Think 2011 Was Bad? 2012 Will Be Even Worse: Joseph Stiglitz

By: Joseph E. Stiglitz   Date: 17 January 2012

About The Author

Joseph E. Stiglitz

Professor at Columbia University. Recipient of the Nobel Memorial Prize in Economic Sciences in 2001

Joseph E. Stiglitz, EconomyWatch Contributor

 

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The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by ideology and vested interests, almost seem to reflect a commitment not to grow. As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions.

Think 2011 Was Bad? 2012 Is Set To Be Even Worse: Joseph Stiglitz

In 2011, We Lost Hope. In 2012, We Might Lose Everything
Photo Credit: ssoosay

KOLKATA – The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labour force – meant little to the 50 year olds with little hope of ever holding a job again.

Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than seven million American families have lost their homes.

Related: Rich Nations, Poor People: The Causes For Rising Poverty In The Western World

Related: The American Economy Is In Danger of Stalling: Mohamed El-Erian

The dark underbelly of the previous decade’s financial boom has been fully exposed in Europe as well. Dithering over Greece and key national governments’ devotion to austerity began to exact a heavy toll last year. Contagion spread to Italy. Spain’s unemployment, which had been near 20 percent since the beginning of the recession, crept even higher. The unthinkable – the end of the euro – began to seem like a real possibility.

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6 or 7 percent (the pre-crisis level of 4 or 5 percent is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems.   On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.

Related: Europe’s Policy Problem: Balancing Austerity With Economic Growth

Related: The Endgame For The Eurozone Has Begun: Nouriel Roubini

Moreover, the major emerging-market countries, which steered successfully through the storms of 2008 and 2009, may not cope as well with the problems looming on the horizon. Brazil’s growth has already stalled, fueling anxiety among its neighbours in Latin America.

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.

The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth, and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.

Related: Why Inequality Will Only Lead To Our Downfall: Nouriel Roubini

Related: A Global Transcendence of Change – What The 99% Really Want: Joseph Stiglitz

Even without widening the fiscal deficit, such “balanced budget” increases in taxes and spending would lower unemployment and increase output. The worry, however, is that politics and ideology on both sides of the Atlantic, but especially in the US, will not allow any of this to occur. Fixation on the deficit will induce cutbacks in social spending, worsening inequality. Likewise, the enduring attraction of supply-side economics, despite all of the evidence against it (especially in a period in which there is high unemployment), will prevent raising taxes at the top.

Even before the crisis, there was a rebalancing of economic power – in fact, a correction of a 200-year historical anomaly, in which Asia’s share of global GDP fell from nearly 50 percent to, at one point, below 10 percent. The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow.

Related: A New Economic Disorder – When Old Western Powers & Emerging Markets Clash: Mohamed El-Erian

Related: A Fragile And Unbalanced Global Economy In 2012: Nouriel Roubini

As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions. With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.

By Joseph E. Stiglitz

Copyright: Project-Syndicate, 2012

Joseph Eugene Stiglitz is a professor at Columbia University and the recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979. Stiglitz has authored numerous books including Freefall: America, Free Markets, and the Sinking of the World Economy (2010), Globalisation and its Discontents (2002) and Making Globalisation Work (2006). Learn more about Joseph E. Stiglitz and his work at EconomyWatch.com.

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