Joseph Stiglitz is a well-known, respected economist. He has strange views on how to solve the European crisis, but he has been correct in pointing to the destructive forces of austerity as applied in Europe. At the same time, he praised the economic policies of Hugo Chavez, Venezuela’s now-deceased authoritarian socialist president. Those same policies have allowed inflation to run away past 50 percent and caused frequent shortages of power, food products and other consumer goods.
Now Stiglitz is at it again. This time he is back on the European crisis, and he actually sounds like he has read this blog. We welcome him among the readership!
That said, he has not done his Liberty Bullhorn homework all the way. While his crisis analysis is largely on the right side, his proposals for how to address the crisis are off the chart wrong. Defying common sense and thorough scholarship, Stiglitz actually wants more government in Europe, in virtually every corner of the economy.
It has been three years since the outbreak of the euro crisis, and only an inveterate optimist would say that the worst is definitely over. Some, noting that the eurozone’s double-dip recession has ended, conclude that the austerity medicine has worked. But try telling that to those in countries that are still in depression, with per capita GDP still below pre-2008 levels, unemployment rates above 20% and youth unemployment at more than 50%.
The European Commission has downgraded its growth forecast, though Europe is still very much in a state of wishful recovery thinking. This prevents any rethinking of fiscal policy, making the continuation of the crisis the only reasonable alternative. No wonder the European Central Bank is close to full-scale crisis panic.
Back to Stiglitz:
At the current pace of “recovery” no return to normality can be expected until well into the next decade. A recent study by Federal Reserve economists concluded that America’s protracted high unemployment will have serious adverse effects on GDP growth for years to come. If that is true in the United States, where unemployment is 40% lower than in Europe, the prospects for European growth appear bleak indeed.
Exactly. As I explain in my forthcoming book, “Industrial Poverty”, Europe is in a state of permanent stagnation.
I am glad Stiglitz has come to the right conclusion regarding the nature of the crisis (and he does not have to feel ashamed that he reads this blog…). What troubles me, again, is that he is such a hopeless socialist when it comes to designing crisis solutions:
What is needed, above all, is fundamental reform in the structure of the eurozone. By now, there is a fairly clear understanding of what is required: • A real banking union, with common supervision, common deposit insurance, and common resolution; without this, money will continue to flow from the weakest countries to the strongest. • Some form of debt mutualisation, such as Eurobonds: with Europe’s debt/GDP ratio lower than that of the US, the eurozone could borrow at negative real interest rates, as the US does. The lower interest rates would free money to stimulate the economy, breaking the crisis-hit countries’ vicious circle whereby austerity increases the debt burden, making debt less sustainable, by shrinking GDP.
Please, no. First of all, the banking union would only serve the same purpose as the currency union, namely to extend a shield of artificially high credit worthiness from strong economies within the euro zone to the weak, poorly run countries on the southern rim. That artificial jag-up of credit was what allowed Greece, Portugal, Spain and Italy to borrow boatloads of money despite the fact that their economies and their fiscal policies were basically unchanged from when they had their own currencies. The banking union would do the same for private banks.
Secondly, the “debt mutualization” idea has been floating around for a long time. Superficially it is a good, or logical, idea: now that all these countries have the same currency, why not issue one and the same series of Treasury bonds for every country in the euro zone? However, this would only reinforce the skewed credit evaluation of euro-zone countries that came about as a result of the currency union. Put bluntly: German taxpayers would be responsible for Greek debt, not just de facto as is the case today, but de jure.
The only way that this could work is if all fiscal policy is completely centralized. That, however, would require the creation of a full-blown federal government in Europe. Given the huge democratic deficit that currently exists in the EU – with first and foremost the toothless parliament and the appointed executive office – this would only strengthen the forces that grow government at the expense of taxpayers and private businesses.
Third, Europe does not need more, cheap money. As I explained at length recently, Europe’s businesses and households are not borrowing for lack of money in the banks. They refuse to borrow because they have no good outlook on the future.
Back to Stiglitz:
• Industrial policies to enable the laggard countries to catch up; this implies revising current strictures, which bar such policies as unacceptable interventions in free markets. • A central bank that focuses not only on inflation, but also on growth, employment, and financial stability • Replacing anti-growth austerity policies with pro-growth policies focusing on investments in people, technology, and infrastructure.
His “industrial policy” point suggests that government needs to grow to help the European economy grow. But every time I review data of the size of government and economic growth, the inescapable result is that the smaller government is, the better the economy performs. Perhaps Stiglitz should go back and take another look at the “performance” of the Venezuelan economy?
As for the central bank idea, the European Central Bank is effectively already doing everything that Stiglitz is asking for. This is, in other words, a moot point. So is his third point, despite its note about the negative effects of austerity: unless and until he gets more specific, his criticism does not serve as the platform for an alternative that he sets it up to be.
Then Stiglitz goes on to try to make the case that central banks cannot be left independent, but must somehow be enrolled in the big government conglomerate that is his vision of our future:
Much of the euro’s design reflects the neo-liberal economic doctrines that prevailed when the single currency was conceived. It was thought … that making central banks independent was the only way to ensure confidence in the monetary system; … independent US and European central banks performed much more poorly in the run-up to the crisis than less independent banks in some leading emerging markets, because their focus on inflation distracted attention from the far more important problem of financial fragility.
No, the reason why the economies of advanced industrial economies have taken such a beating in this crisis is that they have advanced, over-sized welfare states. I have explained this at length on this blog, and – again – more is coming in my book.
And just to get a little taste of his socialist vision:
Finally, the free flow of people, like the free flow of money, seemed to make sense; factors of production would go to where their returns were highest. But migration from crisis-hit countries, partly to avoid repaying legacy debts (some of which were forced on these countries by the European Central Bank, which insisted that private losses be socialised), has been hollowing out the weaker economies. It can also result in a misallocation of labour.
And exactly how does Stiglitz define “misallocation of labor”?? There is no better way to determine where labor is best allocated than the free market. Or would professor Stiglitz suggest that countries with a higher degree of central economic planning somehow allocated their labor better than free-market based economies?
Is professor Stiglitz seriously suggesting that it is better to keep all unemployed Greeks in Greece than to allow them to pursue a better economic future abroad? Evidently, that is his vision.
Europe does not need more government. Anyone who proposes more government for Europe must answer two questions:
a) Why was government not big enough to prevent the crisis? and
b) When is government big enough?