This is a video of an address at the World Bank given by Joe Stiglitz. His topic is about the misdiagnosis of our current economic problems and some suggestions for remedying the problem. He argues that the Great Depression was the result of the transition of the US economy from an agricultural economy to an industrial economy. High productivity in agriculture made it possible for 3% of the labor force to satisfy the demand for food. It took time for growth in the industrial sector to absorb the labor pool and for the migration of labor from rural areas to urban industrial locations. High levels of unemployment limited consumption of manufactured products and limited the opportunities for unemployed agricultural labor in the emerging industrial sector. The New Deal helped to lower unemployment but we made some of the same mistakes that we are making today. Government employment actually fell during the New Deal. The loss of state and local jobs was greater than the increase in federal employment. We have experienced a net loss of 700,000 government jobs today due to job losses at state and local level. Our fiscal policy has been pro-cyclical rather than counter-cyclical. It took WW ll to get us out of the Great Depression. It also promoted the transition to an industrial economy following the war. Because of rationing during the war, households saved money to spend on consumer goods and soldiers returned to form households using skills that were provided by the military. The GI bill also helped to transition the workforce to the new industrial society.
The US economy was sick prior to the financial crisis and the Great Recession. We are making a transition from an industrial economy to a services economy. Fixing the banking system was a necessary but not sufficient solution to the unemployment problem. Consumption was fueled by the housing bubble and the assumption of debt. This was necessary since median income in the US is close to its level in 1978. Moreover, spending on real estate accounted for 40% of investment spending. We had a zero savings rate, but income inequality distorted the savings distribution. Savings in the top 20% increased by 15% but the bottom 80% consumed 110% of its income. We will not be able to restore the economy by returning to a system in which the bottom 80% consume at 110% of its income. Moreover, real estate investment will not provide 40% of business investment again.
Rising oil prices also impact the global economy. Demand is shifted from high consumption industrial economies to low consumption oil producing countries. One of the results is lower job growth in the US and much of Europe.
The decision by emerging market economies to build their reserves also limits global economic demand. This is a forced savings mechanism which might have benefited the US if the savings had been allocated to more appropriate uses. The private market system decided to use the savings to finance real estate construction instead of investing in areas that would benefit national economies in the long term. Since many households did not have the income to afford the homes that they purchased at inflated prices, we will be living with the problem of deleveraging for some time.
In his discussions of remedies he argued that monetary policy is not sufficient. Fiscal policy must be used to build aggregate demand. Countries that can borrow at low interest rates can make investments in which the return exceeds the interest rate. This can lower the debt/GDP ratios in the medium term. Public spending on education and healthcare helps in making the transition to a services economy. Shifting the composition of the tax system can also improve fiscal balance while it can also stimulate demand. We also need to tax carbon emissions and invest in the green technologies that are needed to respond to threats of global warming.
He spent some time dealing with the objections that he would expect from the economists in the audience. Most of the macro models that they use are worthless and some of what they are saying about the need for fiscal austerity is based either on a poor understanding of multipliers in our current environment or other ideas that are without merit.
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