Joe Stiglitz’s Presentation On Global Imbalances

I came across this presentation of Joe Stiglitz (from INET earlier this year) today as someone referred to it on Facebook. I think I may have referred to it earlier. Stiglitz is certainly one of the better economists in mainstream. The presentation is at Business Insider with the title Joe Stiglitz’s Presentation On Why The Entire Global Economic System Is Doomed To Fail – which I think was a nice heading!

The world is severely imbalanced as a result of the promotion of free trade and this has led to debtor exhaustion (borrowing words from Stiglitz). Deficit nations are in a position where they cannot expand domestic demand unilaterally because sooner or later they will run into a balance-of-payments crisis. Surplus nations on the other hand are showing no inclination to do fiscal expansion. Till now the United States was acting as an “importer of the last resort” or a “demander of the last resort” and this allowed the world to grow. But faced with its own balance of payments problems, it is not easy for the United States to grow. The rising public debt (as a counterpart of the rising net indebtedness of the United States to the rest of the world caused due to the United States’ balance of payments) will not be promoted by the Federal Reserve – the exorbitant privilege of the United States has become a burden. This is not to say that fiscal policy will not help the United States but it cannot alone bring the nation back to full employment.

I absolutely love Nicholas Kaldor and I saw some nice things in the presentation (emphasized by Kaldor such as “learning by doing”), promoting industrial policy in the developing world and modifying the rules of the game for the world trade to allow nations to take unilateral action to prevent imbalances from getting out of hand (last slide in the presentation). Kaldor himself (and his “New Cambridge” group) had advocated import controls for the United Kingdom in the late 70s/early 80s.

Kaldor had an articulate way to put his ideas across. Here’s from his 1981 article The Role Of Increasing Returns, Technical Progress And Cumulative Causation In The Theory Of International Trade And Economic Growth (from his Collected Papers, Vol 9):

Traditional theory, both classical and neoclassical, asserts that free trade in goods between different regions is always to the advantage of each trading country, and is therefore the best arrangement from the point of view of the welfare of the trading world as a whole, as well as of each part of the world taken separately. [footnote: The latter part of this proposition abstracts from the possibility that a particular country possesses some degree of monopoly power and thereby can turn the terms of trade in its favour by means of a tariff even after retaliation by other countries is taken into account.] However, these propositions are only true under specific abstract assumptions which do not correspond to reality. Under more realistic assumptions unrestricted trade is likely to lead to a loss of welfare to particular regions or countries and even to the world as a whole – that is to say that the world will be worse off under free trade than it could be under some system of regulated trade …

… Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal, called this ‘the principle of circular and cumulative causation’.

[italics in original]

Although there are some right things Stiglitz says about international imbalances, he emphasizes monetary policy more than fiscal policy (something all mainstream economists do) and also suggests a global reserve system (the kind proposed by Keynes with a World Central Bank and all that). Economists have to wake up to the fact that monetary policy has a limited role to play and it is fiscal policy which matters. The idea of a world central bank won’t work – as emphasized by Kaldor (in the 60s!) because it would necessarily involve surrendering political sovereignty – governments won’t give each other unlimited credit lines to each other in such a system. (More on Kaldor and the world central bank some other time).

I have some commenters contacting me on the “About” and “Aspiration” pages on this blog recently and I thought this blog post should make my position clear that free trade makes everyone worse off. A closely related claim here (which will be defended again and again) is that over the long run, exports are the only source of autonomous demand. Because some nations get ahead of the others, this puts a severe handicap on others and new rules of the game is the only way out to prevent the general state of stagnation in the world economy (in between occasional periods of booms). Hence the title of the blog “Concerted Action”!

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