Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former Senior Vice President and Chief Economist of the World Bank and chair of the US President’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. His most recent book is The Euro: How a Common Currency Threatens the Future of Europe.
As I have traveled around the world in recent weeks, I am repeatedly asked two questions: Is it conceivable that Donald Trump could win the US presidency? And how did his candidacy get this far in the first place?
As for the first question, though political forecasting is even more difficult than economic forecasting, the odds are strongly in favor of Hillary Clinton. Still, the closeness of the race (at least until very recently) has been a mystery: Clinton is one of the most qualified and well prepared presidential candidates that the United States has had, while Trump is one of the least qualified and worst prepared. Moreover, Trump’s campaign has survived behavior by him that would have ended a candidate’s chances in the past.
So why would Americans be playing Russian roulette (for that is what even a one-in-six chance of a Trump victory means)? Those outside the US want to know the answer, because the outcome affects them, too, though they have no influence over it.
And that brings us to the second question: why did the US Republican Party nominate a candidate that even its leaders rejected?
Obviously, many factors helped Trump beat 16 Republican primary challengers to get this far. Personalities matter, and some people do seem to warm to Trump’s reality-TV persona.
But several underlying factors also appear to have contributed to the closeness of the race. For starters, many Americans are economically worse off than they were a quarter-century ago. The median income of full-time male employees is lower than it was 42 years ago, and it is increasingly difficult for those with limited education to get a full-time job that pays decent wages.
Indeed, real (inflation-adjusted) wages at the bottom of the income distribution are roughly where they were 60 years ago. So it is no surprise that Trump finds a large, receptive audience when he says the state of the economy is rotten. But Trump is wrong both about the diagnosis and the prescription. The US economy as a whole has done well for the last six decades: GDP has increased nearly six-fold. But the fruits of that growth have gone to a relatively few at the top – people like Trump, owing partly to massive tax cuts that he would extend and deepen.
At the same time, reforms that political leaders promised would ensure prosperity for all – such as trade and financial liberalization – have not delivered. Far from it. And those whose standard of living has stagnated or declined have reached a simple conclusion: America’s political leaders either didn’t know what they were talking about or were lying (or both).
Trump wants to blame all of America’s problems on trade and immigration. He’s wrong. The US would have faced deindustrialization even without freer trade: global employment in manufacturing has been declining, with productivity gains exceeding demand growth.
Where the trade agreements failed, it was not because the US was outsmarted by its trading partners; it was because the US trade agenda was shaped by corporate interests. America’s companies have done well, and it is the Republicans who have blocked efforts to ensure that Americans made worse off by trade agreements would share the benefits.
Thus, many Americans feel buffeted by forces outside their control, leading to outcomes that are distinctly unfair. Long-standing assumptions – that America is a land of opportunity and that each generation will be better off than the last – have been called into question. The global financial crisis may have represented a turning point for many voters: their government saved the rich bankers who had brought the US to the brink of ruin, while seemingly doing almost nothing for the millions of ordinary Americans who lost their jobs and homes. The system not only produced unfair results, but seemed rigged to do so.
Support for Trump is based, at least partly, on the widespread anger stemming from that loss of trust in government. But Trump’s proposed policies would make a bad situation much worse. Surely, another dose of trickle-down economics of the kind he promises, with tax cuts aimed almost entirely at rich Americans and corporations, would produce results no better than the last time they were tried.
In fact, launching a trade war with China, Mexico, and other US trading partners, as Trump promises, would make all Americans poorer and create new impediments to the global cooperation needed to address critical global problems like the Islamic State, global terrorism, and climate change. Using money that could be invested in technology, education, or infrastructure to build a wall between the US and Mexico is a twofer in terms of wasting resources.
There are two messages US political elites should be hearing. The simplistic neo-liberal market-fundamentalist theories that have shaped so much economic policy during the last four decades are badly misleading, with GDP growth coming at the price of soaring inequality. Trickle-down economics hasn’t and won’t work. Markets don’t exist in a vacuum. The Thatcher-Reagan “revolution,” which rewrote the rules and restructured markets for the benefit of those at the top, succeeded all too well in increasing inequality, but utterly failed in its mission to increase growth.
This leads to the second message: we need to rewrite the rules of the economy once again, this time to ensure that ordinary citizens benefit. Politicians in the US and elsewhere who ignore this lesson will be held accountable. Change entails risk. But the Trump phenomenon – and more than a few similar political developments in Europe – has revealed the far greater risks entailed by failing to heed this message: societies divided, democracies undermined, and economies weakened.
Capital in the Twenty-first Century by Thomas Piketty
by Stephanie Flanders
There has been an intense debate about this surprise bestseller. What is the upshot?
This is a VIB – very important book. Nearly everyone agrees about that. But the reasons for its importance have changed in the months since it was published. At first it was important because it was a big book on a big subject: a book of grand ambition about inequality, written not by the latest “thinker” but a respected academic economist with real numbers to go with his theory. We hadn’t had anything like that in ages. This was the “Piketty as rockstar” phase, when the book was an “improbable hit” and people wrote breathless articles about the modern successor to Marx who could crunch the numbers but also quote Balzac, The Simpsons and The West Wing.
Writing a bestselling economics book is usually a good way to make other economists hate you. But at first even they heaped praise on Thomas Piketty for casting fresh light on inequality – an area where the official statistics are notoriously weak. Say what you like about the theory, the argument went, you had to thank him for the numbers.
At this point you didn’t need to read it to have an opinion about it. Indeed for some, not having read it was a badge of pride. Ed Miliband unashamedly told people he hadn’t got beyond the first chapter – and kept on saying that for several weeks. Maybe he has now. Or maybe he’s just decided that the debate about the book is more important than the book itself. That’s certainly the conclusion I have come to, and not just because several of its central arguments have now been questioned.
There are many claims in the 700-odd pages, but let me highlight some of the important ones, before moving on to whether – and why – any of this matters.
Claim one is that income inequality has increased sharply since the late 1970s, with a particularly dramatic rise in the share of total income going to the very highest earners. The most quoted Piketty statistic here is one that no one, to my knowledge, has questioned: that 60% of the increase in US national income in the 30 years after 1977 went to just the top 1% of earners. The only section of the US population that has done better than the top 1% is the top 10th of that 1%. The top 100th of the 1% have done best of all.
These are remarkable numbers. Uncovering and bringing together this data for the US and a handful of other countries using tax returns is a major achievement, which some say merits a Nobel prize on its own. Piketty goes on to show that this dramatic rise in income inequality hasn’t happened in all rich economies, and, oddly, does not really have much to do with capital. Even in the US, it has been driven by soaring salaries at the top end of the pay scale, not rising incomes from capital.
That rather large complication to the story does not stop Piketty focusing the rest of the book on capital, which he says has also become more unequally distributed since the 1970s, not just in the US but in Europe too. He believes this trend toward greater wealth inequality is very likely to continue, because the returns from capital are likely to grow faster than the economy itself, and faster than the owners of that wealth are likely to be able to spend it.
This is the “central contradiction of capitalism”, which he summarises with a Marxian turn of phrase: “the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future.”
This is where things get tricky, not just for Piketty but for the general reader, who simply wants to know whether he’s right. Let me cut to the chase and say that the evidence for rising wealth inequality is not nearly as clear as the evidence for rising inequality of incomes. Further, even some of Piketty’s biggest fans in the academic world have their doubts whether the forces pushing the economy in that direction are as strong as he suggests. Most would agree that the developed economies are likely to grow more slowly as their populations get older. This might have the “terrifying” consequences for wealth inequality that he suggests, but it’s also possible that slower growth will be as costly to the owners of capital as it is for everyone else. Their share of the total pie might even decrease.
That is actually what has happened in the UK recently. In the boom years after the mid 90s, the owners of capital took a larger share of national income, and the labour share tended to decline. But the trend reversed itself when the economy hit the skids in 2007, and the labour share is back to where it was in the early 70s. Income inequality has also fallen slightly over this period, at least in the UK. So, whatever terrible things have happened to our economy in the past five years, they haven’t followed the long-term path sketched out by Piketty. Rather the opposite.
There is some evidence that the top 10% in the US is sitting on a higher share of total wealth now than in the 70s. But it’s difficult to draw similar conclusions about Britain or France because the data is so patchy. From what we can tell, the share of total wealth held by the top 1% – and 0.01% – hasn’t changed much at all.
Piketty has some interesting analysis demonstrating that wealth begets more wealth: the richer university endowments, for example, tend to earn the highest returns on their investments, not just in absolute but percentage terms. This rings true and also has some economic logic to it. The more money you have to invest, the more – in cash terms – you can afford to spend on finding the best opportunities, without materially cutting into your returns. As a force for rising wealth inequality this makes sense and probably merits a book of its own, given that individuals across the developed world are increasingly having to take greater responsibility for saving for their retirement. It matters if small investors are going to be systematically disadvantaged in making these long-term investments.
But the concentration of wealth at the top doesn’t seem as inexorable as all that. As the economist and former US treasury secretary Larry Summers has pointed out, most of the people on the list of 400 wealthiest Americans in 1982 would have had enough to money to qualify in 2012 if they had simply earned a return of 4% a year. But fewer than a 10th actually did so. The proportion of the top 400 who inherited their wealth has actually been falling – not rising, as Piketty’s theory would also suggest.
Given what has been happening to incomes at the top, you would expect to have seen more concentration of wealth than we can find in the data. That might be – as Piketty suggests – because rich people are good at hiding their money from the taxman. But it might also be because they are very good at spending their money, and their children even more so. I was at a conference recently for advisers and trustees to family estates, and was amused to hear speaker after speaker assert that the “biggest threat” to a family fortune was “not the taxman or the markets but the family itself”.
Say we agree with Piketty, and conclude that wealth has become more concentrated, his own numbers show this is a fairly recent phenomenon. As he admits, the single most important structural change in the distribution of wealth in the past 100 years has been in the other direction. That is the emergence of a new “patrimonial class”, somewhere between rich and poor, owning 25%-35% of the nation’s wealth.
He describes the emergence of this class in the middle years of the 20th century as a transformation that “deeply altered the social landscape and the political structure of society and helped redefine the terms of distributive conflict”. That may well be true. But for me, what’s more interesting about this shift is not what it might or might not have done for “the terms of distributive conflict”, but what it did for households – and the broader economy. Piketty really doesn’t go into that at all, which is a shame because if you don’t have a clear understanding of the benefits of broader capital ownership it’s difficult to explain why it’s so “terrifying” if things are now moving back in the other direction.
The latest official survey of UK household incomes and wealth shows that around a third of all UK households has either negative net worth – debts greater than their assets – or net financial assets worth less than £5,000. I am more worried about that lack of wealth at the bottom and in the middle of the income scale than about the squillions being amassed by a very few.
We know that families with that little to fall back on are much more likely to fall into long-term cycles of dependency and poverty. We also know – and if we didn’t know we could learn from reading the Daily Mail that Piketty’s “patrimonial middle class” feels more squeezed these days, whatever might have happened to the financial value of their home. He seems to assume that all these things are connected, that the greater income flowing to the 1% is making things worse for everyone else. But he never really makes the case. That is remarkable omission for a book of such magisterial sweep.
When I was first learning economics in the late 80s and 90s, the UK was just getting used to the free-market idea that higher incomes at the top did not have to mean lower incomes at the bottom. To ensure growth in the economy, the message went, you had to give the “wealth creators” the incentive to increase both the pie and their slice of it. Economists still believe that, up to a point. But in the wake of the financial crisis there has been broader acceptance of the view that very high levels of income inequality can increase the risk of such crises, and so hurt the economy. We also have evidence – from the IMF, of all places – that in unequal economies, more redistributive taxes might promote faster growth. As with most things, it’s a matter of degree.
This all helps to explain why Piketty’s book has been such a smash. Many people are worried about the slow rate of growth in the developed economies since the financial crisis in 2008. Many are also worried about rising inequality. At first glance, Capital seems to offer an elegant way to explain both. But, by his own admission, the world is a lot more complicated than talk of a “central contradiction to capitalism” might suggest. So is the relationship between capital accumulation and growth.
Like Miliband, Piketty sees a clear difference between the wealth creators and the asset strippers – between the fat cat “rentier” capital that devours the future and the more socially useful capital of the entrepreneur. But his own broad definition of capital doesn’t really help us draw that kind of distinction. It’s all thrown in together, along with all of our houses, and everything else with a financial value that can be bought or sold. That’s a pity because if there’s one thing that policymakers around the world are looking for it’s a way to channel a bit more money into productive investment – and a bit less into house prices and stocks and shares.
Piketty deserves huge credit for kickstarting a debate about inequality and illuminating the distribution of income and wealth. But when it comes to the forces driving growth and wealth accumulation in our modern economy what he has probably done most to bring out into the open is our collective ignorance and confusion.
SARAWAK Report: Rosmah and Najib Razak apply pressure on Thai Government regarding Xavier Justo
Shock news from Bangkok has confirmed that the so-called ‘holiday’ taken by Najib Razak and wife Rosmah in Thailand this week was no coincidence.
In a dramatic reversal, the Thai authorities have made a U-turn over a promised prisoner transfer agreement for Xavier Justo with the Swiss Government.
Under normal rules for prisoner release the star witness and whistleblower in the 1MDB/PetroSaudi financial scandal had been due to be returned to Switzerland on September 1st.
Informal assurances had already been given to the Swiss and US authorities that this was indeed the case and that only a few formalities were needed and papers to be signed.
Then on August 31 there was a sudden delay. Diplomatic whispers explained that since Najib was due to visit in early September it would be polite not to dominate his visit with headlines concerning his global kleptocracy case.
However, Laura Justo told Sarawak Report that she feared the Malaysians were pressurising the Thais to keep this embarrassing witness in the 1MDB case from testifying to global regulators against Najib and his former colleagues at PetroSaudi.
Her fears now seem born out. The formal meeting to secure the transfer had been postponed till today (September 16), just after the Malaysian couple had left. However, Justo’s lawyers confirmed that the papers were now all ready to be signed for his immediate transfer, already delayed under the inter-country convention on prisoners.
There was never any doubt Rosmah would fight this release
The Justo family had made a decision to lower their profile during this sensitive period to allow formal procedures to take place. However, there was increasing concern that the desperate tactics they had already experienced at the hands of the Malaysians and PetroSaudi, now in centre frame for the world’s biggest ever kleptocracy case, would again come into play.
“They were there [in Thailand] to use every influence they had, power, money, sweetheart deals and cooperation, to get the Thais to hold on to Justo. They played the same game with Singapore. They are willing to sell out their country’s interests to save their skin” explained one observer, close to the family.
Laura Justo went public on the circumstances of her husband’s arrest and conviction in July. She explained how PetroSaudi operatives had blackmailed him into a forced confession and had boasted they had “paid everyone in Thailand” to get him arrested.
The British Director of the company, Patrick Mahony, has further admitted in a recorded conversation that behind him it was Najib who was directing the operation because:
“A Prime Minister of a country is in deep shit because of him [Justo]”
But Malaysia’s first couple and their entourage, who refuse to accept they are not all powerful and protected by impunity are still using every power they have to fight through and cement their grip on the situation.
Sure enough, today Thailand presented a U-turn to the Swiss authorities, whom they had earlier assured that all was proceeding with the transfer.
“Because of all the delays in releasing him and the recent amnesty the Thais are now saying that Xavier now has just less than a year left to serve, which means he apparently can’t be transferred! This is a complete turnaround on their previous commitments and they are playing games” wife Laura Justo has told Sarawak Report.
“My biggest fear is that the Malaysians will try and take this a step further and extradite him under some kind of legal pretence” Laura added.
Thai officials have now further warned Justo’s lawyers that despite there being ‘less than a year to serve’ there could be several months of delay after the end of the sentence before he can be released, because of ‘paperwork delays’!
Najib’s game plan to stay in power against growing coalition
Najib has changed his strategies by the day to keep power in the face of increasing exposure over 1MDB.
First, he lied and organised the jailing of Justo in Thailand. He then persuaded a Saudi Minister to appear to condone a story that Malaysia’s stolen billions had been ‘donated’ from an anonymous Royal donor.
Now that the US Department of Justice has exposed the whole scam Najib seems determined to just bludgeon control in Malaysia as a growing coalition of political forces are joining from all sides against him.
The couple are now preparing to fight early elections in March and Najib is trying to bulldoze through a last minute further gerrymandering of seats to disadvantage already disadvantaged opposition politicians – the size of many opposition seats is now well over ten times those of BN held constituencies, which are located mainly in rural areas where the party believes it can control the outcome through ‘money politics’.
With this ‘mandate’ the desperate ‘first couple’ believe they will be able to sweep aside all protests over their billion dollar heists.
Council of War – Jho Low joined Najib/Rosmah in Thai retreat
The purpose of the extended visit in Bangkok was plain from the start, observers say. The Malaysian Prime Minister and his wife were there to offer whatever was wanted to the Thai leadership seeking cooperation on border controls.
Malaysia’s public money is also plainly on offer to smooth any consciences in a country which PetroSaudi Directors had bragged that ‘everyone’ can be bought.
Joining the couple in Thailand was none other than the fugitive 1MDB financier Jho Low, sources have told Sarawak Report.
Others linked to 1MDB, including Nik Faisal Arif Kamil, the executive still in charge of the former subsidiary SRC International, is also believed to have joined the council of war in Thailand. SRC borrowed RM4 billion from the pension fund KWAP in 2012 and has yet to produce a satisfactory account of where that money now is. However, several millions have been traced into Najib Razak’s private spending accounts from SRC.
Nik Kamil is known to have now returned to his home in KL, which is believed to now be the safest place for known 1MDB fugitives from the international manhunt for key players in the theft.
However, Low, who is instantly recognisable in Malaysia, has not dared to returned to the country since he was exposed last year for stealing billions of the country’s development money on behalf of Najib.
Sarawak Report has previously revealed that Taiwan and Bangkok have been his favourite haunts since then, although the financier also still retains his yacht, which recently returned to Hong Kong, where he is believed to be attempting to make a sale.
Only serious nerds like me eagerly await the annual Census Bureau reports on income, poverty and health insurance. But the just-released reports on 2015 justified the anticipation.
We expected good news; but last year, it turns out, the economy partied like it was 1999. And this tells us something very important — namely, that a government that wants to can make American society more equitable, improving the quality of life for ordinary families.
The reports showed strong progress on three fronts: rapid growth in the incomes of ordinary families — median income rose a remarkable 5.2 percent; a substantial decline in the poverty rate; and a significant further rise in health insurance coverage after 2014’s gains. It was a trifecta that we haven’t hit since, yes, 1999.
It’s true that the surge in median income comes after years of disappointment, and even now the typical family’s income, adjusted for inflation, is slightly lower than it was before the financial crisis. But the percentage of Americans without health insurance is now at a record low. And the overall performance of the Obama economy has given the lie to much of the criticism leveled at President Obama’s policies.
Think back to the 2012 election campaign. There were already signs of the conspiracy-theory, bigotry-driven politics of this year’s election; Donald Trump was loudly proclaiming that Mr. Obama’s birth certificate was fake, and Mitt Romney eagerly accepted Mr. Trump’s endorsement.
But there was also something of a policy debate. Republicans accused Mr. Obama of being a “redistributionist,” taking money away from “job creators” to give free stuff to the 47 percent. And they claimed that these socialistic policies were destroying incentives and blocking economic recovery.
There was, in fact, a grain of truth in the first part of this accusation. Mr. Obama is no socialist, but since his re-election he has presided over a significant rise in taxes on high incomes. In fact, the top one percent is now paying about the same share of its income in federal taxes as it did in 1979, before Ronald Reagan began the era of big tax cuts for the rich. And some of the increased tax take is being used to subsidize health insurance for middle- and lower-income families.
Conservatives predicted disaster from these initiatives. Tax hikes on the rich, they insisted, would stall the economy. Obamacare’s combination of regulation and subsidies, they declared, would kill millions of jobs without increasing the number of Americans with insurance.
What happened instead after Mr. Obama was re-elected was the best job growth since the 1990s. But family incomes, at least as estimated by the Census, continued to lag. So there was still some statistical basis for the right’s Obama-bashing. Now that statistical basis is gone.
You might ask whether these numbers reflect reality. It’s often claimed that Americans aren’t feeling any economic recovery — and if anyone were to ask Mr. Trump, he would no doubt claim that the Census numbers, like every number he doesn’t like, are cooked.
But be wary of polling on this issue. When Americans are asked how the economy is doing, many of them just repeat what they think they heard on Fox News: By large margins, Republicans say that unemployment is up and the stock market is down under Mr. Obama, the opposite of the truth. On the other hand, when you ask people how well they personally are doing, the Obama years have been marked by large improvements — a sharp increase in the percentage of Americans who see themselves as thriving.
So the good news is real. And it should (but won’t) finally break the grip of trickle-down ideology on much of our political class.
You know how the argument goes: Any attempt to help working families directly, we’re told, will backfire by hurting the economy as a whole. So we must cut taxes on those “job creators” instead, counting on a rising tide to raise all boats.
It would be an exaggeration to say that the Obama administration has done the reverse, but there definitely was an element of trickle-up economics in its response to the Great Recession: Much of the stimulus involved expanding the social safety net, not just to protect the vulnerable, but to increase purchasing power and sustain demand. And in general Obama-era policies have tried to help families directly, rather than by showering benefits on the rich and hoping that the benefits trickle down.
Now the results of this policy experiment are in, and they’re not bad. They could have been better: The stimulus should have been bigger and more sustained, and Republican opposition hamstrung the administration’s economic policy after the first two years. Still, progressive policies have worked, and the critics of those policies have been proved wrong.
I’m on my way to interview Joseph Stiglitz, economic guru of the political left, about his latest book, The Euro and its Threat to The Future of Europe.
Waiting in the reception of Penguin Books, I notice on display an early, Penguin “classic” edition of George Orwell’s 1984. Orwell is one of those authors who is claimed as their own by both right and left – the left because of his writings on social deprivation, but the right too because of his deep aversion, depicted in Animal Farm and 1984, to totalitarian communism.
I’m not sure Stiglitz, a Nobel prize winning economist who has advised the Scottish government on independence, the Far Left Syriza government in Greece, and very briefly sat on Jeremy Corbyn’s now disbanded economic advisory panel, crosses the boundaries in quite the same way, but there is no doubt that as a critique of the euro, his new book will appeal as much to a right as to the left.
I put this point to Stiglitz at the start of our interview.
It is the absence of any proper economic adjustment mechanism which is the over-riding failure in Europe–Joseph Stiglitz.
“Yes, it’s a fair summary”, he says, “except for one thing. One of the arguments I make for the failure of the euro is that at the time it was being constructed there was a “neo-liberal” ideology which said that all we need to do to make this thing work is to get deficits low, keep inflation low and take down barriers and then everything would be fine.
“That was a very conservative ideology, that if you did those things the markets would on their own adjust and everything else would come right. Not all right wing conservatives thought that, but a lot of what I call ‘market fundamentalism’ did go into the thinking on the euro.”
But most of those in Britain who thought the euro a mad idea were on the political right, I point out.
Stiglitz says that he is not really talking about the issues of national sovereignty raised by the euro. “I was thinking more in terms of the macro-economic adjustment. It is the absence of any proper economic adjustment mechanism which is the over-riding failure in Europe. Where the left and right would agree – and this speaks to the whole Brexit debate – is that Europe needs economic arrangement that work well for a very diverse group of countries.
“This requires a balance between flexibility and harmonisation, and in opting for monetary union they didn’t get that balance right. We see the lack of it particularly in the rigidity that Germany imposes on the eurozone’s crisis hit countries”.
The theme of Stiglitz’s book is that monetary union was basically where it all went wrong for the European Union. A project that was meant to bring countries together has succeeded only in tearing them apart in a manner which now threatens wider European economic and social stability.
“There have been other things that Europe got wrong, but monetary union was the overarching macro economic mistake. We can see this most clearly in the fact that some countries not in the euro but with the same regulatory framework, such as the UK and Sweden, did much better.”
So what, fundamentally, is the problem with the euro?
“For the first nine years up until 2008 there were no symptoms, or no obvious ones, of how dysfunctional things really were. But actually the euro was already creating its own problems.
“When the financial crisis hit, it was roundly blamed on the US, but in fact a very large part of Europe’s crisis was created by the euro.
“The single currency gave markets this excessive confidence. They began to confuse the absence of exchange rate risk with the absence of risk per se. Monetary union had taken away the ability of individual governments to curb domestic inflationary pressures, which led to an increase in price levels relative to Germany. Real exchange rates became out of line.
“One of the key points of the book is that it is easy to create these imbalances, made possible by the easy flow of money between countries under the euro, but with a rigid exchange rate it is very hard to undo them.
“There are only two ways of doing it. Have Germany inflate, or have the others deflate. Germany was unwilling to inflate. But deflation doesn’t work easily either because your debts are still owed, and that means that in forcing countries to deflate you make them even more fragile”.
We move onto the issue that most puzzles Anglo-Saxon commentators such as myself; if the euro is so bad, how come it has lasted so long?
“Well, you have to take account of the eight or nine years before the problem became apparent. Then there was ‘oh it has worked for nine years’ – even though it hadn’t – ‘so the crisis will be over quickly and we can make it work again’. When you have already invested heavily in something, it is very difficult to cut your losses. There is always a tendency to think that with just a little more investment, it can be made to work.
“So the politicians said, just accept a little bit of temporary pain and everything will be OK again. After two years that wasn’t true. And time and again it turns out not to be true. Good money is constantly thrown after bad.
“Imagine yourself in the position of a Greek politician, with 25pc unemployment and an escalating financial commitment as a result of the fight to stay in the euro. As things go more and more wrong, you become ever more committed to the policy that got you there because to admit you are wrong is to say we have suffered all this pain for nothing”.
Does this mean Europe is essentially damned, I ask?
“The most likely scenario is a continued muddling through, which is what they have been doing to date. But neither Frankfurt nor Brussels controls events, as the Brexit referendum vote shows, so what you see – and this is not for sure but almost predictable – is growing alienation.
“This is already apparent in electoral outcomes. More than 60pc of people in Spain, Greece and Portugal voted against austerity parties. The same thing with Brexit, which was also a rebellion against the political centre.
“The only thing that saves the centre ground is that the anti-establishment movement is divided between left and right. So you get a stalemate which is also not at all good for anyone, and out of that who knows what happens.
“Getting a political coalition in any country large enough to leave the euro is therefore difficult. What’s so troubling is that it is also proving impossible for Europe to agree on policies to fix the euro, so you have neither one thing or the other. Despite his apparent pessimism, Stiglitz is not short on suggested solutions.
“If you had a group of people sitting around a table rationally discussing the future of Europe, these are the sort of things they might come up with.
“One is to say let’s finish the job. The US shares a common currency among 50 diverse states, so what are the institutions and rules needed to make the single currency work.
“As a bare minimum, you need common deposit insurance, a banking union, Eurobonds, maybe industrial policies to allow those at the bottom to catch up, you need to move away from just inflation targeting, and you need some way of adjusting real exchange rate that doesn’t involve internal devaluation.
“Germany has to perform its role of allowing its economy to inflate relative to others. So those are the minimum to make a euro that works.
“But Germany takes the view that we are not a transfer union and we won’t even take the risk of a banking union or of common deposit insurance. This is like New York saying we don’t want to have federal deposit insurance because there is a bank in Alabama which might go bankrupt.”
If completing the job proves impossible, says Stiglitz, that leaves the alternative of an “amicable divorce”.
“In the book I use the example of marriage councillors. In the past, the job of the marriage councillor was to keep the marriage together, but modern ones sometimes say you should never have got married in the first place.
“Once you have accepted the marriage can’t be made to work, then the only issue is how to make splitting up go as smoothly as possible.
“In the book, I describe some novel ways of doing this. The core of the idea is that you are going to have to allow redenomination of debt, and allow some form of bankruptcy.
“A third way is the flexible euro where you say lets try and consolidate the institutional advances we have made but recognise that we are not anywhere near a single currency yet. And then I describe some mechanisms that would allow the exchange rate to be operated flexibly and allow economic adjustment”.
So what are the chances of any of these “solutions” being adopted, I ask.“I’m hopeful”, Stiglitz says with a grin, which somewhat suggests he’s not.
The death of neoliberalism and the crisis in western politics
By Marton Jacques
In the early 1980s the author was one of the first to herald the emerging dominance of neoliberalism in the west. Here he argues that this doctrine is now faltering. But what happens next?
Donald Trump seeks a return to 1950s America, well before the age of neoliberalism. Photograph: H. Armstrong Roberts/Retrofile/Getty Images
The western financial crisis of 2007-8 was the worst since 1931, yet its immediate repercussions were surprisingly modest. The crisis challenged the foundation stones of the long-dominant neoliberal ideology but it seemed to emerge largely unscathed. The banks were bailed out; hardly any bankers on either side of the Atlantic were prosecuted for their crimes; and the price of their behaviour was duly paid by the taxpayer. Subsequent economic policy, especially in the Anglo-Saxon world, has relied overwhelmingly on monetary policy, especially quantitative easing. It has failed. The western economy has stagnated and is now approaching its lost decade, with no end in sight.
After almost nine years, we are finally beginning to reap the political whirlwind of the financial crisis. But how did neoliberalism manage to survive virtually unscathed for so long? Although it failed the test of the real world, bequeathing the worst economic disaster for seven decades, politically and intellectually it remained the only show in town. Parties of the right, centre and left had all bought into its philosophy, New Labour a classic in point. They knew no other way of thinking or doing: it had become the common sense. It was, as Antonio Gramsci put it, hegemonic. But that hegemony cannot and will not survive the test of the real world.
But the causes of this political crisis, glaringly evident on both sides of the Atlantic, are much deeper than simply the financial crisis and the virtually stillborn recovery of the last decade. They go to the heart of the neoliberal project that dates from the late 70s and the political rise of Reagan and Thatcher, and embraced at its core the idea of a global free market in goods, services and capital. The depression-era system of bank regulation was dismantled, in the US in the 1990s and in Britain in 1986, thereby creating the conditions for the 2008 crisis. Equality was scorned, the idea of trickle-down economics lauded, government condemned as a fetter on the market and duly downsized, immigration encouraged, regulation cut to a minimum, taxes reduced and a blind eye turned to corporate evasion.
The first inkling of the wider political consequences was evident in the turn in public opinion against the banks, bankers and business leaders. For decades, they could do no wrong: they were feted as the role models of our age, the default troubleshooters of choice in education, health and seemingly everything else. Now, though, their star was in steep descent, along with that of the political class. The effect of the financial crisis was to undermine faith and trust in the competence of the governing elites. It marked the beginnings of a wider political crisis.
It should be noted that, by historical standards, the neoliberal era has not had a particularly good track record. The most dynamic period of postwar western growth was that between the end of the war and the early 70s, the era of welfare capitalism and Keynesianism, when the growth rate was double that of the neoliberal period from 1980 to the present.
Ronald Reagan and Margaret Thatcher, pictured in 1984, ushered in the era of neoliberalism. Photograph: Bettmann Archive
But by far the most disastrous feature of the neoliberal period has been the huge growth in inequality. Until very recently, this had been virtually ignored. With extraordinary speed, however, it has emerged as one of, if not the most important political issue on both sides of the Atlantic, most dramatically in the US. It is, bar none, the issue that is driving the political discontent that is now engulfing the west. Given the statistical evidence, it is puzzling, shocking even, that it has been disregarded for so long; the explanation can only lie in the sheer extent of the hegemony of neoliberalism and its values.
But now reality has upset the doctrinal apple cart. In the period 1948-1972, every section of the American population experienced very similar and sizable increases in their standard of living; between 1972-2013, the bottom 10% experienced falling real income while the top 10% did far better than everyone else. In the US, the median real income for full-time male workers is now lower than it was four decades ago: the income of the bottom 90% of the population hasstagnated for over 30 years.
A not so dissimilar picture is true of the UK. And the problem has grown more serious since the financial crisis. On average, between 65-70% of households in 25 high-income economies experienced stagnant or falling real incomes between 2005 and 2014.
As Thomas Piketty has shown, in the absence of countervailing pressures, capitalism naturally gravitates towards increasing inequality. In the period between 1945 and the late 70s, Cold War competition was arguably the biggest such constraint. Since the collapse of the Soviet Union, there have been none. As the popular backlash grows increasingly irresistible, however, such a winner-takes-all regime becomes politically unsustainable.
Large sections of the population in both the US and the UK are now in revolt against their lot, as graphically illustrated by the support for Trump and Sanders in the US and the Brexit vote in the UK. This popular revolt is often described, in a somewhat denigratory and dismissive fashion, as populism. Or, as Francis Fukuyama writes in a recent excellent essay in Foreign Affairs: “‘Populism’ is the label that political elites attach to policies supported by ordinary citizens that they don’t like.” Populism is a movement against the status quo. It represents the beginnings of something new, though it is generally much clearer about what it is against than what it is for. It can be progressive or reactionary, but more usually both.
Brexit is a classic example of such populism. It has overturned a fundamental cornerstone of UK policy since the early 1970s. Though ostensibly about Europe, it was in fact about much more: a cri de coeur from those who feel they have lost out and been left behind, whose living standards have stagnated or worse since the 1980s, who feel dislocated by large-scale immigration over which they have no control and who face an increasingly insecure and casualised labour market. Their revolt has paralysed the governing elite, already claimed one prime minister (David Cameron), and left the latest one fumbling around in the dark looking for divine inspiration (Theresa May).
The wave of populism marks the return of class as a central agency in politics, both in the UK and the US. This is particularly remarkable in the US. For many decades, the idea of the “working class” was marginal to American political discourse. Most Americans described themselves as middle class, a reflection of the aspirational pulse at the heart of American society. According to a Gallup poll, in 2000 only 33% of Americans called themselves working class; by 2015 the figure was 48%, almost half the population.
Brexit, too, was primarily a working-class revolt. Hitherto, on both sides of the Atlantic, the agency of class has been in retreat in the face of the emergence of a new range of identities and issues from gender and race to sexual orientation and the environment. The return of class, because of its sheer reach, has the potential, like no other issue, to redefine the political landscape.
The re-emergence of class should not be confused with the labour movement. They are not synonymous: this is obvious in the US and increasingly the case in the UK. Indeed, over the last half-century, there has been a growing separation between the two in Britain. The re-emergence of the working class as a political voice in Britain, most notably in the Brexit vote, can best be described as an inchoate expression of resentment and protest, with only a very weak sense of belonging to the labour movement.
Indeed, Ukip has been as important – in the form of immigration and Europe – in shaping its current attitudes as the Labour party. In the United States, both Trump and Sanders have given expression to the working-class revolt, the latter almost as much as the former. The working class belongs to no one: its orientation, far from predetermined, as the left liked to think, is a function of politics.
The neoliberal era is being undermined from two directions. First, if its record of economic growth has never been particularly strong, it is now dismal. Europe is barely larger than it was on the eve of the financial crisis in 2007; the United States has done better but even its growth has been anaemic. Economists such as Larry Summers believe that the prospect for the future is most likely one of secular stagnation.
Worse, because the recovery has been so weak and fragile, there is a widespread belief that another financial crisis may well beckon. In other words, the neoliberal era has delivered the west back into the kind of crisis-ridden world that we last experienced in the 1930s. With this background, it is hardly surprising that a majority in the west now believe their children will be worse off than they were. Second, those who have lost out in the neoliberal era are no longer prepared to acquiesce in their fate – they are increasingly in open revolt. We are witnessing the end of the neoliberal era. It is not dead, but it is in its early death throes, just as the social-democratic era was during the 1970s.
The Earth Institute@Columbia University’s Jeffery Sachs
A sure sign of the declining influence of neoliberalism is the rising chorus of intellectual voices raised against it. From the mid-70s through the 80s, the economic debate was increasingly dominated by monetarists and free marketeers. But since the western financial crisis, the centre of gravity of the intellectual debate has shifted profoundly. This is most obvious in the United States, with economists such as Joseph Stiglitz, Paul Krugman, Dani Rodrik and Jeffrey Sachs becoming increasingly influential. Thomas Piketty’s Capital in the Twenty-First Century has been a massive seller. His work and that of Tony Atkinson and Angus Deaton have pushed the question of the inequality to the top of the political agenda. In the UK, Ha-Joon Chang, for long isolated within the economics profession, has gained a following far greater than those who think economics is a branch of mathematics.
Meanwhile, some of those who were previously strong advocates of a neoliberal approach, such as Larry Summers and the Financial Times’s Martin Wolf, have become extremely critical. The wind is in the sails of the critics of neoliberalism; the neoliberals and monetarists are in retreat. In the UK, the media and political worlds are well behind the curve. Few recognise that we are at the end of an era. Old attitudes and assumptions still predominate, whether on the BBC’s Today programme, in the rightwing press or the parliamentary Labour party.
Following Ed Miliband’s resignation as Labour leader, virtually no one foresaw the triumph of Jeremy Corbyn in the subsequent leadership election. The assumption had been more of the same, a Blairite or a halfway house like Miliband, certainly not anyone like Corbyn. But the zeitgeist had changed. The membership, especially the young who had joined the party on an unprecedented scale, wanted a complete break with New Labour. One of the reasons why the left has failed to emerge as the leader of the new mood of working-class disillusionment is that most social democratic parties became, in varying degrees, disciples of neoliberalism and uber-globalisation. The most extreme forms of this phenomenon were New Labour and the Democrats, who in the late 90s and 00s became its advance guard, personified by Tony Blair and Bill Clinton, triangulation and the third way.
But as David Marquand observed in a review for the New Statesman, what is the point of a social democratic party if it doesn’t represent the less fortunate, the underprivileged and the losers? New Labour deserted those who needed them, who historically they were supposed to represent. Is it surprising that large sections have now deserted the party who deserted them? Blair, in his reincarnation as a money-obsessed consultant to a shady bunch of presidents and dictators, is a fitting testament to the demise of New Labour.
‘Virtually no one foresaw the triumph of Jeremy Corbyn’, pictured at rally in north London last week. Photograph: Daniel Leal-Olivas/AFP/Getty Images
The rival contenders – Burnham, Cooper and Kendall – represented continuity. They were swept away by Corbyn (pic above), who won nearly 60% of the votes. New Labour was over, as dead as Monty Python’s parrot. Few grasped the meaning of what had happened. A Guardian leader welcomed the surge in membership and then, lo and behold, urged support for Yvette Cooper, the very antithesis of the reason for the enthusiasm. The PLP refused to accept the result and ever since has tried with might and main to remove Corbyn.
Just as the Labour party took far too long to come to terms with the rise of Thatcherism and the birth of a new era at the end of the 70s, now it could not grasp that the Thatcherite paradigm, which they eventually came to embrace in the form of New Labour, had finally run its course. Labour, like everyone else, is obliged to think anew. The membership in their antipathy to New Labour turned to someone who had never accepted the latter, who was the polar opposite in almost every respect of Blair, and embodying an authenticity and decency which Blair patently did not.
Labour may be in intensive care, but the condition of the Conservatives is not a great deal better.
Corbyn is not a product of the new times, he is a throwback to the late 70s and early 80s. That is both his strength and also his weakness. He is uncontaminated by the New Labour legacy because he has never accepted it. But nor, it would seem, does he understand the nature of the new era. The danger is that he is possessed of feet of clay in what is a highly fluid and unpredictable political environment, devoid of any certainties of almost any kind, in which Labour finds itself dangerously divided and weakened.
Labour may be in intensive care, but the condition of the Conservatives is not a great deal better. David Cameron was guilty of a huge and irresponsible miscalculation over Brexit. He was forced to resign in the most ignominious of circumstances. The party is hopelessly divided. It has no idea in which direction to move after Brexit. The Brexiters painted an optimistic picture of turning away from the declining European market and embracing the expanding markets of the world, albeit barely mentioning by name which countries it had in mind. It looks as if the new prime minister may have an anachronistic hostility towards China and a willingness to undo the good work of George Osborne. If the government turns its back on China, by far the fastest growing market in the world, where are they going to turn?
Brexit has left the country fragmented and deeply divided, with the very real prospect that Scotland might choose independence. Meanwhile, the Conservatives seem to have little understanding that the neoliberal era is in its death throes.
‘Put America first’: Donald Trump in Cleveland last month. Photograph: Joe Raedle/Getty Images
Dramatic as events have been in the UK, they cannot compare with those in the United States. Almost from nowhere, Donald Trump rose to capture the Republican nomination and confound virtually all the pundits and not least his own party. His message was straightforwardly anti-globalisation. He believes that the interests of the working class have been sacrificed in favour of the big corporations that have been encouraged to invest around the world and thereby deprive American workers of their jobs. Further, he argues that large-scale immigration has weakened the bargaining power of American workers and served to lower their wages.
He proposes that US corporations should be required to invest their cash reserves in the US. He believes that the North American Free Trade Agreement (Nafta) has had the effect of exporting American jobs to Mexico. On similar grounds, he is opposed to the TPP and the TTIP. And he also accuses China of stealing American jobs, threatening to impose a 45% tariff on Chinese imports.
To globalisation Trump counterposes economic nationalism: “Put America first”. His appeal, above all, is to the white working class who, until Trump’s (and Bernie Sander’s) arrival on the political scene, had been ignored and largely unrepresented since the 1980s. Given that their wages have been falling for most of the last 40 years, it is extraordinary how their interests have been neglected by the political class. Increasingly, they have voted Republican, but the Republicans have long been captured by the super-rich and Wall Street, whose interests, as hyper-globalisers, have run directly counter to those of the white working class. With the arrival of Trump they finally found a representative: they won Trump the Republican nomination.
The economic nationalist argument has also been vigorously pursued by Bernie Sanders, who ran Hillary Clinton extremely close for the Democratic nomination and would probably have won but for more than 700 so-called super-delegates, who were effectively chosen by the Democratic machine and overwhelmingly supported Clinton. As in the case of the Republicans, the Democrats have long supported a neoliberal, pro-globalisation strategy, notwithstanding the concerns of its trade union base. Both the Republicans and the Democrats now find themselves deeply polarised between the pro- and anti-globalisers, an entirely new development not witnessed since the shift towards neoliberalism under Reagan almost 40 years ago.
Another plank of Trump’s nationalist appeal – “Make America great again” – is his position on foreign policy. He believes that America’s pursuit of great power status has squandered the nation’s resources. He argues that the country’s alliance system is unfair, with America bearing most of the cost and its allies contributing far too little. He points to Japan and South Korea, and Nato’s European members as prime examples.He seeks to rebalance these relationships and, failing that, to exit from them.
As a country in decline, he argues that America can no longer afford to carry this kind of financial burden. Rather than putting the world to rights, he believes the money should be invested at home, pointing to the dilapidated state of America’s infrastructure. Trump’s position represents a major critique of America as the world’s hegemon. His arguments mark a radical break with the neoliberal, hyper-globalisation ideology that has reigned since the early 1980s and with the foreign policy orthodoxy of most of the postwar period. These arguments must be taken seriously. They should not be lightly dismissed just because of their authorship. But Trump is no man of the left. He is a populist of the right. He has launched a racist and xenophobic attack on Muslims and on Mexicans. Trump’s appeal is to a white working class that feels it has been cheated by the big corporations, undermined by Hispanic immigration, and often resentful towards African-Americans who for long too many have viewed as their inferior.
A Trump America would mark a descent into authoritarianism characterised by abuse, scapegoating, discrimination, racism, arbitrariness and violence; America would become a deeply polarised and divided society. His threat to impose 45% tariffs on China, if implemented, would certainly provoke retaliation by the Chinese and herald the beginnings of a new era of protectionism.
Trump may well lose the presidential election just as Sanders failed in his bid for the Democrat nomination. But this does not mean that the forces opposed to hyper-globalisation – unrestricted immigration, TPP and TTIP, the free movement of capital and much else – will have lost the argument and are set to decline. In little more than 12 months, Trump and Sanders have transformed the nature and terms of the argument. Far from being on the wane, the arguments of the critics of hyper-globalisation are steadily gaining ground. Roughly two-thirds of Americans agree that “we should not think so much in international terms but concentrate more on our own national problems”. And, above all else, what will continue to drive opposition to the hyper-globalisers is inequality.