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Stiglitz writes: "In 2014, the world economy remained stuck in the same rut that it has been in since emerging from the 2008 global financial crisis."

Joseph Stiglitz. (photo: AP)
Joseph Stiglitz. (photo: AP)


Why Stupid Politics Is the Cause of Our Economic Problems

By Joseph Stiglitz, Project Syndicate

02 February 15

 

n 2014, the world economy remained stuck in the same rut that it has been in since emerging from the 2008 global financial crisis. Despite seemingly strong government action in Europe and the United States, both economies suffered deep and prolonged downturns. The gap between where they are and where they most likely would have been had the crisis not erupted is huge. In Europe, it increased over the course of the year.

Developing countries fared better, but even there the news was grim. The most successful of these economies, having based their growth on exports, continued to expand in the wake of the financial crisis, even as their export markets struggled. But their performance, too, began to diminish significantly in 2014.

In 1992, Bill Clinton based his successful campaign for the US presidency on a simple slogan: “It’s the economy, stupid.” From today’s perspective, things then do not seem so bad; the typical American household’s income is now lower. But we can take inspiration from Clinton’s effort. The malaise afflicting today’s global economy might be best reflected in two simple slogans: “It’s the politics, stupid” and “Demand, demand, demand.”

The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies – politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.

Nowhere is this clearer than in the eurozone, which has officially adopted a policy of austerity – cuts in government spending that augment weaknesses in private spending. The eurozone’s structure is partly to blame for impeding adjustment to the shock generated by the crisis; in the absence of a banking union, it was no surprise that money fled the hardest-hit countries, weakening their financial systems and constraining lending and investment.

In Japan, one of the three “arrows” of Prime Minister Shinzo Abe’s program for economic revival was launched in the wrong direction. The fall in GDP that followed the increase in the consumption tax in April provided further evidence in support of Keynesian economics – as if there was not enough already.

The US introduced the smallest dose of austerity, and it has enjoyed the best economic performance. But even in the US, there are roughly 650,000 fewer public-sector employees than there were before the crisis; normally, we would have expected some two million more. As a result, the US, too, is suffering, with growth so anemic that wages remain basically stagnant.

Much of the growth deceleration in emerging and developing countries reflects China’s slowdown. China is now the world’s largest economy (in terms of purchasing power parity), and it has long been the main contributor to global growth. But China’s remarkable success has bred its own problems, which should be addressed sooner rather than later.

The Chinese economy’s shift from quantity to quality is welcome – almost necessary. And, though President Xi Jinping’s fight against corruption may cause economic growth to slow further, as paralysis grips public contracting, there is no reason for Xi to let up. On the contrary, other forces undermining trust in his government – widespread environmental problems, high and rising levels of inequality, and private-sector fraud – need to be addressed with equal vigor.

In short, the world should not expect China to shore up global aggregate demand in 2015. If anything, there will be an even bigger hole to fill.

Meanwhile, in Russia, we can expect Western sanctions to slow growth, with adverse effects on an already weakened Europe. (This is not an argument against sanctions: The world had to respond to Russia’s invasion of Ukraine, and Western CEOs who argue otherwise, seeking to protect their investments, have demonstrated a disturbing lack of principle.)

For the past six years, the West has believed that monetary policy can save the day. The crisis led to huge budget deficits and rising debt, and the need for deleveraging, the thinking goes, means that fiscal policy must be shunted aside.

The problem is that low interest rates will not motivate firms to invest if there is no demand for their products. Nor will low rates inspire individuals to borrow to consume if they are anxious about their future (which they should be). What monetary policy can do is create asset-price bubbles. It might even prop up the price of government bonds in Europe, thereby forestalling a sovereign-debt crisis. But it is important to be clear: the likelihood that loose monetary policies will restore global prosperity is nil.

This brings us back to politics and policies. Demand is what the world needs most. The private sector – even with the generous support of monetary authorities – will not supply it. But fiscal policy can. We have an ample choice of public investments that would yield high returns – far higher than the real cost of capital – and that would strengthen the balance sheets of the countries undertaking them.

The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics.


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+21 # zepp 2015-02-02 13:42
It's worth noting that consumer spending fell 0.3% last quarter, despite plunging gas prices. It seems the peasantry are irritated at the prices of food and housing, and are revolting by refusing to eat to go indoors.
 
 
+11 # Granny Weatherwax 2015-02-03 04:36
Stiglitz mentions Keynes but conveniently forgets he said "Those who believe in infinite growth on a finite planet are either stupid or economists"
The writing is all over the walls left standing by the climate.
 
 
+78 # torch and pitchfork 2015-02-02 14:15
"The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics." I totally agree and as long as fewer than 100 families control one half of the world's wealth solutions will never be enacted.
 
 
+43 # Sisddwg 2015-02-02 14:59
"as long as fewer than 100 families control one half of the world's wealth solutions will never be enacted." And there's the key. Anything we do is purely cosmetic. In the long run we are doomed. Think about it. They have us by the balls: the three branches of government; the army; your vote; and of course the corps. And most Americans are asleep or would rather play pollyanna.
 
 
+11 # Eldon J. Bloedorn 2015-02-02 20:34
Maybe another factor needs to be talked about. How "our" elected congress people sell votes to stay in office. Politicians have been doing this since lobbyists and politicians invented the idea. Have you ever said, "how could she (or he) have voted that way? "It is elemental my dear Watson."
 
 
+53 # fredboy 2015-02-02 14:17
Stupid, yet also intentional.
The only way to stop the Dems in 2000 was to crush the economy. Repug Greenspan did just that, raising interest rates just above the choke point--until Bush was sworn in, then he chopped them like salami.

They will try it again this and next year.

As a wise, corrupt Repug AG who went to prison advised: "Watch what they do, not what they SAY they do."
 
 
+28 # Merlin 2015-02-02 16:38
fredboy 2015-02-02 14:17
“Stupid, yet also intentional.”

This is the most pertinent comment I have seen so far.

It is one thing to make stupid mistakes, or choose a bad policy to follow. Those things can be corrected. It is quite another to purposefully choose an agenda that is harmful and destructive, and institute policies to carry out your Machiavellian philosophy. There is only one word to describe what is happening, and that word is evil! (I say evil in the non-religious sense.)

When you are dealing with evil, the only answer to solving the problem is to get rid of the evil. Adjusting, tweaking or even changing monetary policy is a bandaid solution that can only alleviate the pain a bit. As stated By Pablo, "If you have a knife in my back five inches, and you take it out two inches, you haven't solved the problem". --- Malcom X

That should be our agenda! Seek out, fight, and change the power structure that is running the show. Tweaking shit is a waste of time.
 
 
+11 # Sisddwg 2015-02-02 17:24
"Tweaking shit is a waste of time." I agree. That's about what I said to "torch and pitchfork".
 
 
0 # Cassandra2012 2015-02-04 14:08
OK, I'm game. HOW?
 
 
0 # Cassandra2012 2015-02-04 14:08
OK, I'm game. HOW?
 
 
0 # Cassandra2012 2015-02-04 14:08
Sorry, was getting NO response... so hit the send key thinking it wasn't working... .
 
 
0 # Cassandra2012 2015-02-04 14:08
OK, I'm game. HOW?
 
 
0 # Cassandra2012 2015-02-04 14:08
OK, I'm game. HOW?
 
 
+34 # margpark 2015-02-02 14:20
It is so plain to me that demand increases employment and even causes wages to rise that I am baffled that it isn't apparent to everyone. Nobody hires anyone who is not needed. Demand makes a business need more employees.
 
 
+40 # REDPILLED 2015-02-02 14:23
More accurately, the problem is Selfish Politics, by BOTH wings of the Wall Street/Corporat e Party. Absent is any real notion or belief in Public Service by these phonies. They mouth all the cliches, but their actions and inaction and their ignoring what most people want and need in favor of their wealthy donors belie their rhetoric. By now, most of us are tired of their phoniness, selfishness, and greed, which very much explains the 36% voter turnout last November. The entire political/econo mic system is corrupt and broken, serving only the top 10%. The System must be changed, but how?
 
 
+15 # Pikewich 2015-02-02 15:41
We could follow the example of Greece and elect the green party which IS the equivalent of what they just did.
 
 
+50 # PABLO DIABLO 2015-02-02 14:40
"If you have a knife in my back five inches, and you take it out two inches, you haven't solved the problem". --- Malcom X
The Democrats take the knife out two inches and the Republicans push it back in. The continuing inability for them to work together is merely a "smokescreen" to insure corporate profits. WAKE UP AMERICA.
 
 
+37 # Charles3000 2015-02-02 14:40
Part of the stupid politics was US meddling in Ukraine that instigated the coup that provoked Russia and lead to sanctions that are helping drive down global demand...ie the neo-cons bit themselves in the rear end again.
 
 
+19 # Texas Aggie 2015-02-02 15:34
They weren't the ones who got bitten. It was the rest of us.
 
 
+15 # Pikewich 2015-02-02 15:41
Probably on purpose as part of a strategy to isolate the Russians.
 
 
+42 # harleysch 2015-02-02 14:42
Stiglitz's support for sanctions against Russia is absurd. The sanctions policy is part of a drive for regime change in Russia, backed by Obama and GOP allies such as McCain, and, of course, the neo-cons. The Russian reaction to a U.S.-backed coup in Kiev, that put neo-Nazis in some positions of power in their security and military operations was also not an invasion, as Stiglitz claims.

Support for sanctions against Russia is part of the "stupid politics" that Stiglitz otherwise claims to be combatting, in economic policy.

My question for him is, how does inflicting damage on Russia and the Russian people make any sense? It seems like "stupid politics" to me.
 
 
+22 # jdd 2015-02-02 14:47
Stupid politics indeed. Such as supporting Russian sanctions because of "Russia's invasion of Ukraine." Talk about swallowing outright lies hook, line and sinker.You did it Joe.

Ironically, no mention of the victory by Syriza, which is smart politics. And not muddied by the usual left-liberal baggage about "global warming," multiculturalis m or sanctions, just econmic reforms offering mass appeal. Not a word. Is it because it's embarassing to Obama, who after seven years has yet to propose a jobs program?
 
 
+16 # dascher 2015-02-02 15:18
Your support for the sanctions on Russia in retaliation for the is puzzling in the absence of any evidence of an invasion other than the discredited photos of Russian soldiers supposedly in Ukraine. In this day and age, with the capabilities of US spy satellites and electronic intercepts, how can we possibly let accept that thereason was any invasion.
 
 
+26 # Texas Aggie 2015-02-02 15:36
"The problem is that low interest rates will not motivate firms to invest if there is no demand for their products."

This is so obvious that you don't need a course in economics to understand it, but when you try to point it out to one of these knuckle draggers, they just look at you with their mouths open and a puzzled expression on their face before going back to advocating more government austerity.
 
 
+11 # Jenifer Massey 2015-02-02 18:07
jdd. where were you the night 4 or so years ago when President Obama delivered a 90 minute speech on one subject: JOBS ?
The Republican response: make sure he doesn't have any successes so we can deny him a second term.
 
 
+15 # Schertzing 2015-02-02 19:09
The issue is demand...and this is provided by consumers. The greed is driving inequality as the middle class is undermined. Unions have been the tool for workers to wrestle money from Capital.
While unions have fallen out of favor. .. Or rather been undermined by business and their Republican tools... How are workers to organize and get fair wages so they can be the engine of demand? I think unions are the answer.
 
 
+2 # Cassandra2012 2015-02-04 14:15
Yes, and in Illinois, just today we had a despicable [and phony!!] speech by the newly elected 'Governor' Rauner (R.) on how we need to 'help' workers by instituting a "Right to Work" [for a pittance at the entire discretion of the vulture capitalist owners and the right wing extremists of the state] bill.

Oh yes, and he also waxed delirious on how he was going to implement a raise in the minimum wage to $10/hr. [!!!] over the next 10 years. This from the billionaire who allowed nursing home abuse which resulted in the death of many 'inmates', and who shipped profits overseas to Bermuda and the Caymans like that other moocher, Romney.
 
 
0 # Robbee 2015-02-02 20:01
i misunderrecall any president ever laying out in press releases, state of the union and then proposed budget, a party's economic platform two years before the election of his successor

i see interesting dynamic toward progressive change
 
 
0 # Robbee 2015-02-02 20:01
i misunderrecall any president ever laying out in press releases, state of the union and then proposed budget, a party's economic platform two years before the election of his successor

i see interesting dynamic toward progressive change
 
 
+14 # brux 2015-02-02 21:01
>> The problem is our stupid politics.

Along with that a lot of stupid people who are penny greedy and pound foolish. The conversation about raising the minimum wage that is taking place and all the disingenuous talk about how it is bad for the economy is exactly wrong, but people are sacred to pay a little for more things and fail to realize that making work pay grows the economy and also lowers social program costs as well.
 
 
+4 # geohorse 2015-02-03 07:45
All we need to know about economics is from Henry Ford when he raised the pay for the workers making his cars. "I want them to have enough money to buy my cars". It's not rocket science.
 
 
+3 # Dale 2015-02-03 08:27
Steglitz is right, as far as he goes. He does not go nearly far enough. There are no Keynesian solutions possible when government in the U.S.is a plutocracy with finance capital the leading sector and in the EU the bankers hold sway.
 
 
+11 # Edwina 2015-02-03 10:43
Stiglitz is usually right, but not about Ukraine. He does not give the U.S. enough credit in provoking the split between western and eastern Ukraine. As for stupid politics, the more we try to isolate Russia, the more it will be forced to look to the east. Europe should be trying to find a mediated solution -- in their own interest -- instead of following U.S. policy. Our leaders don't seem to have noticed that we are less and less successful at throwing our weight around, in spite of our vast military might. It IS the economy, which our leaders cannot tackle because they are in thrall to the bankers and financial entities that caused the crash in the first place. And they don't get that we will all have to go the way of Greece and the BRICS countries to gain some independence from the oppressive policies of the oligarchs -- enforced by the IMF, WTO, World Bank, ECB, et al.
 

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