Is the global economy any safer now?
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TEXT OF INTERVIEW
Kai Ryssdal: The streets of Pittsburgh, Pa., are clearing out this week after the G-20 summit that wrapped up this past Friday. In the official communique that came out as the meeting closed, the group gave itself pretty high marks for what it’s been able to do to avoid another global financial crisis.
That is not, though, a view shared by all. Including economist Joseph Stiglitz. A critic of a lot of what globalization has brought to pass. When we spoke I asked him whether the global economy is any safer now, he thinks, a year into the credit crisis and three G-20 meetings later.
JOSEPH STIGLITZ: Clearly, we’ve pulled back from the brink, but if you ask me: Is our financial system reformed in the way that would make it less likely that another event of this kind could occur? I’d say we’re in worse shape.
Ryssdal: Do you have hopes that we’ll eventually get some place where we can fix it?
STIGLITZ: I think we’re going to make some reforms, but I’m getting increasingly pessimistic. Let me go back to why I think things are in worse shape. We had some banks that were too big to fail. What we’ve done is allowed the banks to get even bigger under both administrations has introduced a new concept called “too big to be resolved.” We bailed out the bankers, we bailed out the bond holders, this old problem of moral hazard, perverse incentives, has gotten just much worse.
Ryssdal: Separate the financial crisis from the economic crisis for me for a second. And give me your thoughts on the recession. How we’re coming out of it, if you think we are, and how much longer that might take?
STIGLITZ: The distinction you draw is really an important one. You know, the collapse of Lehman Brothers, the financial crisis, was a consequence of a set a economic problems we would have had to face in one way or another. Even when we fix our banking system, we don’t want to go back, we shouldn’t want to go back to that world. Saving rates are going to go up, they’ve already gone up to around 5, 6, 7 percent. While that’s good for the average American’s personal security, the fact is that if people aren’t spending there will be a lack of aggregate demand. The economy will be weak. The question is what’s going to fill in that hole? And no one has put forward on the part of the government an alternative source of long-term sustainable growth.
Ryssdal: Seems to me on the one hand you’re condemning the government for its massive intervention a year ago, but now you want the government to provide some kind of mechanism for growth and stimulating demand now.
STIGLITZ: The distinction is we need money for real spending that leads to an increase in aggregate demand not throwing money at the banks that didn’t lead to more lending, didn’t lead to a strengthening of our economy. It was certainly not something to put us on a course of sustainable robust growth.
Ryssdal: So despite what Fed Chairman Bernanke said the other day about the recession being technically over, you’re not on board with that one?
STIGLITZ: The key word here is technically. Economists say the recession is technically over when growth turns positive, but for most Americans what they mean by recession is are there jobs? And the basic arithmetic here doesn’t look very good. And we’re not even talking here about lags. The administration, Fed, talk about jobs always lag recovery. This is just not a robust enough recovery to generate the jobs with or without lags.
Ryssdal: I wanted to ask you about that traditional measurement of economic growth — gross domestic product. You came out with a report a couple of weeks ago now saying is what we really need to do when we measure GDP is not just look at factories and production and sales and all that stuff. We need to think about sustainability, and personal satisfaction, and things like that. It’s not the first time that argument has been raised. But why do you think that is necessary?
STIGLITZ: Well, this crisis sort of in a way illustrates that. Many people looking at the U.S. economy, and the years before the crisis looked at our GDP said we were doing great. But the way we value output is to use market prices. An important part of output was real estate. But that was all based on bubble prices. Our growth was based on debt, and it was a kind of borrowing not for investment, but for consumption, and that’s just not sustainable.
Ryssdal: Joseph Stiglitz from Columbia University. He’s got a new book coming out, not till the spring though. It’s called “Free Fall.” Professor Stiglitz, thanks so much for your time.
STIGLITZ: Thank you for talking to me.
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