Youphil: Banks are making profits again and bonuses are growing, but the economy still is in the puddle. Why is that?
Joseph Stiglitz: That’s because the fundamental problems were not just financial sector problems. Actually, in 2007, the economy had an illness that was masked over by a real estate bubble that allowed people to consume beyond their income. If we hadn’t had a bubble, we would have had a deficiency in aggregate demand and the economy would have been weak. So in a way, going back to a fully fixed banking system would still leave us with the problems of a weak economy. Fixing the banks was necessary but not sufficient. And this is where the Obama administration and the people who were so closely connected to the banking system went so wrong. It is right to spend so much time on the banks, but we have forgotten the underlying problems.
Youphil: What were these problems?
J.S.: It’s what caused the bubble. Why was it that lowering the interest rate so much was necessary? The answer has to do with the problems of competing with the emerging markets, the increase of productivity in manufacturing which would have meant that there would have been fewer jobs, the global monetary system that lead countries to save more and more and the high prices of energy transferring money to the oil producing countries.
Youphil: You often talk about deficit fetishism. What is it?
J.S.: It’s the idea that the most important thing we need to do is to get rid of the deficit and, that if we only do that, the economy will be healthy. That is obviously not correct. Right now, lowering the deficit would in fact weaken the economy. Austerity is not the solution; it will make our problems worse. Really, what we need to do is figure out how to put America back to work, how we generate jobs. And that will require spending and the deficit to get even larger.
Youphil: What would be concrete solutions that we could implement now?
J.S.: For the world as a whole, there needs to be a growth oriented strategy, which means: how do we stimulate the economy in a way that creates job? The second issue for Europe is: how do you resolve the euro problem? How do you support the countries in Europe that are having difficulties and preserve the euro? Those are the two immediate issues. There are two medium term issues that won’t be solved over night but that have to be addressed too. One is what do we do about the growing inequality in most countries around the world and the second one is how do we reform the global monetary and reserve system.
Youphil: How do you stimulate employment?
J.S.: Creating employment in the main part will require government expenditure. Right now, we are cutting back public expenditure in the United States. The government is actually contributing to the unemployment problem rather than offsetting weaknesses in the private sector. We need huge investments efforts in infrastructure, technology and education. So we need an investment oriented program that looks particularly for opportunities that create jobs and helps the economy restructure itself from dependence from sectors that ought to be diminishing (real estate, manufacturing, financial sector) in order to move to sectors that ought to be increasing (services, health, education).
Youphil: What can be done about the euro crisis?
J.S.: The core is European solidarity and a commitment to help the countries that are having difficulties. That could take a number of forms: a Eurobond, a common physical framework with common taxes used to support the European economic activity, a growth strategy, recognizing that Greece will never solve its problems based on austerity and that it has to focus on growth. There are many elements but what won’t work is austerity.
Youphil: Any advice for Christine Lagarde?
J.S.: To create a new global reserve system. In the short run, it means expanding the SDRs [Special Drawing Rights]. It’s an action that was undertaken in 2009. It helped, but now we have to do it on a regular basis. There are three other key issues that need to be dealt with, such as a better system for restructuring sovereign debt, for regulating cross countries capital flows, and for regulating the global financial institutions.
Youphil: According to you, QE2 [Quantitative Easing 2] didn’t work?
J.S.: QE1 didn’t work, QE2 didn’t work, and QE3 won’t work. The intent of QE2 was to lower the interest rate and lead to more investments in the United States. QE2 has only lowered the long-term interest rates by a little bit. When there is so much excess capacity, lowering interest rates does not lead firms to borrow much more. The regional banks, the ordinary banks are not lending, so small businesses cannot borrow money.
Youphil: What about the growing inequality?
J.S.: In the short run, we need to strengthen progressive taxation, safety nets and social protection. In the long run, the most important thing is making sure that everybody has the opportunity to get the education that lives up to their potential. Also, we need to think a little bit on how we can go about industrial policies that increase demand for jobs at the bottom. So far, the private sector focuses its innovations on creating unemployment, on using less labor, and little of the innovation in trying to protect the environment for example. So if we redirect these innovations, we will have a much better economy. One of the increasing concerns I have is that the low interest rates are actually encouraging firms to go for robots that will replace workers. What we are doing now is actually creating the foundation of a jobless economy.
Youphil: How do you impose it on the private sector that aims to cut costs?
J.S.: What we need to do is encourage them to think about costs that can be subsidized, such as environmental costs.
Youphil: You were at Occupy Wall Street on October 2nd. What do you make of it?
J.S.: I was a little surprised that it has taken so long [for this to happen]! It is certainly understandable why people in America are angry. They were told: “if we give the banks 800 million dollars, they will restore their health. Don’t put any constraint and lending will be restored and the economy will recover.” And that was wrong. What we’ve seen instead is that the government gave the money to the banks, the banks gave the money to their officers, paid out dividends and big bonuses. Banks were recovered but lending was not restored to small and medium enterprises and the economy is not recovered. So ordinary Americans are suffering, banks continue throwing them out of their homes, the foreclosures are continued unabated, the abuses of the banks in predatory lending and credit cards have continued even after the American taxpayers bailed out the banks. When you give these banks so much money and they return the favor by abusing the American ordinary citizens, it’s understandable why they are angry. And the jobs are still not there.
Youphil: It seems hard to believe that the US would accept such a big role of the State.
J.S.: It’s going to be difficult but Americans see more and more that the market is not the solution - not that we are abandoning the market but that it’s the balance that we got wrong. It’s also the realization of the Tea Party movement, which, in a way, has a similar genesis. They are right to some extent, but their answer is wrong because they are getting the balance even more out of tilt by taking away the role of the government. The question is not the size of the government but what the government has done. So this is not only to occupy Wall Street; it’s to stop Wall Street from doing what it’s doing and making it do what it ought to do. And it’s also about getting the government to do what it ought to do.
Youphil: That will take a strong leader.
J.S.: What is interesting to see is how this movement has spread from New York to the whole country. But obviously money speaks loudly and lobbyists speak loudly so I don’t think this is going to be solved overnight.
Youphil: With the next elections?
J.S.: I am actually not very optimistic. It may take another five years.
Youphil: I guess you're even less optimistic with the risk of a double-dip recession in the United States and in Europe, right?
J.S.: I think the risk is very high. It may be that we will grow at a very slow rate, but whether it’s a double-dip or a slow growth, it will be too slow to make a dent for the 25 million Americans who are unemployed for instance and who would want to get a job.
Photo: Sidney Opera House - photographer: Daniel Baud.