Stiglitz: Europe's View on Inequality

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1 Stiglitz: Europe's View on Inequality June 17, 2014 by Marianne Brunet When you approach a crowd conversing over coffee at an economics conference, you don t normally expect to hear them giddily saying: He s absolutely adorable! Adorable, and so sweet. But at a recent economics conference in Toulouse, France, participants were raving about Joseph Stiglitz like he was a movie star. Stiglitz, the Columbia professor and Nobel economist, spoke June 2 and 3 at the TIGER Forum in Toulouse, an event sponsored by the Toulouse School of Economics that brings together economic leaders from academia and business for a series of lectures and debates. This year s forum focused on globalization and the inequalities it elicits. Stiglitz released his new book, Creating a Learning Society, at the TIGER Forum. At the very beginning of his keynote address, Stiglitz said, It s particularly noteworthy that the book is coming out here, because many of the ideas in this book would find greater receptivity here in France than in the Anglo-American tradition. France has traditionally a great deal more receptivity to industrial policy of government supporting the notion of economic growth. And based on the enormous applause he consistently received throughout the conference, Stiglitz was right. The discussions focusing on global inequality at the TIGER Forum were a testament to the recent popularity of this topic. I asked Stiglitz why inequality has become such a central issue. He said that it is because it has gotten much worse, and because we ve become much more aware of the adverse effects that inequality has on our economy, our democracy and on society. It s not a matter of envy, contrary to what most people at the top say. It is a matter of the functioning of society. Stiglitz said that there is a problem with the way that those in the top income bracket are acquiring their fortunes. The wealth of those at the top comes not by creating more wealth but by taking wealth from other. For example, CEOs take large salaries without any concomitant increase in productivity, he said. This has resulted in few people doing very well, and most Americans doing badly, according to Stiglitz. Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.

2 Stiglitz spoke about the necessity of improving education and adding more safeguards to free-trade agreements at the conference. More government intervention Stiglitz believes that rising incomes are largely attributable to technological progress. Although some increases in productivity come from major innovations, he said most growth comes from small and incremental changes. Thus, he believes that we should focus on the acquisition and diffusion of knowledge within societies, which allows societies to learn. He recommended industrial policies that would likely elicit pushback in the U.S. But at this European conference, nobody questioned his argument that more extensive government intervention is necessary to promote knowledge. Stiglitz mostly received questions and comments about the best ways to implement these policies. Europe is more willing to deal with the problem of inequality than the U.S. because Europeans accept the premise that market failures are pervasive, according to Stiglitz. Citing Adam Smith, he said the idea that markets pursued in self-interest leads as if by invisible hand to the well being of society has strongly influenced American society. Stiglitz went on to specify that this idea is widely held by Republicans. But according to Stiglitz, the assumptions that Smith s theory rests upon are not reflective of true market conditions. Markets are never efficient, he said, due to asymmetric information and imperfect risk. Many Republicans oppose a move towards greater government intervention in markets. Stiglitz had little optimism that Americans would lead the way in promoting knowledge and reducing inequality. He explained that he hopes the U.S. will take the lead, but the likelihood that it will is not very great, because we have the highest level of inequality and we re so far off the ability even to get to a level of inequality comparable to many of the other countries that it will take us a while to establish what we may call a leadership position in this field. He added that the U.S. also has the lowest levels of equality of opportunity and the highest inequality of healthcare. European concerns The panels and round-table discussions at the Forum featured many prominent European economists, including Elsa Fornero, former minister of labor and social policies in Italy, and Hélène Rey from the London Business School. They almost all reinforced the same notion: Inequality is pervasive in economies around the world and needs to be addressed by examining global trade regulations. One of the most heated sessions at the forum was Tiger Insights, an intimate round-table discussion whose thought-leaders included Stiglitz and Rey. Discussions focused on the negative externalities of free trade, such as when low-cost subsidized goods drive unemployment in countries to which they are exported. Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.

3 Stiglitz jokingly said: It s almost been a basis that if you don t support free trade, they ll take away your PhD. But according to Stiglitz, the well-established doctrine that free trade unambiguously leads to improvement of welfare in all countries is incorrect. Imperfect risk markets mean that free trade can make everybody in all countries worse off, according to Stiglitz, because it can expose more people to more risk. Rey discussed the risk created by the globalization of financial markets. She explained that over the past two decades, there has been a massive increase in international capital flows, resulting in a highly integrated world. She argued that this had led to problems, because domestic distortions have taken a larger scale. For example, according to Rey, there were large global economic repercussions in 2007 due to Iceland s increase in international capital flows. According to Rey, in 2007, Iceland had external assets and liabilities equal to five or six times its GDP. She argued that this was a tremendous amount of internationalization for a smaller economy, with a lot of balance sheet risk. The audience asked whether globalization was a good thing. Rey began her response by smiling and stating: Well let s get this straight first, so I didn t mean to do an anti-globalization speech. Rey said that she simply wanted to identify very specific issues prompted by globalization that policies have not dealt with very well. Stiglitz said that trade is important and made clear that he was not attacking the concept of globalization. Rather, he specified, The heart of the issue is designing the systems of the global rules that will work for the system as a whole. He highlighted the importance of creating rules that allot a certain level of autonomy to individual countries to make decisions based on their individual circumstances. He recognized that many countries, especially European countries, face economic challenges that demand different types of intervention. Stiglitz advised Europeans to be critical of agencies such as the United States Trade Representative (USTR), which creates trade agreements and participates in designing global trade policies. According to Stiglitz, the U.S. is trying to persuade Europe to go along with major trade agreements, some of which are bad for both Europe and Asia. One example was what he called the 21st-century version of the opium wars. He explained that in 19th century, Europe wanted to import Chinese goods, but China was not interested in European goods. Britain figured out a brilliant way to solve this problem. On their way to China, British ships would stop to pick up opium from producers authorized by the Indian government. Stiglitz comically added that opium was a great product, in that it created a strong customer base. But this was not good for China, so it tried to restrict opium trade. The British argued that China was impeding free trade and the basic right of all countries to export opium. Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.

4 According to Stiglitz, the USTR is waging the 21st-century version of the opium wars through policies that promote the sale of tobacco products. He explained that the U.S. maintains it is a basic right to sell poisonous cigarettes to all countries. He argued that the trade agreements being put forth contain provisions for deregulation of tobacco sales, which the USTR disguises within statements about other topics such as property rights. Stiglitz ultimately concluded that new trade agreements are not transparent. He argued that private companies use trade agreements to get rid of the regulations they never wanted and to undermine the democratic process. He added that in this process, provisions for worker safety and environmental protection like those designed to safeguard against tobacco use are often jeopardized. Participants at the TIGER forum shared Stiglitz s sense of urgency in carefully selecting which international policies to pursue. There was resounding agreement about the need for more comprehensive international policies. However, Europeans acknowledge that reaching a consensus and implementing appropriate reforms will remain a daunting challenge. Fornero was disgruntled when she spoke about political motivations in dealing with important issues. She said many issues are manipulated by politicians seeking to gain popularity, such as the Italian pension system. Legislation that compromises pension safeguards for the preservation of private business alliances may be one of the greatest challenges in battling inequality, she said. Many at the forum insisted that overcoming these political obstacles is absolutely necessary. They suggested that to do so, the first step should be an increase in the dialogue between academics and politicians. Unemployment Stiglitz took a strong stance about the recent acceleration in unemployment around the world. Most of the innovation in advanced Western economies has been directed towards saving labor, he said. However, in many countries labor is in surplus and unemployment is the issue. Thus, he said, labor-saving innovations exacerbate this key social problem. Unskilled workers have been replaced by expensive innovations such as automatic banks tellers and automated checkout in drug stores, Stiglitz said. Thus, he argues, massive innovation and investment have simply created more unemployment. Stiglitz believes that technological development is the most important source of innovation. He argued that when developments do not promote a learning society, they can have detrimental effects on inequality. In his keynote lecture, Stiglitz acknowledged the depth of the problem: I m always amazed when we have a high level of unemployment of unskilled workers, nothing compared to Europe, but we worry about it and we worry about what it will do to our future. And you should be worried about what, Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.

5 especially, youth unemployment will do to your future. Audience members brought up questions about unemployment in relation to pension funds and social welfare, but the conference yielded little in the way of specific short-term policy solutions. Conclusion Inequality is growing in both the U.S. and Europe, and understanding its complexities is crucial in promoting future economic growth. According to Stiglitz, we must focus on implementing policies to create learning societies. He argues that improving the diffusion of knowledge within a society will lead to higher standards of living. Stiglitz is convinced that reducing global inequality is contingent on the promotion of learning. Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.