Wednesday, 3 October 2012

Joseph Stiglitz vs the US and the EU

Nobel laureate, Professor Joseph Stiglitz gave an interesting review of the situation in the US at the moment. Notably, he mentioned that in 2011 the six heirs of the Wal-Mart empire had a combined wealth of $70 billion, which equals the combined wealth of the bottom 30% of the US population! Just 6 people. Although I do not consider myself a populist, these figures are amazing. I wouldn't want to know by how much this percentage would rise if both Bill Gates and Warren Buffett joined the above 6. 

Stiglitz states that there has been no improvement in the well-being of the typical American over the last 40 years. On the other hand, the top earners have weekly incomes of 40% more than their compatriots earn in a year. Income inequality appears to be large in the US, compared to other nations in the world. This is measured statistically using an index called the Gini coefficient. Have a look at the following:
Gini Coefficients by nation. Source: Wikipedia
What this Gini coefficient measures is income inequality, with 0.0 being the case where everyone has exactly the same income and 1.0 the maximum inequality where only one person has all the income. It is one of the very few indices where the smaller the better for society. As one may see from the graph, most EU nations have Gini coefficients which are quite low (with the exception of Portugal). The US on the other hand have more income inequality than China, Iran and Uganda! 

Why this difference you may ask? The US are considered to be the largest economy in the world and the American Dream of rags-to-riches has haunted many generations of both immigrants as well as residents. However, this seems more of a fable now than of a plausible scenario. The now rich pay less than 30% of their income and if their profits result from capital gains they get off with much less. And nothing much has been done about this. Greed was the main cause of the sub-prime loan fiasco in 2008, a disaster from which the economy has not fully recovered.

Yet Stiglitz has an important view of the EU at the moment: "The main problem in Europe right now are the austerity packages, they depress demand and weaken economic growth. The reversal of this policy is absolutely essential to develop growth and more equality. Spain, for example, gets weaker and weaker, money flows out of the country, and it is a vicious downward spiral."
And: "No, Europe's crisis is not caused by excessive long-term debts and deficits. It is caused by cutbacks in government expenditures. The recession caused the deficits, not the other way around. Before the crisis Spain and Ireland ran budget surpluses. They cannot be accused of fiscal profligacy. More fiscal discipline will only worsen the downturn. No economy ever recovered from a downturn through austerity"
And still: "... countries are different from households. If a citizen cuts back his spending, it is without any consequences for the country. Unemployment does not increase. But if the government cuts back its spending, it has a major effect. An expansion of spending can increase production by creating jobs that will be filled by people who would otherwise be unemployed."
Stiglitz even answers to those who believe that Draghi will not be able to take the injected liquidity out of the system: "A well-managed central bank has lots of tools. It can raise interest rates or reserve requirements for private banks. So I think there is actually relatively little danger. The weakness in the European economy poses much more of a risk than any risk of moderate inflation. Better some job where the pay has declined in real terms by a few percent than no job at all."

Stiglitz mentions that their are two strategies: one of "more Europe" and one of "no Europe". Although he recognizes that both options will cost Germany some money, the first one will cost much less.

Well, its one of the few times in my lifetime that I have ever agreed with an economist.

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