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Wednesday, October 11, 2006

Joseph Stiglitz Q & A

A Q&A with Joseph Stiglitz:

Q & A with Joseph Stiglitz, by Daniel Altman, Managing Globalization:We’re truly fortunate to have Joseph Stiglitz’s responses to readers’questions today.

I sent Professor Stiglitz nine representative questions and asked him toanswer five or six. He answered them all ‐ thoroughly...

Q. Since the beginning, economics has sought to perfect “economic well‐being” as in, lay down the conditions to maximize well‐being andexplain faltering well‐being. What does this well‐being entail? Thereshould be a definition of economic well being that functionsindependently of capitalist or socialist classifications. Would you care toexplain your definition of the one entity that guides all economictheories: “economic well‐being”? Himanshu Kothari United States

A. There is no simple measure of economic well‐being, andunfortunately, the standard measure, gross domestic product per capita,is misleading. This is important, because ... if we try to “maximize” thewrong thing, there can be serious adverse consequences. I stress theimportance of equitable and sustainable development and growth. GDPcan be going up, yet most individuals can be worse off (as has beenhappening in the United States during the past 5 years).

Similarly, GDP can be going up, yet standards of living going down, asthe environment becomes degraded... When I was chairman of theCouncil of Economic Advisers, I pushed for the use of Green GDP, whereaccount is taken both of the depletion of natural resources and thedegradation of the environment. ...

Neither will growth be sustained if it is based on borrowing—when debtis used to finance consumption, not investment. ... Today, many areworried about America, whose growth is based on borrowing more than$3 billion a day from abroad.

GDP may be a misleading measure for another reason: it measures thevalue of what is produced in the country, not the income of the citizensof the country. When a developing country opens up a mine, with lowroyalties, most of the value of what is produced may accrue to theforeign owners; and when account is taken of the environmentaldegradation and resource depletion, the country may actually be worseoff.

Q. What I find difficult to imagine is why a “superior authority,” such asthe government or an international organization, would be able toregulate/decide what is the best trading strategy for any givencountry/region/community. Why shouldn’t we let the free market forcesdetermine what is the best for the world? What is your opinion on theissue on free worldwide market forces vs. regulation? Guillermo BonaSwitzerland

A. Adam Smith, the father of modern economics, is often cited asarguing for the “invisible hand” and free markets: firms... But unlike hisfollowers, Adam Smith was aware of some of the limitations of free

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11/20/2015 Economist's View: Joseph Stiglitz Q & A

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markets, and research since then has further clarified why free markets,by themselves, often do not lead to what is best. ...[T]he reason that theinvisible hand often seems invisible is that it is often not there.

Whenever there are “externalities”... markets will not work well. Someof the important instances have been long understood—environmentalexternalities. Markets, by themselves, will produce too much pollution.Markets, by themselves, will also produce too little basic research...

But recent research has shown that these externalities are pervasive,whenever there is imperfect information or imperfect risk markets—thatis always. Government plays an important role in banking and securitiesregulation, and a host of other areas: some regulation is required tomake markets work. Government is needed, almost all would agree, at aminimum to enforce contracts and property rights.

The real debate today is about finding the right balance between themarket and government (and the third “sector”—non‐governmental non‐profit organizations.) Both are needed. They can each complement eachother. This balance will differ from time to time and place to place.

Q. What is the future of globalization where there is an increasinglygreater disproportion between the movements of capital and goods andthat of people? Nabil El Aid El Othmani Morocco

A. This disparity in the liberalization of capital and labor is a majorproblem. Enormous energy has been focused on facilitating the flows ofinvestment and capital, while movements of labor remain highlyrestricted. This is so, even though the gains to global economicefficiency from liberalizing labor flows are an order of magnitudegreater than the gains from liberalizing capital flows. Indeed,liberalizing movements of short term speculative capital has beenassociated with increased instability, but does not bring enhancedeconomic growth...

This disparity has large distributional consequences. Because capital canmove easily, it threatens to leave a country if it is taxed, or if wages arenot tamed, or worker benefits are not cut. The disparity in liberalizationis one of the reasons for the growing inequality in incomes that havemarked most countries around the world. It is one of the reasons thateven when globalization has brought increases in GDP, it has led to thelowering of incomes of many workers.

There is a risk that unless globalization can be made more fair, so thatthere are more winners and fewer losers, there may well be a back lash.We should remember that globalization is not inevitable. ...

Q. What is the long‐term future of globalization, and indeed the globaleconomy as whole, if core problems like the world’s coming water crisisare not addressed? ... Will it take government regulation, an expandedinternational framework (such as Kyoto), or both? ... Hasan Jafri UnitedStates

A. The concerns you raise are real. ...What good would it do ... if wemade economic globalization work if, at the same time, we all fried as aresult of global warming. Worse still, too often the poor are the mostvulnerable. ...

On the other hand, globalization has the potential of helping us addressthese problems. The Montreal Convention, dealing with ozone‐destroyinggases, included a provision for trade sanctions against any country thatdid not comply. The threat of these sanctions was one of the reasons thatthe agreement was so effective.

The WTO seems to have recognized that trade sanctions can legitimatelybe imposed to ensure compliance with global environmental agreements.Indeed, one can argue that American firms today have an unfair trade

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advantage over others because they do not have to pay the full cost oftheir production—a hidden subsidy. They do not have to pay the cost oftheir greenhouse gas emissions, as firms in Europe and Japan do. We canactually measure the magnitude of this implicit subsidy.

Q. I would like to know what your thoughts are on China’s ever‐increasing strength (dominance) in the global trading system and itseffects on small, wealthy, developed nations. ... Linda BjörgvinsdóttirIceland

A. China will have an impact on almost every country in the world, richor poor, small or large, but its impacts will differ markedly from countryto country. Overall, I believe that growth is positive sum, not zero‐sum:China’s growth benefits not only the citizens of China, but contributes toa strong global economy. Many around the world benefit from theinexpensive goods it produces; China’s large purchases abroad havebenefited many producers around the world; and competition from Chinahas kept inflation in check, and that has allowed Central Banks tomaintain lower interest rates than they otherwise would have had; andthat too has contributed to strong global growth.

But the impacts are varied. China’s rapid growth has been contributingto high commodity prices, which have been enormous benefit to theproducers of these commodities, but imposed additional costs oncompeting users. Many factories both in the advanced industrial countriesand in developing countries have found that they cannot compete;factories have been shut down and workers face unemployment, or,when they do get another job, lower wages.

Small economies both are more vulnerable and face more opportunities.They are more vulnerable, because they are often less diversified, and anindustry in which they have specialized can be wiped out almostovernight. But they face more opportunities, because if they find a nichein which China has a strong demand, their prospects may be very bright.Parts of Ethiopia are doing so much better today than they have in thepast, because China has begun to buy sesame seeds...

Q. You have suggested a ‘tax switch’ and expenditure cuts as possiblesolutions to the United States fiscal deficit ‐ without hurting growthsignificantly. What monetary and fiscal steps should China take to reduceits over‐dependence on United States consumers and settle down to moresustainable growth rates? Litcy Kurisinkal India

A. China has been intensely concerned about its over‐dependence on theUnited States consumers. As part of its 11th five year plan, announcedlast March, it has stressed increasing aggregate domestic demand,including consumption. ...

The challenge facing China (unique in the world) is how to get itscitizens to consume more. One way is to provide better public socialsecurity, health care, and education. Its citizens save as much as they do(savings has amounted to 42 percent of GDP) because they worry aboutthe future; savings are required to protect them. ...

Q. I would like to have your opinion on the recent reconfiguration ofvoting powers at the International Monetary Fund, and your assessmentof how it compares to the dictates for stability of the internationalfinancial architecture of the realities of global payments‐settlementimbalances and the prevailing situation of accumulated foreign exchangereserves. Malleck Amode Canada

A. As the IMF has increasingly lectured others about the importance ofgovernance, problems in its own political legitimacy have increasinglyimpaired its efficacy. Granting more voting powers to China and a fewother countries that are under represented is a step in the rightdirection. But even the IMF recognizes that it is only the first step. Critics

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Tweet 1

point out that these changes are unlikely to have much effect on itsdecisions, and they worry that having granted the most powerful of theunderrepresented more voting power, the drive for further reform willweaken.

That would be a shame. The U.S. still is the only country with vetopower. The choice of the heads of both the IMF and the World Bankmake a mockery of legitimate democratic governance. Neither asks whois most qualified, regardless of race, color, nationality. The Americanpresident appoints the head of the World Bank and Europe chooses thehead of the IMF. The recent selection of the head of the World Bankhighlighted the problems.

The IMF’s new focus on global imbalances is also a step in the rightdirection. ... The IMF should have long been focusing on such issues—itsreal mandate—rather than on development and the transition fromCommunism to the market economy, areas that are clearly not within itscore competence, and where its policies were often badly misguided. ...

Q. Has the World Bank changed since you were there, and if so, is it forbetter or for worse? Michel Monette Canada

A. Of course, the World Bank has changed, and it will continue tochange. The world is changing, and any institution that did not changewould quickly find itself in deep trouble.

During my time there, the World Bank began to take on an advocacy role—advocating policies that are needed for the successful development ofpoor countries, even when they were opposed by some of the advancedindustrial countries. It has continued to do that, most notably in itsopposition to agricultural subsidies by the U.S. and EU which ... so hurtthe developing countries which depend on agriculture.

But a central achievement of this period was the recognition thatsuccessful development requires a comprehensive approach—there is nomagic bullet. ...

Today, it often seems that the only issue that the Bank talks about iscorruption. It sermonizes, but does not have a comprehensive set ofpolicies and approaches to attack it... But even were it to succeed inaddressing the corruption, that would not be sufficient to address povertyin the Third World. Money can be spent honestly, but incompetently; andeven when money is well spent, unless there are appropriate institutionsand policies in place, success will be limited.

The challenges facing the Bank are enormous. There is now a consensuson the failures of the Washington consensus; the free market ideologyone size fits all policies failed almost everywhere they were tried. Iraq,already suffering from so many other afflictions, is the latest country tobe afflicted with the imposition of these policies, part of the conditionsfor debt relief. ... Hopefully, as the Bank strives to devise a strategy foritself going forward, it will not revert to these failed doctrines, even ifput in new terms. What is needed is a new vision.

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anne said...

[http://delong.typepad.com/sdj/2006/10/let_slip_the_do.html

October 10, 2006

Let Slip the Dogs of WarEdited by Brad DeLong

Iraqi Death Toll Exceeds 600,000, Study Estimates By NEIL KING JR. ‐ WSJ.com

A new study asserts that roughly 600,000 Iraqis have died from violence since the U.S.‐led invasion in March 2003, a figure many times higher than any previous estimate.The study, to be published Saturday in the British medical journal the Lancet, wasconducted by the Johns Hopkins Bloomberg School of Public Health by sending teams ofIraqi doctors across Iraq from May through July....]

Reply Wednesday, October 11, 2006 at 04:11 AM

john i said...

Thanks anne that was really an appropriate remark how dare stiglitz leave out iraqwhen he is discussing the world economy.

Reply Wednesday, October 11, 2006 at 07:22 AM

anne said...

No; Joseph Stiglitz is a gem, but I thought this report of importance enough to refer toin brackets. Again, though, possibly no discussion of globalization should pass wherethe lunatic tragedy of our occupation of Iraq fails to be mentioned. Joseph Stiglitz, beassured, understands.

Reply Wednesday, October 11, 2006 at 07:29 AM

anne said...

Yes; thank you, when discussing the world economy, when discussing managingglobalization, there must always be reference to such a needless lunatic tragedy asIraq. We have, after all, involved ourselves in a trillion dollar war and occupation,when a trillion dollars might well have been spent manage globalization in athoroughly benign way for Americans and so many others. Thank you, Iraq is so dearlyrelevant.

Reply Wednesday, October 11, 2006 at 07:36 AM

anne said...

http://www.nytimes.com/2006/10/11/washington/11veterans.html

October 11, 2006

Data Suggests Vast Costs Loom in Disability Claims By SCOTT SHANE

Nearly one in five soldiers leaving the military after serving in Iraq and Afghanistanhas been at least partly disabled as a result of service, according to documents of theDepartment of Veterans Affairs obtained by a Washington research group.

The number of veterans granted disability compensation, more than 100,000 to date,suggests that taxpayers have only begun to pay the long‐term financial cost of the twoconflicts. About 567,000 of the 1.5 million American troops who have served so farhave been discharged.

"The trend is ominous," said Paul Sullivan, director of programs for Veterans forAmerica, an advocacy group, and a former V.A. analyst.

Mr. Sullivan said that if the current proportions held up over time, 400,000 returning

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service members could eventually apply for disability benefits when they retired....

Reply Wednesday, October 11, 2006 at 09:51 AM

anne said...

No brackets here, I am too angry. There is, we have to understand, a trade betweenbutter and guns, and we have chosen guns. We have chosen a trillion dollar war andoccupation, beyond the physical, psychological and moral costs, when there mighthave been the butter of peace here and internationally as we assisted internationally.

Reply Wednesday, October 11, 2006 at 09:55 AM

evagrius said...

It's a fairly well known fact that the ratio of wounded to killed casualties is roughlyten to one, ( or was). The ratio has now gone up because of the U.S. skill inemergency medicine‐ ( this skill was honed in the ghettoes and 'hoods of the U.S.A.‐there's a well‐known emergency room surgeon, a specialist in multiple gun‐shotwounds victims based in New York who is a consultant to the U.S forces in Iraq)).Remember, the U.S. ranks #1 in the WHO survey for emergency services. Also, thosemultiple gun‐shot victims are there because of the U.S. fixation on the 2ndamendment.All in all a pretty good return on the investment.

Reply Wednesday, October 11, 2006 at 11:16 AM

anne said...

Fierce and true comment.

Reply Wednesday, October 11, 2006 at 11:29 AM

slink said...

anne with out intending itu point out the stig rex problem

he can't move folks with his phrasesu read go ya ya very truethen make an additional point his renditions fatigue his fans andflow over the unengaged like bad local radio adds

he seems to bleet like a sheepwhen he's really a wolf...to keep it in animal terms

el stigneeds a bull dog like darwin had in huxley

Reply Wednesday, October 11, 2006 at 12:53 PM

anne said...

Slink, what a remarkably incisive comment; I agree completely.

Reply Wednesday, October 11, 2006 at 02:25 PM

himanshu said...

sir,as we see inflation is rising at alarming rate, in today's world.Can there be anymeasure to control over it?

Reply Wednesday, August 05, 2015 at 02:43 AM

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