Interview with Joseph Stiglitz

  1. In your seminal work on globalization, notably in “Globalization and its Discontents” (2002) and “Making Globalization Work” (2006), you discuss the shortcomings and challenges of globalization. How do you assess the path of globalization following these publications? In particular, what new challenges has the global financial crisis added to globalization?

In both of these books, I had talked about the risk of global financial instability and the flow of money going backwards uphill from developing to developed countries. I think the 2008 crisis just reinforced the argument that deregulation had exacerbated the risks globally, and that capital market globalization and financial market globalization had compounded the problems by making the risk of contagion much worse. So in a sense, 2008 was bearing out the forecast that I had already raised, showing that it was probably worse than I have fully anticipated. The positive side of the aftermath is the recognition that you need regulation; the IMF has actually said that capital controls are a good thing while in “Globalization and its Discontents” were virulently opposed to what I said whereas now we’re on the same side. There are still some disagreements about the conditions under which you want capital controls and the forms, but the basic recognition that seems to be now universal.

  1. You have been an outspoken critic of the austerity measures adopted in response to the Euro Area debt crisis by characterizing them as “suicide pacts”. How has your evaluation of the overall response of international and European institutions to this crisis evolved, especially as the proponents of such measures claim thir success in quickly moving the involved countries towards recovery (e.g. Greece has entered again the bond market, much sooner than it was expected)?

I think there has been a fundamental confusion between “stopping going over the cliff” and recovery. And even if these countries were growing again in the way that would’ve hoped, that still doesn’t say that the policy was a good policy because you have to ask: Could we have gotten where we are at a lower cost? And right now Europe is about 20% below the trend growth where it would’ve been, and that gap is not closing, the gap is actually widening. I don’t think anybody looking at economies within Europe can deny that there’s an average of 20% unemployment, youth unemployment of over 50%, GDP per capita lower than it was in 2007-2008. As for the most successful country Germany, a growth rate over the period of just around 1% per capita would be viewed as a dismal growth rate at any other context. I think what they hailed as a most success is a failure. Moreover, within that country the bottom 30% have actually seen their income go down. So I don’t see how anybody can claim those policies as a success.

  1. You have stated that with time, wages across the world would converge to the same level thanks to globalization. However looking at real facts, it seems that inequality is still increasing worldwide. Why do you think is that?

The story of disparity between countries is complicated because there has been convergence between the best performing countries, say China, and the advanced countries, to the point where China will shortly be the largest economy; but there has not been convergence between the poorest countries and the richest. I think it’s partly related to the policies that have been forced on the countries such as the “Washington Consensus” policies related to trade globalization leading to the deindustrialization. That was one of my main theses of my book “Creating a Learning Society” where I actually talk about this issue in the chapter on Industrial Policy. That’s been one of the factors that has resulted in the none-convergence of the poorest countries.

  1. We try to turn more on policy questions. In 2000 you created the initiative for policy dialogue. With the goal of coming up with policy ideas in development and bringing them to policymakers facing the challenges and opportunities of globalization. Has this think-tank lived up to your expectations and its conceived goals? And what are the contributions and limitations of such non-governmental initiatives with respect to the future of globalization?

I think if you look at the series of books that we’ve published and the interactions that we’ve had with government, I would say that we have been as successful as a small NGO can be. [Being] very small in some ways had more weight that could normally have been expected. If you look at the huge international organizations you look at the minuscule, but it does speak to the power of ideas. So, for instance two of our early books were about capital market liberalization, and those ideas now moved into the mainstream and we were successful. One of our early books talked about the need for better financial regulation and the fact that simply focus on inflation was not going to lead to better, strong economic growth. That now has moved mainstream as well. One of our early books was “Fair trade for all” arguing that the trade system as it was, was unfair. I think there is broad; you know focusing on particularly the problems of, including the problems of intellectual property. I think again it was not the only voice but it was a voice trying to articulate that view. So, you know, there are other issues where, we did a book on sovereign debt restructuring, debt defaults.  That remains an issue that is very unsettled. I don’t know if you followed the recent court decisions in the United States. The US courts have come down in a very peculiar decision in support of vulture funds, and it’s gone to the supreme court whether they will rule or whether they ‘ll take the case. But interestingly France has joined me and saying what the US government is doing is wrong. So the French government has actually find how to breath in that case. So  those of you who are very much alive and very much on. I guess the question you raised is a very good one. It’s very difficult for a small group but the fact that, you know, and it’s one of the great things of democracy, is that individuals and small groups can make a difference and can raise issues that otherwise would go beneath the radar screen. I should say one more thing that may be relevant. Probably have more influence in changing the debate in developing countries and emerging markets than we do in the developed countries,  because these are matters of their life and death, I mean of their prosperity. They are gonna pay more attention and when we started this, one of our objectives, was in fact concerns was, there was an established wisdom coming out from the IMF and the World Bank. And they were, you might say, lacking confidence. They say, you know, “who are we to challenge the received wisdoms?” And we saw that one  of our roles is saying in many of these cases “you’re right and they’re wrong”. And so by doing that we changed the debate, at least we say ok “some people think this and some people say that” in exchange that give more confidence to people to stand up.

  1. You’ve been highly engaging in climate change as well both as a researcher and a lead author at the Intergovernmental Panel for Climate Change which won the Nobel Peace prize in 2007. So what are in your opinion the most pressing measures that need to be adopted on the international level for realistically addressing this global issue given political and economic considerations?

Well the last cause has everything in it. I think it’s very clear that we need to have a carbon tax or an agreement on carbon reductions. Chapter 8 of my book on “Making globalization work”, was on “Saving the planet”. So I describe what I think can be done. I think the only difference is that book was written 8 years ago. Today the evidence is greater. The dimension on which there was not as compelling evidence then was the impact on weather variability and the cost of this weather variability. You know droughts, floods, hurricanes, typhoons. We now know so much more clearly the magnitude of the cost.

  1. But at the same time it seems the evidence increased but also there are problems especially attached to the crisis that happened. So are you optimistic or pessimistic whether or not the government would be engaging in that sort of problem?

So my own feeling is that the major problem of inefficiency was in aggregated demand. If we passed the carbon tax and help provide some lending, funds through loans, we’ll be able to stimulate the economy. So I actually think that the current context is one where we ought to be doing more investment in literally feeding the global economy for global warming. So the two are actually complementary, the downturn and addressing climate change are actually complementary.  Just as an insight the point that I made yesterday that we need to also change our innovation system we need to focus more on saving the planet on reducing emissions and less on creating, saving jobs when we already have so much more unemployment. So again, redirecting our resources towards climate change and away innovations that kill jobs seems to me something that would be imperative on both the climate and the economics for instance. To me I view it would be complementary.

  1. Your work has contributed to a broad range of topics in economics, both in macro and microeconomics. As someone who has worked on the policy side of things, bringing ideas to policy makers, what would you say about the policy impact stemming from research in these areas. Would you say that research in either micro or macro-related topics holds more relevance to policymakers today?

Well obviously both do. Now research is a two-edge sword. I think that bad macroeconomic “research” played a very big role in causing the crisis in 2008. Too many policymakers paid too much attention to the theories and models that said that markets are self-correcting, markets were efficient, no such things as bubbles, all you need to do is focus on inflation. So the standard macroeconomic prevailing line for 10 to 20 years was one of the causes of our problems. There are other lines of research on macroeconomics, it’s really important, and now are beginning to  be reflected in the work, say of the IMF, I’ve been in a number of conferences that recognize that markets often don’t work, they need a broader agenda. The good news is that they’re beginning to focus on alternative models which recognize some of the problems and that will be absolutely critical if we’re going to get stability going forward. A lot of these are really interesting in difficult areas like macroeconomic externalities, credit inter-linkages, network models… On the micro, stuff that I talked about on the role of learning, but also areas like welfare economics such as how do get self-insurance market to work and how to mitigate the problems of moral hazard.

  1. In the context of moral hazard, you proposed global greenbacks as way to balance risk-sharing between borrowers and lenders and to provide stronger global aggregate demand. How would you then allocate the greenbacks between countries to avoid the current behaviors between lenders and borrowers?

There are a number of proposals for the allocation of global greenbacks. One of them is to use the funds to incentivize countries to address the problems of global warming. Another one is to incentivize countries not to have excess surpluses, for surpluses are the counterpart to deficient aggregate demand, if countries are producing more than they are spending, that was what Keynes talked about. That would be one of the ways I would do it.

  1. What would you say to the economics students who are reading this interview?

What I would say is a couple of things. First, economics is really important; economists for better or for worse have a lot of influence and that means that bad ideas can have bad influence just as good ideas can have good influence. For a very long time economists focused mostly on efficiency and didn’t talk about equity, fairness, income inequality; in fact in most standard textbooks you won’t see much discussion of income inequality. If you think what are the major problems of our day, there are issues like income inequality, global warming; and those issues have a very large economic  aspect to them, but unfortunately they have been given a very short shrift by the economics profession in the past and it’s really important for them to focus on problems that are really at the core of the functioning of not just our economy but the whole society. The other thing I would say is that progress in any discipline comes from questioning standard assumptions, not accepting authority; so question your teachers, don’t accept what they say. When I was a student, we were told that markets were efficient. I grew up  in a place where I saw discrimination, unemployment, poverty, and it seemed to me that what they were telling me was not true. I didn’t know why and the question was: “which assumptions?”. So one of the assumptions was obviously imperfect information, imperfect risk market. Another set of assumptions that is clearly not correct is that what we believe our preferences are given to us at birth as opposed to being socially determined, that we’re all rational being, and we enter the world with well-defined preferences.  In fact, we know that that is not true. And that set of assumptions served some purposes and some people and some problems. But there are other problems for which those assumptions are particularly unsuited. So the general problem is to ask questions.