The Great
Malaise Continues
NEW YORK – The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth.
The
Eurozone managed to avoid a meltdown over Greece, but its near-stagnation has
continued, contributing to what surely will be viewed as a lost decade.
For
the United States, 2015 was supposed to be the year that finally closed the
book on the Great Recession that began back in 2008; instead, the US recovery
has been middling.
Indeed, Christine Lagarde, Managing Director of the
International Monetary Fund, has declared the current state of the global
economy the New Mediocre. Others, harking back to the profound pessimism after
the end of World War II, fear that the global economy could slip into depression,
or at least into prolonged stagnation.
In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.
The
economics of this inertia is easy to understand, and there are readily
available remedies. The world faces a deficiency of aggregate demand, brought
on by a combination of growing inequality and a mindless wave of fiscal
austerity.
Those
at the top spend far less than those at the bottom, so that as money moves up,
demand goes down. And countries like Germany that consistently maintain
external surpluses are contributing significantly to the key problem of
insufficient global demand.
At
the same time, the US suffers from a milder form of the fiscal austerity
prevailing in Europe. Indeed, some 500,000 fewer people are employed by the
public sector in the US than before the crisis. With normal expansion in
government employment since 2008, there would have been two million more.
Moreover,
much of the world is confronting – with difficulty – the need for structural
transformation: from manufacturing to services in Europe and America, and from
export-led growth to a domestic-demand-driven economy in China.
Likewise, most
natural-resource-based economies in Africa and Latin America failed to take
advantage of the commodity price boom underpinned by China’s rise to create a
diversified economy; now they face the consequences of depressed prices for
their main exports. Markets never have been able to make such structural
transformations easily on their own.
There
are huge unmet global needs that could spur growth. Infrastructure alone could
absorb trillions of dollars in investment, not only true in the developing
world, but also in the US, which has underinvested in its core infrastructure for
decades. Furthermore, the entire world needs to retrofit itself to face the
reality of global warming.
While
our banks are back to a reasonable state of health, they have demonstrated that
they are not fit to fulfill their purpose. They excel in exploitation and
market manipulation; but they have failed in their essential function of
intermediation. Between long-term savers (for example, sovereign wealth funds
and those saving for retirement) and long-term investment in infrastructure
stands our short-sighted and dysfunctional financial sector.
Former
US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering
from a “savings glut.” That might have been the case had the best use of the
world’s savings been investing in shoddy homes in the Nevada desert. But in the
real world, there is a shortage of
funds; even projects with high social returns often can’t get financing.
The
only cure for the world’s malaise is an increase in aggregate demand.
Far-reaching redistribution of income would help, as would deep reform of our
financial system – not just to prevent it from imposing harm on the rest of us,
but also to get banks and other financial institutions to do what they are
supposed to do: match long-term savings to long-term investment needs.
But
some of the world’s most important problems will require government investment.
Such outlays are needed in infrastructure, education, technology, the
environment, and facilitating the structural transformations that are needed in
every corner of the earth.
The
obstacles the global economy faces are not rooted in economics, but in politics
and ideology. The private sector created the inequality and environmental
degradation with which we must now reckon. Markets won’t be able to solve these
and other critical problems that they have created, or restore prosperity, on
their own. Active government policies are needed.
That
means overcoming deficit fetishism. It makes sense for countries like the US
and Germany that can borrow at negative real long-term interest rates to borrow
to make the investments that are needed. Likewise, in most other countries,
rates of return on public investment far exceed the cost of funds.
For those
countries whose borrowing is constrained, there is a way out, based on the
long-established principle of the balanced-budget multiplier: An increase in
government spending matched by increased taxes stimulates the economy.
Unfortunately, many countries, including France, are engaged in balanced-budget
contractions.
Optimists
say 2016 will be better than 2015. That may turn out to be true, but only
imperceptibly so.
Unless we address the problem of insufficient global
aggregate demand, the Great Malaise will continue.
©
2015 Project Syndicate
Joseph
E. Stiglitz is University Professor at Columbia University. His most recent
book isThe Price of Inequality: How Today's Divided Society
Endangers Our Future. Among his many other books, he is the
author of Globalization and Its Discontents, Free Fall: America, Free Markets, and the Sinking of the
World Economy, and (with co-author Linda Bilmes) The Three Trillion Dollar War: The True Costs of the Iraq
Conflict. He received the Nobel Prize in Economics in 2001 for
research on the economics of information.
