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Friday, 8 August 2008

Turn left for growth?

Joseph Stiglitz picks up where he left off with a new piece in the Guardian. His central argument is that in contrast to the right, the left has a coherent agenda. It's one that offers not only higher growth, but also social justice.

Turn left for growth, by Joseph Stiglitz, Commentary, The Guardian :

Both the left and the right say they stand for economic growth. So should voters trying to decide between the two simply look at it as a matter of choosing alternative management teams?

If only matters were so easy! Part of the problem concerns the role of luck. America's economy was blessed in the 1990s with low energy prices, a high pace of innovation, and a China increasingly offering high-quality goods at decreasing prices, all of which combined to produce low inflation and rapid growth.

President Clinton and then-chairman of the US Federal Reserve, Alan Greenspan, deserve little credit for this – though, to be sure, bad policies could have messed things up. By contrast, the problems faced today – high energy and food prices and a crumbling financial system – have, to a large extent, been brought about by bad policies.

There are, indeed, big differences in growth strategies, which make different outcomes highly likely. The first difference concerns how growth itself is conceived. Growth is not just a matter of increasing GDP. It must be sustainable: growth based on environmental degradation, a debt-financed consumption binge, or the exploitation of scarce natural resources, without reinvesting the proceeds, is not sustainable.

Growth also must be inclusive; at least a majority of citizens must benefit. Trickle-down economics does not work: an increase in GDP can actually leave most citizens worse off. America's recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today than they were seven years ago.

But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. A country's most valuable resource is its people. So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all.

A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net. If not, citizens may demand protection from foreign competition. Social protection is more efficient than protectionism.

Failures to promote social solidarity can have other costs, not the least of which are the social and private expenditures required to protect property and incarcerate criminals. It is estimated that within a few years, America will have more people working in the security business than in education. A year in prison can cost more than a year at Harvard. The cost of incarcerating two million Americans –
one of the highest per capita rates (pdf) in the world – should be viewed as a subtraction from GDP, yet it is added on.

A second major difference between left and right concerns the role of the state in promoting development. The left understands that the government's role in providing infrastructure and education, developing technology, and even acting as an entrepreneur is vital. Government laid the foundations of the internet and the modern biotechnology revolutions. In the 19th century, research at America's government-supported universities provided the basis for the agricultural revolution. Government then brought these advances to millions of American farmers. Small business loans have been pivotal in creating not only new businesses, but whole new industries.

The final difference may seem odd: the left now understands markets, and the role that they can and should play in the economy. The right, especially in America, does not. The new right, typified by the Bush-Cheney administration, is really old corporatism in a new guise.

These are not libertarians. They believe in a strong state with robust executive powers, but one used in defense of established interests, with little attention to market principles. The list of examples is long, but it includes subsidies to large corporate farms, tariffs to protect the steel industry, and, most recently, the mega-bailouts of Bear Stearns, Fannie Mae, and Freddie Mac. But the inconsistency between rhetoric and reality is long-standing: protectionism expanded under Reagan, including through the imposition of so-called voluntary export restraints on Japanese cars.

By contrast, the new left is trying to make markets work. Unfettered markets do not operate well on their own – a conclusion reinforced by the current financial debacle. Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are "self-correcting." During the Great Depression, similar arguments were heard: the government need not do anything, because markets would restore the economy to full employment in the long run. But, as John Maynard Keynes famously put it, in the long run we are all dead.

Markets are not self-correcting in the relevant time frame. No government can sit idly by as a country goes into recession or depression, even when caused by the excessive greed of bankers or misjudgment of risks by security markets and rating agencies. But if governments are going to pay the economy's hospital bills, they must act to make it less likely that hospitalisation will be needed. The right's deregulation mantra was simply wrong, and we are now paying the price. And the price tag – in terms of lost output – will be high, perhaps more than $1.5trn in the US alone.

The right often traces its intellectual parentage to Adam Smith, but while Smith recognised the power of markets, he also recognised their limits. Even in his era, businesses found that they could increase profits more easily by conspiring to raise prices than by producing innovative products more efficiently. There is a need for strong anti-trust laws.

It is easy to host a party. For the moment, everyone can feel good. Promoting sustainable growth is much harder. Today, in contrast to the right, the left has a coherent agenda, one that offers not only higher growth, but also social justice. For voters, the choice should be easy.


  1. " Markets are not self-correcting in the relevant time frame. No government can sit idly by as a country goes into recession or depression, even when caused by the excessive greed of bankers or misjudgment of risks by security markets and rating agencies. "

    Unless the government has been killed off. Which is why they want to continually reduce the size of government. Read the article about Eddie Cross (MDC) from 2000, and he is very clear he wants to 'privatise' everything in sight.

  2. It is this uneasy combination which Cross appears to have inherited. It combines "conservative'' economic policies that meet the needs of the white-dominated business elites, with the memory of state support for a then-white, now-black working class. For even while punting rapid privatisation, the argument Cross makes has an anti-monopolistic flair:

    An MDC government will sell our shares in the Dairy Board [the partially-privatised national milk and cheese marketing board] immediately, use the proceeds to retire debt and we will work actively to encourage competition. What about all the other cosy monopolies? What about Anglo American Corporation and their stranglehold on the sugar industry in Southern Africa? Let us open our border posts ... It is competition that will sort out the fat cats in the private sector.

    Cross was especially scathing of his CZI colleagues:

    They have been too complacent, they have been playing footsie-footsie with this government for too long. They need to be tougher. This Millennium Reform Programme - we see leaders of the private sector saying it is a good programme! It is, well I was going to use a rude word but I won't. It is absolutely nonsense.

    ... to corporatism and social democracy?

    Critical of fat cats living off ultra-cheap Zimbabwe labour and acquiescing to ZANU power, Cross adds two additional pillars - corporatist industrial relations and an expanded social plan - to the foundations of the MDC programme:

    On the social side we are going to re-visit the issue of minimum wages. Now I am an industrialist and I am well known in industrial circles for actually following this political strategy. I do not believe in low wages. I do not believe in an industrialist or anybody else being allowed to pay wages which are well below the basic cost of living in cities ... So we will, as a Government, and with the private sector through a social contract, and working with the trade unions and employers, work towards a situation where we will pay much higher wages in industry, even if it means losing jobs, so that people working in the cities will be able to afford to live in those cities on a whole family basis. He will be able to send his children to school, he will be able to rent or own accommodation which means he can live there with his entire family. For us that is fundamental.

    In addition to "attacking that [migrant labour] system with everything at our disposal" - in part because of migrancy's contribution to the spread of AIDS - Cross sets out impressive social promises:

    Education is the key and seven years of compulsory free education - free education - and free, not in the way we are doing it at the moment [with parent fees]. We mean free, parents will not be required to pay for it. And you ask, "Can we afford that?" Yes, we damn well can, we damn well can! And the international community has the resources to help us build that system and they are willing to do so ... We have a programme for housing - we are going to give tenure, freehold tenure, to everybody who holds tribal trust land leases, immediately we come to power ... The government has been talking about this for the past ten years, we are not going to talk about this, we are going to do it and we are going to fast-track the administration procedures through massive housing schemes, to provide site-and-service schemes in all our cities for the entire backlog of housing within five years. And you say, "Can we afford to do it?" Yes, we can! Yes we can, and the international community is prepared to help us with a programme like that ... We have got to have primary health care throughout the country. We have got to get our hospitals back on their feet ... Our social programme is going to be strong and it is going to be dynamic and it is going to be directed at the absolute poor, and there's no compromising that. We are totally committed to that, and you need to know it - this is not a rhetorical commitment, this is not a party of the "haves," this is not a party on the gravy train.

  3. Why do people write sentences like this one ?:

    what is, and will be, the balance of power within the MDC when the obvious choice between free education and free markets must be made? That will be the real crossroad.

    What has free education to do with price controls, or other distortions ?


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