Points of View
Rossoff & Company’s Points of View is a forum for industry experts, leading finance professionals and senior Rossoff & Co. professionals to provide insights and commentary on current news stories, financial market themes and industry dynamics.
THE WORLD ACCORDING TO STIGLITZ
Joseph Stiglitz is, along with Paul Krugman, one of America’s foremost liberal economists. He is a Nobel Prize winner, a former head of the President’s Council of Economic Advisors under Bill Clinton, former chief economist at the World Bank and professor at Yale, Stanford, Oxford, Princeton and now at Columbia. Although a staunch liberal – and as we know, economists, like judges, come in either liberal or conservative flavors – Stiglitz normally maintains a civilized demeanor in debate with his conservative opponents. In fact, he’s downright cuddly. Stiglitz is also prolific, both in his publications and in his willingness to take stands on current macroeconomic policy issues. Often to the left of the Obama Administration, Stiglitz opposed the Obama bank bailouts and is currently arguing against the Trans Pacific Partnership. Stiglitz has also been vocal in the debate regarding income inequality and has published two books on the subject, most recently The Great Divide: Unequal Societies and What We Can Do About Them (2015). The Great Divide is a collection of short essays and opinion articles that Stiglitz has published over the last several years (many in Vanity Fair and The New York Times), with newly written introductory material added by the author. Given the choppy nature of the presentation, the analysis is uneven and lacks narrative drive. And yet, a worldview emerges, one that even a free market conservative might find worth pondering.
Stiglitz believes that the economies in much of the developed world, and particularly in the U.S., are being propelled by powerful underlying forces that are the source of our current economic dilemmas. He illustrates his point by taking the reader back to the developments in the U.S. economy in the 1920’s and 1930’s. At the end of World War I, the American economy was still substantially agricultural, with farmers making up about 30% of the labor force (farmers currently make up a little over 2% of our labor force). Over the next two decades, the U.S. agricultural industry rapidly mechanized. Crop yields dramatically increased, prices plunged and many farms went into bankruptcy, as did rural businesses that relied upon farmers. According to Stiglitz, this was the real cause of the Great Depression – a dramatic shift in the structure of the U.S. economy and not, as Ben Bernanke and others argue, the mismanagement of our monetary and banking system. Stiglitz then reminds us, as we all know, that the Great Depression and the country’s elevated unemployment and lack of growth wasn’t cured until the U.S. entered World War II. Stiglitz argues that the transformation to a war economy sucked those rural unemployed into the cities to man the munitions factories. By the time the war ended, the U.S. had transformed itself into a much more powerful industrial economy, with a trained and urbanized industrial work force. To the astonishment of many, that industrial base shifted rapidly to consumer goods production once the military orders dried up. Our transformation to a modern industrial economy was spurred by massive government wartime spending, financed with debt.
Fast forward to the U.S. economy of the 1980’s, 1990’s and 2000’s. Stiglitz believes that, once again, the American economy is being moved by powerful underlying forces. This time it is the advances in technology and automation that are transforming the U.S. economy from an industrial to a post-industrial structure. Those industrial workers who moved to the cities to man the factories have watched their plants close and, like the rural workers of the 1920’s, been left jobless. Some of our cities have made the switch to a service economy – New York, San Francisco, Pittsburgh. But many have not – Detroit, St. Louis, Baltimore, and those cities are hollowed out and dying. Globalization has speeded this transformation, says Stiglitz, but the change was coming anyway. As in the 1920’s and 1930’s, we are going through periods of financialization, asset bubbles, elevated unemployment and slowing growth in connection with this alteration. If we want to get well economically, Stiglitz argues that we are going to have to do what we did before, but without the war – issue massive amounts of government debt and spend on the occupations of the future. And what are those occupations? Health care, education and common goods, like infrastructure. Stiglitz wants to see Detroit and St. Louis turned into versions of Pittsburgh, with massive new health care facilities, universities and maybe a high speed train or two.
Stiglitz’s assessment provides a neat rationale for the standard liberal bromides – tax and spend. And yet, his underlying analysis has some bite. The U.S. economy has plentiful capital, an educated and underemployed work force and plenty of needs. Why can’t we put these pieces together? Many talk about the imperative to revive manufacturing. But do we really believe new plants will be built in our aging cities. And have you visited a modern manufacturing facility lately? You won’t find many workers there, just a lot of machines. The economy is transforming and a lot of people are going to suffer in the process. Are there policies we can implement collectively to ease the pain and spur the adjustment? Even a free market conservative has to scratch his or her head.