Home > The Evils of Unregulated Capitalism: Remedy for the US economy: end the wars

The Evils of Unregulated Capitalism: Remedy for the US economy: end the wars

by Joseph E. Stiglitz - Open-Publishing - Monday 15 August 2011

Economy-budget USA

The Evils of Unregulated Capitalism
Remedy for the US economy: end the wars, rein in military and drug costs, and raise taxes – at least on the very rich

ef. In June 2009, the then President of the UN General Assembly Miguel d’Escoto Brockmann, and former chief World Bank economist and Nobel laureate Joseph E. Stiglitz had called together a “conference at the highest level” on the issue of the world financial and economic crisis and its impact.

This was the urgent attempt, not only not to leave the topic of global crisis to their originators, the G20, but also to help those to have their say and to participate, who most clearly experienced the consequences of the crisis. All countries, the G192, the world community, was to be involved in solving this problem of humanity, because the crisis affected the whole international community and therefore all peoples had to be equally involved in the quest for solutions. Miguel d’Escoto Brockmann, and Joseph E. Stiglitz had consistently advocated that the nations were treated as equal and sovereign partners and that powerful financial blocks or individual industrial states should not dominate.

At the conference it was clear that a new way of thinking was urgently needed, an economy based on exploitation, competition, selfishness, greed, an economy structured by the developed countries had had its day. Rather, a world economy was needed, that was driven by ethical principles: respect, caring, responsibility, cooperation – an economy in which the human being was again the focus. These ethical principles should help to “overcome the selfishness and take the necessary measures to prevent the crisis to become a catastrophe, but instead an opportunity, to create new forms of cohabitation, innovative business models and a highly developed sense of life and living together”. (Opening address by Miguel d’Escoto Brockmann, Current Concerns No 14 of 14.7.2009)

The then pressing demands while facing the devastating impact of the global financial and economic crisis, particularly for poorer nations, seem to have faded largely unheard in the west in the meandtime: The report of the Stiglitz Commission, which was presented at the conference, had asked for fundamental reforms of the international financial markets, amongst others a representative world economy council and capital transaction controls. At that time this attempt was rejected by the industrial nations.

In his book “Free Fall”, published in 2010, Joseph E. Stiglitz turned to the international community and invited them to a deeper reflection and actions by joining all forces. Carried by respect for the nation states and for their sovereignty he posed the future task that we are all facing, in all its complexity, driven by the desire to avoid future crises. Without blaming and with an openness, showing great humanity, he presented the omissions and mistakes in his book that had led to today’s disaster.

But the invitation to jointly seek human-friendly solutions for all, obviously seemed still not enough, to abandon a Western-style capitalism and to join for a real “world economy”.

The effort by Stiglitz and Brockmann must be brought to mind while raising the question of where we are today: In almost all Western countries debt crises are emerging - not only Greece is facing national bankruptcy. The USA, as largest economy, and most other major economies are facing the same problem.

In the article below Joseph Stiglitz warns against other costly experiments with ideas, which have already failed several times, and therefore against the next aggravation of the crisis. In another attempt, to turn the rudder around, he offers solutions that have to be included in the discussion.

Just a few years ago, a powerful ideology – the belief in free and unfettered markets – brought the world to the brink of ruin. Even in its hey-day, from the early 1980s until 2007, US-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world.
Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.

Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.

I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government.

Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish.

In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of mathematics and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed.

Rather than carefully balancing the benefits of each government expenditure program with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer – not allowing the national debt to increase forces expenditures to be limited to taxes. This leaves open the question of which expenditures get priority – and if expenditures to pay interest on the national debt do not, a default is inevitable. Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.

A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt.

So what happened?

Unaffordable tax cuts and wars, a major recession, and soaring health-care costs – fueled in part by the commitment of George W. Bush’s administration to giving drug companies free rein in setting prices, even with government money at stake – quickly transformed a huge surplus into record peacetime deficits.

The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.

But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract.

Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.

But matters are little better in Europe. As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatisation, which will merely leave the countries that embrace them poorer and more vulnerable.

This medicine failed in East Asia, Latin America, and elsewhere, and it will fail in Europe this time around, too. Indeed, it has already failed in Ireland, Latvia, and Greece.

There is an alternative: an economic-growth strategy supported by the European Union and the International Monetary Fund. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments.
Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.

Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.

Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn’t, but increasingly it appears that we will have to endure another one nonetheless.

A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous – even if the major emerging-market countries have attained self-sustaining growth.
Unfortunately, unless wiser heads prevail, that is the way the world is heading.

Source: aljazeera.net, 10 July 2011
Joseph E Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy. W. W. Norton & Company, 2010, ISBN 9780393338959