Joseph Stiglitz on globalisation and global governance

The Dutch government in 1972 instituted a Scientific Council for Government Policy -in Dutch: “WRR”. The rationale is: while there are Ministries for actual policy and while there are Planning Bureaus for separate fields, the WRR is supposed to look over a longer horizon and across fields. Their YouTube channel may contain interesting material also for foreigners.

Here is the lecture by Joseph Stiglitz (1943): The future of globalization, given on Thursday November 6 2014.

Stiglitz pointed to world problems and the interconnectedness of nations, the rise of world governance, but the lack of instances of world government. The economic integration proceeds faster than the political integration. In the piecemeal system that arises it are special interests who take the lead. Bankers want to control financial markets. Producers want to control sales and thus dominate trade talks. National political systems become corrupt because of campaign financing.

Globalisation has been a huge and unpredicted success in other realms. With China and India 2.5 billion people have seen their prospects improve. China has taken care in the sequence and pacing of joining the world system. In September 2014 China became the biggest economy in the world, putting the USA in second place. Compared to 1815 China en India only take their historical position, and their position in the last two centuries was “only temporarily” affected due to Western colonisation. The new balance of economic power also requires a political balance, and the multipolar world requires new institutions.

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

What about my suggestion of Economic Supreme Courts ?

My suggestion, and not Stiglitz’s suggestion, is: Each nation could adopt an Economic Supreme Court (ESC), see my memo in the RES Newsletter this Fall, and also see the About page above. When these national ESCs communicate, then there will be some form of co-ordination based upon economic science. Governments will be better informed about the world situation, and the bargaining issues will be clearer.

I wondered what Stiglitz would think about this suggestion, since he had been chairman of the Council of Economic Advisers in 1995-1997 under Clinton. Asked after the lecture, his first reaction was that such a court might make such horrible mistakes as the US Supreme Court has made in the past. My  reply was: (a) It would be economists and not lawyers, and the court would be based in economic science, (b) Duration of terms would not be for life but for seven years, on a revolving basis with one new appointment per year, (c) Court decisions would be open to society so that the discussion before and after would remain open to science too. Stiglitz was willing to consider these aspects, and seemed to agree that the dynamics in policy making would change. Due to his initial negative reaction and my need to defend it, I didn’t get to ask Stiglitz about his reaction to the possible contribution to world governance via that mutual contact.

World governance is an old idea. It was supported by Jan Tinbergen who pointed to the obvious externalities and the need to incorporate them in the economic process (rather then leave them be with Coase’s Theorem). The idea also finds support in my book DRGTPE, see the About page.

TTIP

One of Stiglitz’s messages was that the Transatlantic Trade and Investment Partnership (TTIP) proposed trade agreement is “framed”. It uses terms of “trade” and “freedom” and “harmonisation”, but is actually a different kind of beast. The old trade agreements that dealt with comparative advantage have run much of their course. Tariffs are already quite low. What is at stake now are the so-called “non-tariff barriers” – but those are in place precisely because of national regulations that have their own reasons. Thus the real issue is deregulation again, but now under the guise of international trade agreements. An example is health regulation that might be abolished under international pressure. What is severely lacking in these negotiations is transparancy. Again it are the producers who want to have control over their sales, but one should wish that the consumers are also at the table.

In the EU TTIP  is politically sold with the argument that it would generate jobs. But trade agreements should create a balance between imports and exports, and thus the effect on jobs should rather be balanced too. The classic argument for trade and comparative advantage is income and not jobs. The EU should look for jobs elsewhere.

My own experience at the CPB in 1982-1991 with the Single European Act a.k.a. “Europe 1992” proposed by Delors was that the European Commission claimed efficiency gains from trade, but did not account for job losses that explained those gains. They overlooked the investments that would be needed to create new employment. See CPB (1989), “Europe 1992″, working paper 28, that might be only mildly critical.

Low wage unemployment

There is an economic theory that trade would enhance prosperity, but (with reminiscences of the Ricardo – Malthus debate on the Corn Law of 1815+) free trade now seems to have adverse effects for many. The factor price equalisation theorem causes lower wages for the lowly productive. Competition between governments causes cutbacks on public services and less progressive taxation. Globalisation exacerbates the national problems. The low income groups are worse off on all accounts. The median income of the full time male worker is as low as four decades ago. The minimum wage has the real level of five decades ago. Stiglitz claimed that trade had been a critical factor in the last 15 years to explain these developments in inequality. He referred to James Galbraith. An article that I could find is “A perfect crime: inequality in the age of globalization“. Galbraith also has this new book: The End of Normal (2014).

Another point that I could ask Stiglitz after the lecture was whether he was aware of the notion of a tax void. It is relatively hard to explain such a notion in a noisy reception hall, but professor Stiglitz has a Nobel Prize and seemed to get a major part of it. See my paper with the graphical display also for the USA. See my discussion of Larry Summers’s Tinbergen Lecture on Secular Stagnation, last Friday. After some confusion we established, for the US, that families with children might have such a tax credit that there might be no tax void, but that singles still would have a problem. I must be careful here since my last calculation for the US was from 2009 and that is five years ago. Overall there might be scope for an analysis to counter above negative effect of globalisation on the internal market, see this other paper on exposed and sheltered sectors. Professor Stiglitz seemed to think that the German introduction of a minimum wage shouldn’t be a problem, but I haven’t looked into that yet and am less optimistic.

Quantitative Easing

Stiglitz was quite critical of the Quantitative Easing (QE) that has pursued since November 2008. The funds didn’t go to the common people (e.g. by reducing the mortgage burden), but to the banks, who invested the sums in the emerging markets, aggravating their problems by exchange rates and inflation. Who is to blame the banks for selecting options with potentially higher returns ? According to Stiglitz the difference between the US and the EU is that the US didn’t have much austerity while the EU did – see indeed the Depression in Southern Europe. The difference has not been caused by the US with QE and the EU without QE. The policy by the ECB to embark upon QE, by buying up problematic assets, would be dubious.

I hadn’t seen that US link to the emerging markets yet. My paper Money as gold versus money as water (2013) however uses new money only for a targetted use, and thus doesn’t make that mistake with QE in the US and the new policy by the ECB.

Stiglitz was also critical that standard monetary policy neglects the impact on inequality. He claimed that 95% of QE since 2008 benefitted the top 1%. A low rate of interest hurts pensioners who save in bonds and benefits the rich who are active on Wall Street. Janet Yellen would have more awareness of the issue.

Other issues

One cannot discuss globalisation without a whole range of topics: bankruptcy law (also for sovereign debt, cf. Greece), (de-) regulation, capital controls, failure of co-ordination, the Bush-selected G20 of 2008 rather than the legitimate UN, tax havens, … Stiglitz pointed to several mechanisms how there can be regulatory capture and (deliberate) catch-22’s. A system with private prisons might welcome new prisoners. Take the farmaceutical case of a known drug, a placebo, and a new drug. A new competitor might not be able to do a test with the placebo, since it would be unethical not to use the known accepted drug. The competitor cannot create a good test with that known drug since it has no access to the required performance data.

A short response on this: A special feature of the US system is litigation, in which companies can even sue regulators. Others have already observed that China is ruled by engineers and the US by lawyers: a major element in tackling world problems is tackling litigation.

Of course, minister Lilianne Ploumen spoke as well. It came down to explaining the VVD-PvdA coalition government agreement since Fall 2012 for another time, now to the distinguished guest.

Discussion

For me the discussion did not add novelty. The moderator was professor Arnoud Boot from Amsterdam, who is member of the WRR, and who also chaired the KVS meeting last Friday with Larry Summers – see this discussion. There are some constants in the Dutch discussion on economics. Professor Boot is quite capable in many respects but observe his Catch 22:

  • If there is censorship of economic science by the directorate of the CPB then Dutch Parliament should investigate it.
  • Only such an investigation can establish that there is such censorship.
  • When Parliament does no investigation then we will never know and there is no need to discuss it.
  • Hence the issue does not exist.
Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

Advertisements

Comments are closed.