Diagnosing the Illness

Joseph Stiglitz suggests some of the underlying factors behind the economic downturn:

First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services. The problems are not dissimilar to those of the early 20th century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50 percent from 1929 to 1932, one might have anticipated massive migration. But workers were “trapped” in the rural sector: They didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

For America and Europe, the need for labor to move out of manufacturing is compounded by shifting comparative advantage: Not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.

Globalization has been one, but only one, of the factors contributing to the second key problem: growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves—partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the U.S. Treasury. Countries recognized that without reserves, they risked losing their economic sovereignty. Many said, “Never again.” But, while the buildup of reserves—currently around $7.6 trillion in emerging and developing economies—protected them, money going into reserves was money not spent.

I would trace the buildup of foreign exchange reserves farther back than that to China’s decision to peg the yuan to the dollar back in the early 90s but no matter.

His prescriptions:

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves

I suppose it is the mark of a good storyteller but this leaves me wanting more. Has any country anywhere ever conserved its way to prosperity? I don’t think so but I’m willing to learn. A lot of the energy that we produce is lost in the distribution process. We can accomplish energy conservation and what I think is more important, cheaper, more abundant energy by putting more attention on energy distribution.

What government expenditures would facilitate restructuring? I honestly want to know. Certainly neither infrastructure spending nor healthcare spending. I think that Dr. Stiglitz is repeating by implication the assertion that more education is the solution to the problem of not enough jobs. What concerns me is that the claim may be reverse causality, a sort of cargo cult proposal. I don’t think that more people with college degrees automatically creates more jobs that require college degrees. It just provides a credential that enables those with college degrees to displace candidates with lower levels of educational attainment from jobs that don’t require college degrees. Given the high expense of college education that sounds like a prescription for what’s been called “indentured servitude via student loans”.

If he’s proposing that more people complete high school, who doesn’t believe that? Unfortunately, the rate of on time high school completion has remained stubbornly stable for more than a half century. It’s an elusive goal for which no one really has a good solution.