• The Listener
  • North & South
  • Noted
  • RNZ

Nobel economist Joseph Stiglitz talks inequality, power and profits

Joseph Stiglitz: an outspoken critic of the management of globalisation. Photo/Alamy

He’s a big fan of New Zealand’s “well-being budget”, but Nobel Prize-winning economist Joseph Stiglitz believes much more needs to be done to tackle tax avoidance, inequality and the widespread sense that “something’s wrong”.

They call economics the dismal science, but there’s little that’s dull about Joseph Stiglitz, the Nobel-prize winning economist and bestselling author. He seems positively beaming when we meet, having worked up a deep tan on holiday in Spain. But more than his complexion, it’s his mind that dazzles.

A former chief economist at the World Bank, Stiglitz, 76, is based at New York’s Columbia University, but he also gives classes at the Paris Institute of Political Studies and travels widely, including several visits to New Zealand, where he has a cousin in Auckland. For an outspoken critic of the management of globalisation, he has a global reach, sitting on panels and advising governments around the world. As recently as last November, he spoke to Prime Minister Jacinda Ardern.

Macro alias: ModuleRenderer

Blood in the water

His latest book, People, Power and Profits, is another impassioned warning of the dangers of unfettered markets and the corruption of the political process by big business. At our previous encounter in 2015, he was promoting The Great Divide, which raised a flag about the widening gap between rich and poor. Back then it struck me that he bore a resemblance to the actor Richard Dreyfuss. Not just his looks, but also in his slightly disdainful assessment of the political elites, which was analogous to Dreyfuss' attitude towards the insular authorities in Jaws. And, as in the film, no one listened. That great white shark Donald Trump still swam up and became US President. Then there was Brexit, the rise of populism and a kind of full-blown identity crisis in the West. But Stiglitz hasn’t walked away in despair. Rather, he sees these developments as a form of protest.

“I’d call them signs of social upheaval,” he says. “They’re not articulated as inequality upheaval. It’s ‘something’s wrong’ upheaval. People think the system is rigged, that it isn’t working for them. So, in a sense, it is about inequality.”

Stiglitz addresses the China Development Forum. Photo/Getty Images

Kudos for Kiwis

If the global picture isn’t too promising at this particular juncture in history, then Stiglitz does see reasons for optimism in New Zealand. In particular, he’s pleased that it’s adopted well-being indicators as part of its performance analysis, rather than, as with most countries, relying on the crude figure of gross domestic product (GDP). The problem with GDP, says Stiglitz, is that it conceals issues such as childhood deprivation.

“New Zealand is leading the way by building these ideas into its budgetary process, and the interesting thing that’s so distinctive about New Zealand is how early it got on to this.”

Last year, he talked to Ardern about the well-being budget that was unveiled in May. The plan had already been decided upon by then, but it’s been a long-standing concern of his, on which he consulted New Zealand civil servants and Treasury some years ago.

“I was chairman of the International Commission on the Measurement of Economic Performance and Social Progress,” he says, “and we emphasised the fact that GDP was not a good indicator. If you want a society that performs well, in a way that most of us think that society ought to be, it won’t happen by the market itself.”

Stiglitz has advised various politicians, including former US President Bill Clinton, though often his advice hasn’t been taken and relations have deteriorated. At which point, he’s not been shy about voicing his criticisms. This approach has led to the suggestion that he is not best suited to practical politics.

I once asked a leading macroeconomist in New York what he thought of him. “He’s absolutely brilliant,” the macroeconomist said, “but he’s increasingly inclined to pontificate beyond his knowledge or experience. He’s a great theorist, and his work on inequality is respected, but he’s not someone you’d ever go to for policy advice.”

Taming Silicon Valley

What’s striking about Stiglitz is that he sees solutions to problems everywhere. At the moment, no one seems sure what to do about multinationals such as the tech giants that avoid tax with elaborate offshore methods. If it’s difficult for major nations to go up against them, what does that mean for smaller nations such as New Zealand? For Stiglitz, it’s straightforward.

“Tax avoidance could be shut down. The US could easily have a global minimum corporate income tax. Anybody who wants to do business in the US pays 15-20% of their corporate income in taxes. If you don’t want to pay tax, you’re not welcome in the United States. If Europe does the same, nobody is going to opt out of operating in the US and Europe, and once you have a global minimum, why shouldn’t New Zealand tax 20%?”

Yes, but what about companies such as Google that have so much of a monopoly that they determine the online business models across the globe?

“Google is good,” he says, “but the difference between its search engine and what New Zealand could do on its own is not significant. You have some really good people doing artificial intelligence in New Zealand. So, the ability of competitors to succeed if they were given space for competition is quite great.”

In the short term, he says, the anticompetitive practices of Google, Amazon and Facebook can be easily restricted. He can’t see why Facebook was ever allowed to buy WhatsApp and Instagram, and believes they should be separated as soon as possible. In his book, he goes into greater detail on longer-term answers to Silicon Valley’s domination.

Photo/Getty Images

Lessons from Gary

One of the reasons he sees viable alternatives to the present arrangement of economic affairs is that he has witnessed great change in the course of his life. As he explains in People, Power and Profits, he grew up in the so-called “golden age of capitalism” in the steel town of Gary, Indiana.

His mother was a schoolteacher and his father an insurance salesman, two examples of an upwardly mobile middle class that Stiglitz believes is under grave threat. Even in this apparent golden age, he writes, he witnessed “massive racial discrimination and segregation, great inequality, labour strife and episodic recession”.

As with much of the American Midwest, Gary’s industrial base collapsed in the 1980s and 90s and now the city has half the population it had when Stiglitz was a child. Its hollowed-out centre is often used as a Hollywood location for post-apocalyptic films. His desire to understand what was happening in his hometown is what led the young Stiglitz to switch his subject of study from theoretical physics to economics.

Although they sound worlds apart, the two disciplines share a fundamental intention: both seek to explain complex systems by mathematical assessment of the different forces that act within them. Stiglitz did his degree at Amherst College, then went via MIT, Chicago and Cambridge universities – where he was immersed in the Keynesian economics that remain the basis of his outlook – to Yale, Princeton and Stanford. He gained his Nobel Prize in Economics  in 2001 “for laying the foundations for the theory of markets with asymmetric information”.

That sounds complex, and almost certainly is, but it refers to how transactions work in which one party has more information than the other. For all the seeming abstraction of his theoretical work, Stiglitz is chiefly concerned with the real world. His motivation for understanding macroeconomic systems is so he can try to change them.

Reading his books, you soon start to wonder why the world isn’t in better shape if the answers are so readily available. You come swiftly to the reassuring conclusion that all it requires is rational action. Unfortunately, we are not rational beings, as much as we may pretend to be.

Progressive capitalism

Just look at the issue of inequality. At its economic height in the 1950s and 60s, the US had chief executives earning about 20 times more than workers on the shop floor. Now, it’s in the region of 300 times. And yet, in the wake of the 2008 financial crisis, when irresponsible bankers were bailed out and the low-paid disproportionately suffered the consequences, what did US voters do about this state of affairs? They elected a billionaire who boasts of his tax avoidance and gives tax breaks to the super rich.

“I share a little of your mystification,” says Stiglitz, noting that many Americans, particularly, but not exclusively, Democrats, are outraged by what’s happened. In fact, he seems to think of Trump as someone who has indirectly forged a consensus among US progressives.

I’m not sure that this is true. Since Bernie Sanders’ almost-successful campaign to become the Democratic presidential candidate in the last election, the Democratic Party seems increasingly  split between old-style centrists and a new generation of socialists, such as Alexandria Ocasio-Cortez. Does Stiglitz think of himself as being on their side?

“AOC [Ocasio-Cortez] and Bernie call themselves democratic socialists. Their use of the word ‘socialism’ is totally different from the meaning 40 years ago, which was the ownership of the means of production. No one is advocating that in the US. I prefer the term ‘progressive capitalism’ for two reasons.” One is the negative association of socialism with Cold War politics, and the other is that Stiglitz believes in a decentralised market economy – it’s just that he wants it to serve society as a whole.

Stiglitz with then-French Finance Minister Christine Lagarde. Photo/Getty Images

Trickle-down tosh

In many ways, Stiglitz’s argument is quite simple. Capitalism is a wonderful thing but, left to its own devices, it doesn’t deliver what it promises. The market has a great track record in producing goods, but is clueless about what constitutes the general good. And as we’ve lost confidence in our abilities to shape society, we have increasingly and mistakenly subcontracted that job to the whims of private enterprise.

This is a lesson that seems to need to be repeatedly learnt, though Stiglitz believes New Zealand, having led the deregulatory way with the Fourth Labour Government’s Rogernomics, is making efforts to redress some of the inequalities it spawned.

“New Zealand didn’t think as much about the distribution consequences as it should have and it overestimated the way that markets on their own would adjust, and underestimated the need for industrial policies. It may have been one of the first countries to adopt a lot of neo-liberal policies, but it’s also been one of the first to leave them.”

Still, we live in a globalised world now and many social and lifestyle changes are global trends that even large, authoritarian nations – China being one example – struggle to combat. Though critical of many of the consequences of globalisation, Stiglitz acknowledges that it was an inevitable development and it has delivered extraordinary results for countries such as China and Vietnam.

What he takes exception to is the belief in trickle-down economics, which has accompanied globalisation like an evangelical religion. The idea was widely promulgated that if the rich got richer, then everyone else would benefit, but it hasn’t exactly worked out like that. This, he says, was what led to conflict when he was chair of President Clinton’s Council of Economic Advisers.

“I used to have these arguments in the Clinton Administration and basically say, ‘Economic theory is so clear that this is not true. How do you believe it’s going to be true?’ And there was never an answer.”

He thinks no one fully grasped just how much globalisation was going to weaken workers’ bargaining power. The result is that unskilled workers have seen their wages driven down. His answer is to increase workers' bargaining power, though I’m not sure how this can be done, especially when it will leave lower-paid foreign workers as an even more attractive source of labour.

He implicitly accepts this point, without going so far as to agree, by noting that developed nations should have made much greater efforts to train their unskilled workforces.

Radical redistribution

Of course, some analysts predict that, with the coming of automation and artificial intelligence, it won’t just be unskilled workers whose jobs will be on the line. Therefore, is talk about full employment a realistic approach to what the future holds, or should we be thinking in terms of how to organise a leisured society?

Stiglitz thinks the effects of automation have been exaggerated. “The people who are easy to replace are in things such as manufacturing, some kinds of transportation, but the largest sector is the service sector today: teachers, healthcare providers, people who care for the aged. Lots of those services are not going to be quickly replaced.”

At the same time, he’s not a technology optimist. Although in the past technology has created more jobs than it has destroyed, he says there is no reason to believe this trend will continue. His solution is to tax those who become wealthier as a consequence of innovation and redistribute that money to teachers and carers, and spend more money on beautifying cites and retrofitting the economy for climate change. That will be anathema to many, but once upon a time that kind of radical redistribution was conventional politics.

“For the next 30 years, I see a shortage of labour, not a surplus,” he says. “I see so many things that need to be done that the idea that we’ll have a surplus of labour is a little bit of a fantasy.”

That’s exactly it with Stiglitz. He does see so many things that need to be done. And should any of us doubt that they will be done, it’s worth remembering that in Jaws, Dreyfuss and his friends get the shark in the end “Google is good, but the difference between its search engine and what New Zealand could do on its own is not significant.

This article was first published in the July 20, 2019 issue of the New Zealand Listener.