Nobel Prize-winning economist and professor Joseph Stiglitz tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:
Alan Kohler: Thanks very much for joining us, Professor Stiglitz. It’s great to have you on.
Joseph Stiglitz: Nice to be here.
AK: Now, your last couple of books have been fairly pessimistic. And as you’ve travelled around Australia there’s been quite a lot of publicity about all the problems in the world and in Australia. I just wondered if we could start the interview on a slightly different note and ask you what, if anything, are you optimistic about?
JS: I’m optimistic, I suppose, that people are listening to this pessimistic talk, that there’s a beginning of a recognition that we are facing this very serious problem of inequality, that the recovery from the crisis of 2008 has been disappointing, that there are important tasks, challenges ahead and hopefully we’ll get down to work and succeed in addressing these problems.
AK: I guess the fact is that the American market model, which you now say has failed, has been the paradigm ever since the Soviet Union collapsed. What you’re saying there that you’re optimistic that everyone seems to recognise that it’s now failed?
JS: That’s right. Let me make it clear. The failure of Russia was misinterpreted to mean the success of the American economic model. Russia failed and so the Soviet system failed for a whole variety of reasons. But the irony was that around 1980, as the Russian system was failing, that the American system began to change.
It had been working very successfully in the period 1950 to 1980. From the end of the World War II until around 1980 we had very rapid growth. It was shared prosperity, where every group in our population saw their incomes rise and those at the bottom saw their incomes rise the most, so we were coming closer together. And then we changed course in ways that resulted in slower economic growth and almost all the growth going to those at the top.
This is not about market economy. The market economy can deliver. It’s about the fact that the extreme version of market fundamentalism that marked the Reagan-Thatcher era that had failed.
Stephen Bartholomeusz: But Professor, how much of your criticism of the US domestic economic policies is about domestic policy, and how do you factor in the impact of China on world trade generally, but on US manufacturing in particular?
JS: There are many aspects of that question. China is obviously the most successful economy among the emerging markets. It’s grown 10 per cent per annum for more than 30 years. Its large growth of manufacturing goods, which are provided at low prices, actually contributed in some ways to America’s misunderstanding of its success because it grew very rapidly without inflation.
One of the reasons there was no inflation was the dampening effect of Chinese production on prices. Now we’re facing a real challenge because globally, employment in manufacturing is going down, simply because the growth in productivity in manufacturing has been so high. We are the victim, in a way, of our own success. And inevitably, as we’ve corrected the distortions of the global economy of the past, China and other emerging markets will get a larger fraction of that diminishing global employment, and that means the United States, Europe have to restructure their economy. That’s one of the real challenges facing us going forward.
Robert Gottliebsen: Professor, let’s give you a clean sheet of paper in the United States. What are the two or three things you would do in the US to help alleviate this problem? Two specific things.
JS: I would say the agenda would include obviously reforms in our education system. Right now, we have a broken education system, broken in a couple of ways. On average it’s not delivering. The top is doing very well, but on average performance like standardised scores and the OECD average, the average of the other X countries. But it’s also a very inequitable system. Those who are not lucky enough to have well-off parents typically don’t have the opportunity to live up to their potential.
The result of that is that young Americans’ prospects are more dependent on the income and education of their parents than in other advanced countries. So, reforming education is one important area.
Secondly, the government needs to take a more active role in helping the American economy engage in structural transformation, moving from manufacturing into the service sectors including education, health, supporting research. These are all sectors where the government plays an important role and where government cutbacks have been particularly costly. Certainly I believe that one of the main problems in the United States and other advanced countries are facing today is this high-level inequality and low level of equality of opportunity.
AK: Can I just bring you to Australia now? A catchphrase of the Australian government in underpinning its policies is that it’s the “end of the age of entitlement”. Do you think there we’ve had an age of entitlement and do you think it has ended?
JS: I think it’s a vocabulary that’s intended to have a particular notion that there are many people who are getting benefits not because they’ve made contributions, but because they think they’re entitled to them. We’re not making contributions; that’s absolutely wrong. Mitt Romney made a very similar statement during the presidential campaign in the United States and was roundly attacked for that.
The fact is that though the elderly who are getting social security and old-age pensions have contributed throughout their whole lives. They have contributed to helping our economy and society function; they’ve made tax contributions to social security and now they’re getting back a repayment on those contributions. Those who contribute to healthcare, to Medicare taxes are now getting the benefits of those.
What is true is that there those in the financial sector who would like to privatise the social security system or old-age retirement so they can make more profits. The UK did some partial privatisations and the result of that was that benefits went down by 40 per cent because the rest was eaten up in transaction costs. The private sector, financial sector, likes to maximise transaction costs.
The government’s programs have been trying to maximise what old-aged people get in terms of benefits. It’s that simple. The US has the least efficient healthcare system because it’s basically privately based. Australia has a very efficient healthcare system that delivers more at half the cost of the US. There are those -- the private healthcare firms in the United States -- who believe that they are entitled to get monopoly profits. So, there are these entitlements of the rent-seekers and those are the ones that I would go after.
AK: You’ve put it out that the Australian budget is not in crisis; we don’t have a debt problem by comparison with most other countries. But it is the case that over the long term, the revenue and expenditure of the Australian government will get further and further apart if nothing is done. Wouldn’t you agree that something needs to be done to reset Australia’s budget settings?
JS: Every country has to constantly reassess its revenues and expenditures. Dynamic firms always have a debt because they’re always investing in their future. They’re always borrowing so they can make the investments that will make them productive in coming years. So, debt by itself is not necessarily a problem. Even growing debt is not necessarily a problem because the economy is growing, the firm size is growing. The real question shouldn’t be do we have too big of a debt, the question is: what are we spending the money on?
I know the expenditure patterns in the United States. I know the money that we are spending to subsidise effectively the pharmaceutical companies, healthcare insurance companies, is money that’s wasted. It doesn’t have to be spent and we could spend the money in other ways much better.
I know that in the United States, we overpay for much of our defence expenditures and we’re spending a lot of money on weapons that don’t work against enemies that don’t exist. That’s wasted money. But when we are spending money on infrastructure, on technology, on education, on investments, on poor families so that the children of these poor families can have access to food, healthcare, have an opportunity to make somewhere in the future -- those are investments in the future. And if you have to finance those investments through debt, that you spend the money wisely, I think that’s money well spent.
SB: Without challenging anything that you’ve just said, Professor, in most of the developed world -- and I know the US is slightly different -- we’ve got this issue of an ageing baby boomer generation, a very large generation, being followed by much smaller generations of future taxpayers.
At some point that ageing baby boomer generation is going to be a very, very heavy burden on my children and my grandchildren. How do you reconcile that with the notion that governments should spend more and borrow more?
JS: I think getting the programs for the aged in balance is an important part of any economic agenda and I can’t speak to the particular numbers in Australia. I know that in the United States we’ve had a very big debate about that.
There are two major programs for the aged. One is old-age retirement, what we call social security. When you look at that program in detail, it’s roughly in balance.
There are lots of uncertainties and it’s very hard to forecast those uncertainties. If we had more immigration, we will have a surplus. If we have larger increases in productivity, we will be in good stead. But it could be that politics in America will restrict immigration and that underinvestment in research will lead to lower increases in productivity. And in that case, we will have a moderate problem, but when that becomes evident, that’s the appropriate time to make those cutbacks.
The other very expensive program for the aged is their healthcare program. But if the United States had the healthcare system that was as efficient as some of the best-performing healthcare systems in Europe -- let alone in Australia -- if we have one of those more efficient healthcare systems, we wouldn’t have deficit on any grounds. So, it’s not just for the aged.
I think it’s better to focus on the cost of delivering services, the cost of delivering a healthcare service where you may have one of the best performing systems -- if not the best performing system -- in the world.
Your superannuation scheme, there are some inefficiencies. The cost of delivering retirement benefits through the for-profit financial sector is very high. The loss of tax revenues I associate with the tax deductibility for high-income people is costing your Treasury a lot. So, there are some important reforms that ought to be undertaken, but the basic framework in Australia seems to be on a much better stead, particularly in healthcare, than in the United States.
RG: Professor, are you aware of what the current government is doing? If we think he’s probably unique in the world to try and address the problem that you’re talking about. That is this plan to review the contracts between small enterprises and large enterprises to make sure that they fit consumer fairness.
The idea is that large companies won’t be able to use their market power to screw into the dust small enterprises, and so you’ll get a huge growth in the smaller sector. In other words, it’s trying to change the balance between large and small. It’s an idea that was thought up by one of our former prime ministers, Kevin Rudd, but they dropped it to be taken up by the current government. Have you studied it?
JS: I have not studied it, but it touches on something I’ve been very concerned about in the United States and many other economies: the increasing role of large enterprises, the increasing role of, you might call them, monopolisation and monopsonation – monopsony. And so I think an act of policy for more effective enforcement of anti-trust laws, what we call pro competition laws, is absolutely essential. I welcome that the government do something about this.
AK: You mentioned before about the taxation problems that are occurring. Globalisation, as you pointed out, has driven down inflation and allowed inflation-free growth, but it’s also allowed tax-haven shopping by global corporations. What do you think can and should be done about that?
JS: I think it’s a really serious concern. I think it can be addressed. I’ve written a paper where I describe how it could be addressed.
One way of thinking about this is to think about the analogy with the United States. Many of the states have state corporate income taxes. The attempt to try to figure out through what’s called the transfer price system what economic activity occurred in each state is actually impossible, so we use what is called a 'formulaic' system.
What we do is we attribute to a firm in each state profits based on sales, based on employment, based on capital, within each state. That eliminates or at least significantly reduces the capacity of corporations to move money from one place to another to find a low tax jurisdiction.
Look, let me give you an example. It’s well-known that Apple used all the cleverness that they’ve used to create new products to avoid paying taxes, even though companies like Google and Apple only could exist as a result of the Internet and advancements in technology that the public have paid for.
These are companies that are willing to take, but not to give back. And our society can’t function via those kinds of attitudes spread throughout our society. But these companies make a substantial part of their profits as a result of sales in the United States, as a result of innovation that occurs in the United States, and so we should tax them on the basis of the actual economic activity based on employment, sales, capital stock, research that occurs in the United States. And similar principles apply to Australia.
AK: But do you think it’s pushing the world towards much greater consumption taxes?
JS: Well, not necessarily. That’s why I say that I think that this formulaic basis is a way of actually taxing on the basis of at least some aspects of production that occurs within the country. But there will be an element of moving towards more where is consumption actually occurring. So yes, there’ll be a slight movement in that direction. But I think it is important that taxes be imposed on the places where economic activity occurs.
RG: Professor, you’ve said in the US the healthcare system is inefficient. Would you put the same tag on the education system in the US? Is part of its problem inefficiency or is that just not enough money?
JS: Well, the US education system is very complex. At the pinnacle, what many people think about when they think about the US, they think about Harvard, Columbia, Ivy League schools. None of these, let me repeat, none of these are for-profit institutions. None of these are motivated by the usual profit motive. These are either state universities like Berkeley, first-rate universities, or they are not-for-profit supported by very generous contributions, philanthropy mainly by alumni, but by others. That part is working well.
The rest of our education system is not, and it’s partly that we don’t have a good financial model, particularly for tertiary education, for university education. Australia has a model that works. It’s the envy of the rest of the world and I don’t understand why you would ever think about moving away from it.
We also have a momentary and secondary education system that is based primarily on local funding. That means if you’re lucky enough to live in a rich neighbourhood you get a good education, but if you live in an average or poor neighbourhood, you’re more than likely to get a poor education. The net effect of this is, as I said, is that the overall outcome of our education system is on average is pretty dismal. It is partly a matter of resources, but it’s partly a result of an increasing level of economic segregation in the United States, which separated the poor from the middle class and from the rich.
SB: Professor, after the crisis almost every central bank in any major economy adopted quite expansionary monetary policies. The US Fed’s expanded its balance sheet by about three trillion dollars. How’s that going to be unwound? Why hasn’t it had more of an effect? And given this has driven dramatic asset price inflation in the meantime, is it inevitably going to end in tears?
JS: I don’t think it’s inevitable that it will end in tears. The reason it has not had more effect in commodity price inflation or in resuscitating the economy for that matter is that the government has effectively given the banks scope for lending more, but the banks have not been particularly interested in lending more to, say, America’s small and medium sized enterprises. We were talking earlier about the important role that small, medium sized enterprises play in job creation. Well, our banks lending to SMEs is about 20 per cent below what it was before the Crisis.
Now, in the case of unwinding, it will be possible I believe for the liquidity to be taken out of the economy. Almost surely the members of the Fed will be more worried about inflation than probably they ought to and so I anticipate that they will probably if they make an error, they will be on the side of excessive caution and taking more liquidity out of the system too fast. That’s why I don’t think it’s all going to end in tears.
There are going to be some challenges and particularly some challenges if the Fed tries to obfuscate the cap of losses associated with the long-term bonds that it bought at very high prices and will be selling at lower prices.
It will probably try to make it seem as if it’s not experiencing capital losses. To avoid that it may undertake some, you might call unorthodox approaches and there are risks associated with those unorthodox approaches to monetary policy.
AK: Just one more question, Professor Stiglitz. Do you think that China will end up having a happy ending?
JS: I think more likely than not China will be able to manage the important risk that they face going forward. They’re sitting on a, you might say, a reserve of more than three trillion dollars. They have the excesses, they have the instruments to deal with the problem or wear the problems. They’ve managed repeatedly to manage similar kinds of challenges.
On the other hand, as its economy gets bigger and bigger and soon will become the largest economy in the world, it becomes more and more difficult to manage this huge economy. So, I don’t think this should be a cause of complacency, the fact that they manage some more problems in the past. I think countries like Australia who are particularly dependent on trade with China need to at least contemplate what would happen if there were a big problem in China sometime in the future.
AK: Well, on that note, we’ll leave it there. Thanks very much for joining us.
RG: Thank you.
JS: Thank you.
SB: Thank you.