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Joseph E. Stiglitz Oaxaca Oct 27, 2011 PARTICIPATION, GROWTH, AND EQUITY: THE GLOBAL ECONOMY IN A TIME OF CRISIS AND CHANGE.

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Presentation on theme: "Joseph E. Stiglitz Oaxaca Oct 27, 2011 PARTICIPATION, GROWTH, AND EQUITY: THE GLOBAL ECONOMY IN A TIME OF CRISIS AND CHANGE."— Presentation transcript:

1 Joseph E. Stiglitz Oaxaca Oct 27, 2011 PARTICIPATION, GROWTH, AND EQUITY: THE GLOBAL ECONOMY IN A TIME OF CRISIS AND CHANGE

2  Protests are no surprise  Real surprise is they didn’t come sooner  OWS numbers may be small, but many share their views  The market is unfair  “We are the 99%”  Inequalities not justified by relative contributions (old fashioned theory of “marginal productivity theory”)  Inequities major complaint in each of the protests  The political system is unfair, has been captured by the 1% FROM TUNISIA TO THE INDIGNADOS TO OCCUPY WALL STREET

3  Competitive theory:  Profits are supposed to be zero  Supply is supposed to equal demand  In practice  High unemployment  Credit not available, even for good borrowers  Banks make large profits, use market power over the payments system, engage in predatory lending  In crisis, we socialized losses while allowing the privatization of gains THE MARKET HASN’T WORKED LIKE IT SHOULD

4  We have homeless people and empty homes  Millions of Americans have lost their homes  We have vast unmet needs and underutilized resources  Retrofitting the global economy for global warming  Investments in infrastructure  Needs for development  Understandable why young people in Spain were indignant  Youth unemployment rate more than 40% THE MARKET HASN’T WORKED LIKE IT SHOULD

5  Rather, we don’t have the right regulations  In any society, individuals can take actions that harm others  Preventing such harm (externalities) is one of the main objectives of regulation  In the US protest, megaphones prohibited  But corporations have unbridled spending to amplify political views  Banking system is underregulated, which allowed the banks to impose huge costs on the rest of society OVERREGULATION IS NOT THE PROBLEM

6  Banks and their shareholders, bondholders, and bankers were bailed out  Those who caused crisis have done well, the rest of society has suffered  Banks bailed out without conditions  But assistance to ordinary citizens comes with many conditions  Banks were supposed to use the money to restart lending  Hasn’t happened -- used the money for bonuses, dividends  No one held accountable for what went wrong  Culprits seem to have been rewarded—by the victims  This was not just an accident—it was a manmade event THE POLITICAL SYSTEM HASN’T WORKED

7  Predatory lending  Credit card practices  Foreclosures—even on people who owe nothing on their homes  Standard of justice—most of the people thrown out of their homes did owe money—not acceptable  Burden of proof changed—guilty until proven innocent  Robo-signing epitomizes fraudulent and near-fraudulent practices  Political influence used to stop effective reforms BANKS HAVEN’T CHANGED BEHAVIOR

8  Problem of too-big-to-fail worse  Non-transparent CDS’s continue  Derivatives continue to be underwritten by US taxpayer  Capital is still inadequate  Accounting practices still deficient  Explains fragility of global credit markets  Banks know that they can’t trust anyone else—risk of credit markets freezing INCOMPLETE REFORM

9  Example: the debate on reform of bank regulation  Most Americans want banks to be regulated  But political influence of few banks roughly balanced that of 350 million Americans  Theory: “median voter” is supposed to be decisive  In practice, doesn’t seem to be the case NOT THE WAY DEMOCRACY IS SUPPOSED TO WORK

10  Campaign contributions  Lobbying  Revolving door  American process: “best government that money can buy” EXPLAINING THE POLITICAL PROCESS

11  Persuading voters to vote  They feel participation won’t make a difference  Self-fulfilling prophecy  In 2010 election—youth voter turnout almost same as youth unemployment rate: a dismal ~20%  Informing voters on complex issues  Confusion between household and government finance  Belief that austerity is the solution  But public skeptical of experts  Not surprising: economic experts brought on the recession, and financial experts couldn’t manage risk KEY PROBLEMS

12  Ensuring that government officials act on behalf of citizens  Information is key—which is why transparency, right-to-know laws are so important  Incentives are important—which is why revolving doors are so dangerous and why campaign finance reform is so important AGENCY ISSUE

13  Always difficult  But especially in areas of “expertise”  Is independent central bank “right” system?  Political independence  easier to be “captured” by financial market  Less independent central banks (like those of India and Brazil) performed better  If independent, still could/should be representative  US Fed was not representative, not transparent—major flaws in governance which have inflamed popular reaction DESIGNING SYSTEMS OF ACCOUNTABILITY

14  Large inequalities can undermine social cohesion  Which In turn may undermine the political process  Worry that state will engage in redistributions  And wealthy are less dependent on public provision of services  Result: constraints on spending, weakening of government  Impairing crucial investments in education, infrastructure, technology  Decaying education, social protection  more inequality  Contrast with successes in Scandinavia  GDP is a bad measure, but even on that measure they perform well  Even the successful East Asian countries had low inequality  Key to their success DYSFUNCTIONAL DYNAMICS

15  Unemployment in Europe and America still unacceptably high  Even 4 years after bubble burst, hundreds of billions spent on banks  Risk of another financial crisis and another downturn  2008—US exported toxic mortgages and crisis  Now Europe is returning the favor  Europe’s political problems worse than those of the US  European project was “top down”  Inadequate participation from citizenry  Lack of support for “European solution” not surprising  Evidence that we didn’t do what was needed to be done  If another financial crisis occurs, won’t be able to take same actions as last time  And global coordination that marked last response will be missing THE WORLD AT THE BRINK

16  Resources (human, physical, intellectual, and natural capital) same as before the crisis  Though management of crisis may have undermined social capital  Real output after the crisis—after we eliminate distortions associated with the bubble—should be even higher than before the crisis  Key problem—claims on resources exceed resources  Battle over whose claims are honored  In that battle, all will lose, as wealth gets destroyed  Debt restructuring can make everyone better off  Inflation is a slow process of writing down the “real” debt  But in current environment, neither is likely to happen  Implying extended period of malaise UNDERLYING CRISIS IS ANOTHER REDISTRIBUTIVE BATTLE

17  Restoring social cohesion  Creating a “fairer” society  Necessary to make our economy function better, more stably  Increasing recognition of link between instability and inequality (IMF)  But also necessary to make our politics function better, more stably  We need to create a more responsive politics, with more inclusive participation LONG-RUN PROSPERITY REQUIRES BALANCE OF MARKET AND GOVERNMENT

18  Changes in technology have given us new tools  Changes in technology/information make failures even more apparent  Political reforms can change current unfavorable dynamic  Campaign contributions, mandatory voting, more effective right-to- know laws  “Reinventing government” to make it more responsive and accountable  Public support of media, restrictions on media concentration CREATING A MORE RESPONSIVE AND INCLUSIVE POLITICAL PROCESS

19  Politics sets the rules of the game  Unless the rules are set right, the game is neither efficient nor fair  And such a political/economic system will not be sustainable POLITICS AND ECONOMICS: INSEPARABLE


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