Sunday, 14 February 2010

Ideals: Stiglitz is worried by America's state of capitalism and the rise of the right



Born: 1943
Education: Amherst College, MIT, Cambridge University
First job: assistant professor, MIT
Key moves: professor at Yale, Stanford, Duke, Oxford and Princeton; chair of US president's Council of Economic Advisers; chief economist, World Bank; winner Nobel Prize; professor at Columbia Business School
Hobbies: photography, theatre

Over here to promote his latest book, Freefall: Free Markets and the Sinking of the Global Economy, the American Nobel Prize-winning economist, Stiglitz.

Perhaps it's the presence of politicians and their assistants in the coffee bar in which we sit that makes him seem more irascible than ever. He's bloody angry — and he wishes we and they would get what it is he is so angry about. Freefall is a raw diatribe against the greed of bankers and the US financial services industry.

It follows on from his interventions against global economic inequalities and injustices.

What's particularly moving him today, he says, is that we've been presented with a great opportunity — one that unites much of his past and present argument. He's a backer of the campaign launched this week by charities for a Robin Hood tax on financial companies to reduce cuts in public services and assist the world's poor. Taking 0.05% from world bankers' transactions would raise £250 billion a year.

“The benefits are twofold,” he says. “In general, the tax philosophy should be to tax bad things rather than good — so pollution should be taxed more than work and savings.” And in Stiglitz's eyes, much of what bankers get up to qualifies as pollution. “Very little social returns come from short-term trading. It results in extreme volatility and excessive trading. So anything that discourages short-termism is to be encouraged.

At the same time, the money collected can be used to perform a socially useful function.

“Does anybody seriously believe that anything happens because of the sort of micro-second trading we're now seeing? It's a function of speed. No investments are being made as a result of it, no jobs are being created. Finance has a vital socially important role to fulfil, which is to raise capital, to run payment systems, to oil the wheels of everything society does. But the bankers fail to perform that socially useful function — and because of that, the world's economy has suffered.”

Bill Clinton admired Stiglitz, now 67, as chief economic adviser; right-on staff at the World Bank, where he was chief economist, revered him, and centre-left governments still hang on his every word. He's now a professor at Columbia Business School, and looks the academic with his grizzly beard.

But his outpourings are far from dry and dusty. To those of a liberal persuasion, he's a rock star. To the right, he's simplistic and idealistic. He worries about America's “ersatz capitalism”. He hopes Britain does not succumb to “fiscal fetishism” and slash public spending (although it's not clear he can square that with a soaring deficit). His language is savage. Bankers were “foolish”, the markets are “crazy”, the US banks' bailout was “the Great American Robbery”.

Stiglitz was born in Gary, Indiana, a steel town where unemployment was ever-present. When he began to study economics at Amherst College and then at MIT, “none of the conclusions of neoclassical theory seemed to make sense to me”. He was, he recalls, driven “to look for alternatives”.

He won his Nobel Prize in 2001 for co-authoring a paper in which he dispelled the belief that, apart from when they fail, markets are generally free and efficient. He demonstrated that even in good times, they can require government intervention.

However, his work since then has drawn him to a wider audience. His book Making Globalization Work, in which he highlighted international iniquities and claimed that wealthy governments have been content to sit back and let the markets do their work — leading to a yawning gap between rich and poor — was a best-seller.

Now, in Freefall, he turns to the bankers who brought that world economy down. “Bankers make money in a way that encourages them to undertake risk-taking in a short-sighted way,” he says. “They claim their industry rewards them with incentive pay but it's an incentive to behave badly.”

The banks' easy success tilted the balance of the economy in their favour, so, for example, they recruited the most talented people — to the detriment of everything else. The taxation system was also rigged. “One of the mistakes we made as a society is that we taxed speculative profits at lower rates than people earning a living. We encouraged short-sighted behaviour.”

In the UK, he says, “in settlement of the economic consequences of that behaviour, Gordon Brown is now having to impose taxes, and above a certain level this distorts the economy”.
Stiglitz condemns successive governments.

“As a matter of public policy, we allowed deep problems to open up in corporate governance — so that at Goldman Sachs and others, shareholders and bondholders have not done well after their holdings are adjusted for inflation and the risks they bore, but a small group of people, the senior executives, have walked off with a lot of money.”

Those owners, he says, “should have had a say in the bankers' pay”. But they could, I point out, and chose not to. “Investors should take a more active role. It's a chicken and egg — they don't take a more active role because they feel powerless.”

As well as reforming corporate governance so shareholders really can dictate pay, he wants to see changes in the tax structure to encourage more long-term investing. We've got to put checks into the system to stop a recurrence — and to begin righting the wrongs that stare us in the face every day.

“There's such a popular revolt in the US. It's unconscionable what has happened, that so much money flowed to the banks but instead, has gone to bankers' bonuses. They've not created jobs. In Europe, in some cases, they've even created national deficits, where governments are saying they'll have to cut back on health and education as a result.

Voters are getting the message, politicians are getting the message and that's a hopeful sign…” But not bankers?

They've been able to capitalise on the differences between countries as to how to react to the crisis. That's worrying. Also, what bothers him is “that public anger is so great people will listen to any politician, whether they'll do anything about it or not and whether they'll make the problems better or worse.

Look at the policies of the extreme right. In the US, we've already got Sarah Palin's party advocating little government'. It was corporatism and deregulation that led to these problems and now they're advocating it?”
There are those, I say, who argue large bonuses weren't that bad, that there was a “trickle-down” effect into the rest of the economy. He emits a loud snort.

“That's absurd. Is it the best way of running our affairs that a lot of money should be concentrated in the hands of the few and they decide who receives it? Absolutely not.” Hence his support for the straight, across-the-board Robin Hood tax. Stiglitz, you just know, would approve of the legendary outlaw.

No comments: