Joseph Stiglitz received the Nobel Prize in Economics in 2001. The American economist was among the voices that questioned the nature of the US response to the 2008 financial crisis, arguing that the design of bailouts would only exacerbate inequality in the country, while being unfair in their scope and focus.
With Covid-19 forcing countries around the world to shut down their economies, Stiglitz argues that the developed world needs to provide support to emerging economies, failing which the global effects of the pandemic will be even more devastating than imagined.
Stiglitz says that while compassion should be sufficient motivation for advanced countries to support a multilateral response, it is also a matter of self interest. As long as the pandemic is still raging anywhere, it will pose a threat – both epidemiological and economic – everywhere.
Scroll.in spoke to Stiglitz about inequality, US President Donald Trump and an interdependent world. Edited excerpts:
Can you give us a sense of how severe this economic crisis is, especially in comparison to past crises such as the 2008 economic crash, the East Asian financial crisis and the Great Depression?
In many ways, there is [no similarity]. On the other hand, there are some similarities. For instance, there is a debate about what started the Great Depression. Was it a stock market crash, the foreign agriculture crisis? But any deep economic downturn translates into a financial crisis. So, three, four years after the stock market crashed in 1929, the banking system collapsed.
What we know is we have a very interrelated system, and weakness in one part – if you don’t correct it – translates into a systemic problem. We also know that if people’s bank accounts [and] balance sheet gets eroded, if firms’ capital gets destroyed, then they will not be able to consume, produce and invest.
We know these are periods of fragility and we are forecasting there will be a lot of bankruptcy. And the result of this is a downward vicious cycle where more firms are bankrupted, more unemployed and lower demand and so forth.
That’s why appropriate government intervention can make a very big difference. So that’s a similarity. The nature of the intervention has to be different this time because the shock this time is not from the financial sector mis-allocating mortgages, it’s from the disease.
How has the virus exacerbated existing inequalities, both within countries, but then also between developing countries and the developed world? Do you think it will disproportionately affect developing countries and emerging markets?
It’s very clearly a disease that targets people with poor health and in all of our countries the poor have poorer health than the rich.
In the US among the advanced countries we have the greatest health inequalities. And that’s why it’s been so vicious. We also see every day in the US a visual representation of inequalities, because if you look at delivery people at stores who are in contact and therefore are at risk of coming down with the disease – they are lower income people – often minorities, often recent immigrants.
And the higher income people are working from home and so you don’t see them. So, you see very visually in the US almost a class division.
There is also an increase [in inequalities] between the developed and the developing countries, simply because, the developing countries on average have poor health. They don’t have the healthcare facilities, the hospitals, the resources, and people are very close together, especially in the urban areas, in extended families so the disease can get transmitted to the elderly who are one of the more vulnerable. And they don’t have the additional resources, the $2.2 trillion dollars [that the US has pumped into its economy], they don’t have the equivalent to that to stimulate the economy.
There have been efforts made by the IMF, World bank, the UN to help the commitment of money and resources, and it will help but the magnitude of help is minuscule in comparison to what is needed.
I have argued and a number of others have argued for instance an issuance of SDR [Special Drawing Rights] by IMF of the magnitude of half trillion dollars and it has gotten a lot of support but from a few quarters, resistance. And so even though the G20 said we should use all the instruments at our disposal, this is a very powerful instrument, it is not being used yet.
[Another] recommendation that I’ve supported is a stay on interest. The G20 agreed on a stay on the official debt from advanced countries to the poor countries but most of it is private debt and they haven’t done that.
With India’s population at risk, public finances stretched and financial markets in turmoil, the country faces a Herculean challenge right now. As you mentioned developing countries such as ours do not have the financial cushion to tide out of this. Then where should it look for outside assistance in an increasingly divided and multipolar world, where all countries are reeling with unprecedented shutdowns and damage to their own economies? Is it the international institutions? Why is it important for rich, developed nations to help emerging markets? Do they have a stake here?
I think so very much, we live in a highly interdependent world in two distinct ways. We live on a single planet. The virus doesn’t carry a passport or a visa, and in one way or another if there is one part of the world where a pandemic is raging it will find a way across borders.
People may move from country A to B, B to C, and C to D, but eventually, it will get around the world. When Ebola started, it was in one of the remote areas of Africa but it wound up in New York City. So, we have to recognise the nature of our global integration including climate change as well.
And secondly, we have a very interdependent economy. In fact, in the years after 2008 the emerging markets were the engine of economic growth. And if today they are weak and they are not growing because of the pandemic, global growth will be slow. Again, the links can be very complicated.
If India doesn’t buy from some other country, that country won’t be able to buy from the United States. So, there doesn’t have to be a direct link... the links are very strong both directly and indirectly.
India joined with the US in turning down Special Drawing Rights from the IMF. What do you make of this development?
I don’t know enough about Indian politics to know why they did and what their circumstances are but even when the SDRs get returned they are a part of the reserves of the country and reserves are important because they are the cushion the country can turn to if it needs. Countries with larger reserves are able to borrow at a lower interest rate and this is a time when many countries will need to turn to financial markets for assistance
So, it is simply wrong to say because a country gave it back it doesn’t need it. Every country needs reserves. The US doesn’t need it in some sense because it can print dollar bills.
But other countries need those dollars and SDRs that can be converted into dollars, in their bank accounts as a cushion against contingencies that are hard to anticipate and nobody anticipated the pandemic the way it was. And in that sense prudence would say keep a certain degree of reserves.
One of the mistakes – one of the many mistakes – the US made was the tax cut in December 2017 which resulted in a massive deficit. It was a tax cut not to finance investment but to give money to billionaires and large corporations who didn’t use money for investment but used it to pay out money for their dividends and share buybacks, the result of which was a one trillion-dollar deficit.
Of course, a country already has a one-trillion-dollar deficit, then it passes a 2.2 trillion-dollar deficit and then it passes another half trillion-dollar deficit and pretty soon you’re having really big deficits. So, this year instead of having the largest deficit in our peacetime history of one trillion, we will have a deficit of probably 4 trillion that is because it was not thought about the kind of contingencies that you might have to face.
How does one weigh lives against livelihoods at this point? Is there really a conflict between the two? What can developing countries do to counter the combined effect of slowing growth and accelerating inequalities?
Well I’ve thought about it a lot and the answer for it in the US is unambiguous but it may be more complicated in [developing countries]. For the US it’s very clear we can’t open up our economy until we control the disease because if the disease is raging like it is in New York and we can hear sirens going every 20 minutes – then people won’t want to buy and won’t want to go to work and the economy will be shut down automatically.
It’s only by controlling the pandemic that we can allow ourselves to go back to work. There is a growing sense that we will probably go back to work before it is fully controlled.
The disease will then tick up and we will have to go back to shelter-at-home in a kind of self-isolation. So there may be periods of oscillation of withdrawal and then engagement so that may be the pattern. Some say the optimum pattern.
While the economy is shut down, some of our poorest people have continued to work. They can’t work from home, they have no reserves. They live cheque to cheque. The government has failed in providing them assistance and they don’t want to die of starvation so they have no choice. So, the economy is continuing but at a diminished level.
Those [complications] are obviously much greater in developing countries. There are many people who live on the edge, many more people who have no reserves and on the other hand the problem of contagion is much worse because people live in extended families in closed quarters.
So, the possibility of the disease growing super exponentially are much worse. So, the choices facing developing countries and emerging markets with high urbanisation may be much more brutal and I think we haven’t seen how this will play out in countries yet.
You asked me before if this has happened before and the answer is no. So that means we have to learn very quickly from what happened in our country and what’s happening in other countries and one of the critiques I have of Trump is that we in the US didn’t learn what we could’ve learnt from Europe. So, for instance Denmark had a better program making sure unemployment didn’t soar. Switzerland had a better program for getting money to small businesses. So, we could’ve learnt to do things much better, but we didn’t.
In your recent book, People, Power, and Profits, you have argued that excess capitalism can be tamed by greater state intervention, which means that the government works to provide a “public option” to areas like healthcare instead of leaving everything to the forces of markets (and hoping for the trickle-down approach to exist). You have called for a new social contract, a new balance between the market, the state and the civil society.
In your book you have concluded that it’s not the economics that’s difficult, it’s the politics.
Do you see this as an important opportunity for governments to redress the imbalances in the economy and strive for a more equitable economic system also working towards a world where there is more redistributive justice?
Very much so. The chief of staff of [former US President] Barack Obama in 2008 said we should never let a crisis go to waste. Unfortunately, Obama did that. But the point of the pandemic is that it should’ve taught us a lot of lessons. I think it has had a very big impact, obviously, on people all over the world. And if we learn the right lessons, we will redirect our economy and our society in the right way. This pandemic is unprecedented in the forcefulness with which it has taught us a whole set of lessons.
For instance, we turn to the government when we have a disaster. We now realise collective action is absolutely necessary. No individual by himself can solve the problem of a pandemic. But because for 40 years in the US we have undermined the value of a government, our government was not able to respond in a way that other governments, much poorer than us, could respond.
We didn’t have the tests, we didn’t have the hospital beds, the masks. Our private sector didn’t perform well when we needed it. It couldn’t even produce the masks that we need. It couldn’t produce the protective gear that we need. We saw that we under-emphasised the role of the state, decapitated it in a way. But at the same time, the private sector was not up to the task. And the result has been an utter disaster.
Second example, [is] the role of the state in promoting basic science. The reason we have a higher standard of living than we did 250 years ago, or in India 50 years ago, is basic advances of science.
But this administration has proposed every year a cutback in science by 30%.
It cut back support for the Centers for the Disease Control and Prevention, the scientific basis of our responding to a crisis. We cut back support for the White House office of pandemics, the scientific body trying to understand the pandemic and how we respond to it as a society.
So, by undermining science, we undermine our capabilities. Fortunately, science is global. If everyone followed that model the effects would’ve been disastrous. But scientists have a global community. Scientists didn’t say, “America first”, scientists said: “the world first”.
And they got together and have been working cohesively to find vaccines, to understand the nature of the virus. It has been a moment of unity at the level of science around the world, you know, from what I hear from my science friends, there has never been this kind of cohesion in working together even though national governments are not working together and undermining the international community, like undermining the World Health Organisation.
The third related lesson, I mentioned the failure of the market. The question is to understand better the systematic failure of the market. The crisis of 2008 was a systemic failure of the financial markets. I think one of the things we have seen is that financial markets are not robust. They’re not resilient,
They were designed as if there’s never going to be a shock. It’s like a car with no spare tyre. If you never have a flat tyre you never need a spare tyre. But everyone knows that occasionally you do get a flat tyre and then you really want a spare tyre in your car.
We created an economy with no spare tyres. So, we are beginning to understand how we make so many mistakes. We allow there to be too much inequality. And that inequality is contributing to the high death rates that we have in the US.
However, there is a flip side that’s possible too.
Do you worry that the forces of populism and authoritarianism will be able to use this crisis to strengthen their grip over the important institutions of a functioning democracy? Can this crisis turn things uglier than what they already have been? In the US and India but also in general?
I worry about that a great deal. There are demagogues, populist, authoritarian figures who have seized the moment to strengthen their position and weaken democracy.
That’s the fight we are going through right now. There are authoritarian figures all over the world who are trying to take advantage of this. Trump has taken advantage of this. Something he could not have done before is of course the shutting down of immigration. He issued an executive order to shut down immigration.
It’s been his dream since he became the President and he used this moment to fulfill that dream. He used a bogus excuse, you know he says [they’re] taking away jobs.
In fact, there was a clamouring from businesses that they needed those immigrants for jobs that nobody else could fulfill. And the number of immigrants with green cards. And then taking their job... it’s like a million [of people] and we already have 24 million people unemployed because of Trump’s misplaced policies. That’s a drop in the bucket! So, what is he talking about?
He is a demagogue who is trying to use this occasion to advance his agenda, and we have to be vigilant that he doesn’t do something even worse.
Project forward one, two, three years in the future. What do you think changes? What will be different about the global financial system, about developing and developed economies, about the world? Is there one thing that you think will be radically different?
I hope that we will have learnt the lessons of this crisis. In America I think, I have my fingers crossed, I hope it will lead to the election of a Democratic candidate, that will lead to the US re-joining the international community. It will lead to provision of healthcare for all, in one way or the other. It will increase access to education for all, we will create a more equal society, more balanced and the kind of ‘Progressive Capitalism’ I talk about in my book will become a reality. There will be an attack on some of the monopolies, we will create a more efficient and more dynamic economy, we will invest more in science.
So, I think there will be a new vision of what kind of a society. We have seen the nightmare of where the Reagan trickle-down economics left us. And the worst version – Trump demagogue – we’ve seen that. And that will mean, people would now say: We were saved in a nick of a time from what would’ve been an Orwellian dystopia.