked beautifully. It actually created an investment that has stimulated their growth. But the very fact that you used that medicine in 2009 meant that the second dose of the same medicine is likely to be less effective and potentially dangerous.

Are you concerned about China’s high debt?

Yes. I’m not a deficit hawk but raising private sector debt in China would be very risky.

You were in Beijing in March. What impression did you get?

They didn’t seem to have a plan B. And I think there have been some signs that they haven’t fully grasped the challenges of a market economy. By that I mean they thought that a market economy was a kind of under-regulated financial market with Chinese characteristics that would be more stable than a market economy, say, with American characteristics. And the answer is that an under-regulated financial market, with Chinese or American or European characteristics, is unstable.

So politicians are powerless?

They’re not powerless. You can never have full stability but you can limit the risks. Things are predictable and you can take mitigating actions. I don’t ever view this as perfect steering. But in China, they still have a lot of people who have a control mentality rather than a regulating mentality.  What you see in the last few months is almost the mentality, “we told you the stock market to behave and now we’re putting journalists in prison.”  That to me is very disturbing because it shows a lack of understanding of markets.

People in other places are also struggling to understand the markets. Does the election of Jeremy Corbyn as the new head of the Labour Party in the United Kingdom show people are losing faith in capitalism?

There are similar developments in Greece and Spain and even in the United States. The experiment we began thirty years ago – lowering tax rates at the top, deregulation – has failed dramatically and the bottom 90 percent of America has seen stagnant incomes for a third of a century.

This policy was shared by the center left and the center right – think about New Labour for example.

It began with [U.S. President Ronald] Reagan, or even with [Jimmy] Carter, and [Margaret] Thatcher in the U.K. It continued with [U.K. Prime Minister] Tony Blair and [German Chancellor Gerhard] Schröder. The left never believed in the trickle-down effect but in re-distributive elements, but both on the right and the left there was a sense that the new deal, the welfare state, was out of date.

And now politicians on the right and left are questioning this neo-liberal consensus?

Yes, though politicians like Donald Trump express the anger but don’t have a particular agenda. But the left is coming together in the United States with a very coherent agenda, that I’ve summarized in my book “Rewriting the Rules of the American Economy.”

What does it say?

It basically argues that beginning with Reagan we began rewriting the rules of capitalism in ways that led to a poor performing economy and more inequality. Labor law weakened unions, corporate law gave CEOs more power over corporations, financial laws led to short-termism. And we now have to rewrite the rules again.

Who’s supporting that program?

[Democratic presidential candidates] Hilary Clinton and also Bernie Sanders have both taken much of it on.

It sounds like you’re on the way to playing a role in the next administration.

I hope I’d have an advisory role as opposed to the day to day fight in the battlefield. It’s more back in general headquarters, advising the generals.


Handelsblatt’s Torsten Rieke writes on international finance and economics. To contact the author:

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