A new book by eminent economist Joseph Stiglitz dissects the reasons for the failure of free-market capitalism...

The market isn’t working, the system isn’t working

WORKERS, OCT 2012 ISSUE

The Price of Inequality, by Joseph E. Stiglitz, hardback, 414 pages, ISBN 978-1-846-14693-0, Allen Lane, 2012, £25.

In this remarkable book, the man widely seen as the greatest living economist shows how the economic and political system has failed – the market is not working and government has not corrected this market failure. His focus is on the USA, but his insights apply to other countries too.

Most people in the USA are worse off than they were 30 years ago. 18 per cent of young people are unemployed and eight million families have been evicted from their homes. Wages are falling by $0.5 trillion a year, far more than Obama’s stimulus packages.

Some say that flexible labour markets and lower wages will aid recovery. But, as Stiglitz points out, “the United States, with allegedly the most flexible labour market, performed far worse than countries with stronger labour protections (like Sweden and Germany). And the reason is obvious: cuts in wages reduce total demand and deepen the downturn.”

Poor performers

Gordon Brown told us that an independent central bank would improve matters. But Stiglitz explains, “The independent central banks of the United States and Europe didn’t perform particularly well in the last crisis. They certainly performed far more poorly than less independent central banks like those of India, China, and Brazil. The reason was obvious: America’s and Europe’s central banks had, in effect, been captured by the financial sector. They might not have been democratically accountable, but they did respond to the interests and perspectives of the bankers. The bankers wanted low inflation, a deregulated financial sector, with lax supervision, and that’s what they got – even though the economic losses from inflation were minuscule compared with the losses that arose from the excessively deregulated financial market. The losses to ordinary consumers from predatory lending were given short shrift – indeed, the additional profits increased the financial strength of the banks. The soundness of the financial system was, after all, the central banks’ first charge.”

As he observes, “As soon as wages start to recover, the central bankers, with their single-minded focus on inflation, raise the spectre of price increases. They raise interest rates and tighten credit, to maintain unemployment at an unnecessarily high level.”

The Coalition tells us that its “austerity” policies (actually, poverty policies) will bring recovery, but Stiglitz emphasises, “The critical point to bear in mind in thinking about deficit reduction is that the recession caused the deficits, not the other way around. More austerity will only worsen the downturn, and the hoped-for improvement in the fiscal position will not emerge.”

He points out, “Europe’s crisis is not an accident, but it’s not caused by excessive long-term debts and deficits or by the ‘welfare’ state. It’s caused by excessive austerity – cutbacks in government expenditures that predictably led to the recession of 2012 – and a flawed monetary arrangement, the euro. When the euro was introduced, most disinterested economists were sceptical....Looking across Europe, among the countries that are doing best are Sweden and Norway, with their strong welfare states and large governments, but they chose not to join the euro.” After the crisis started, “The countries could agree only on further belt tightening, which forced Europe into a double-dip recession.”

Stiglitz warns, “cutbacks in expenditures and taxes will lead to a contraction in the economy. And if we go one step further, as the Right wants to do, to cut back expenditures even more, in a valiant if possibly fruitless attempt to reduce the deficit, the contraction will be even greater.” Simply, “cutting back on government spending destroys demand and destroys jobs.” He compares “austerity” policies to medieval doctors’ bloodletting.

Myths

Stiglitz notes, “The worst myths are that austerity will bring recovery and that more government spending will not.” He goes on, “Recessions are caused by lack of demand – total demand is less than what the economy is capable of producing. When the government cuts back on spending, demand is lowered even more, and unemployment increases. ... Underlying the myth that austerity will bring confidence is often another myth – the myth that the national government’s budget is like a household’s budget. Every household, sooner or later, has to live within its means. When an economy has high unemployment, the simple rule does not apply to the national budget. This is because an expansion of spending can actually expand production by creating jobs that will be filled by people who would otherwise be unemployed. A single household, by spending more than its revenues, cannot change the macro-economy. A national government can. And the increase in GDP can be a multiple of the amount spent by the government.”

So the solution is clear – spend more. But why isn’t it happening? What’s the problem?

As Stiglitz writes, the USA has a government of the one per cent, for the one per cent, by the one per cent. He notes, “...the success of the moneyed interests in creating a system of ‘one dollar, one vote’”, in “corporations controlling Congress”.

So the 99 per cent in the USA will have to organise to break Wall Street’s stranglehold. To do this they will first have to shed illusions about American society. ■