Joseph Stiglitz: ‘Solving the crisis with less inequality and more sustainability’

He speaks staccato, like someone who has a lot more to say than possible in the limited time he has been awarded here – on conferences, during interviews or even, generally speaking, on this planet. The speed of his mind is even more impressive; Stiglitz often stumbles in his words, just before he dazzles you with some more statistics, relevant figures and eloquently phrased sentences, 
Joseph Stiglitz teaches at Columbia University in New York en won the Nobel price for Economy in 2001. Between 1997 and 2000, he was the leading economist and vice president of the World Bank. From 1993 to 1997, he was member of the American Council of Economic Advisors, which he chaired from 1995. In 2008, Nicolas Sarkozy asked him and his colleague Nobel price winner Amartya Sen to prepare a report on how to measure economical performance against social progress. Later in 2008, the president of the General Assembly of the United Nations invited Stiglitz to chair a commission on the necessary reforms of the financial and economic system.
Some say that the Financial and economical crisis has reached its bottom point. Are they right?
Joseph Stiglitz: The problems of the global economy are far but solved. In the short run, the strong decrease in demand has been countered by the stimulation programmes organized by the governments in the rich countries, but there is a tendency to reduce the budget deficits as soon as possible, even though we know that the crisis will strike harder and longer because of that. In addition, we see the number of unemployed people rise tremendously, while at the same time the demand for welfare and ecological investments remains. An adequate solution to solve the crisis would aim to link the high supply to the unanswered market demands, in stead of reducing the governments’ deficits as soon as possible.  
You think that the measures to solve the crisis are insufficient?
Joseph Stiglitz: In the United States, some people plead to give more power to the Federal Reserve, the National Bank. The problem is that before the crisis, the Fed didn’t even use the power it already had. On top of that, its ideology was based on a model unable to detect the economical illusions and drifts. I would never award more power to an institution which is partially responsible for the crisis, unless it should adjust its economic analysis in a fundamental way. The Fed did no such thing. 
Doesn’t this also apply to the International Monetary Fund (IMF), which was given much more means and powers, mainly through the initiatives of the G20?
Joseph Stiglitz: The IMF and other international financial institutions promoted deregulation and liberalization of the capital markets for years and years, they co-created this crisis. Even if these institutions would now have learned their lesson, an apparent lack of trust remains. Both for the development countries and for the countries who built up a financial reserve which could be invested in the development of other countries. This distrust makes it almost impossible for the IMF to play the key role which it was attributed by the G20.    
Is the distrust towards the IMF still justified today?
Joseph Stiglitz: Today, the IMF no longer enforces a list of structural and macro-economical conditions, but I hear from different governments that in practice, hardly anything changed. Informally, it is still made very clear which are the conditions, so the government can submit a proposal which could be approved by the IMF. The IMF often even asks for a social correction on the proposal submitted, which is very beneficial to their reputation on the international stage. But I have knowledge of a few cases in which the Minister of Finance did not agree with this scenario, after which he was replaced by a more cooperative person.
Are you in favor of economic interventions by the government to counteract the crisis?
Joseph Stiglitz: Yes, even though the way they intervene creates new anomalies. Banks, car industries and other companies now appear to be able to count on the state when they are in trouble. That is: in the industrialized countries, they can, because the development countries have no means to intervene. So Northern companies can just take more risks, because they know they will be saved when it goes wrong. The rescue actions by the Western governments have drastically changed the image of globalization. What was supposed to be an equal play ground for everybody, has now been adjusted tremendously in favor of the companies from the industrialized countries. A situation that cannot be corrected in the short or mid-long term.
Furthermore, countries from the development countries are much more affected by the crisis than the rich countries, even if many of the poorer countries have far better financial regulation mechanisms and much better national bankers than we do. The only thing they lack is the means to get out of the crisis by making extra investments. 
So you say that development countries have better central banks than rich countries?
Joseph Stiglitz: The autonomy of central banks is highly controversial since the actual crisis. Countries like India, China and Brazil have no independent central bank, but have very competent central bankers. They survived the crisis much better than countries in which they do have an independent central bank. “Independency” means namely autonomy from the political control and government policy, regardless the fact that they are being funded with tax money. The independent central banks clearly proved to be unable to resist the pressure from financial lobbyists, enabling financial air bubbles to originate.
In the discussions on the new regulations necessary to adjust global economy, the financial sector’s bonus system is often targeted. Is this justified?
Joseph Stiglitz: The reforms should go much further. The first thing should be to recognize that our financial sector didn’t do what it supposed to have done: managing capital risks against low transaction costs. In reality, enormous transaction costs were applied: 40 percent of all corporate profits were booked in the financial sector, whereas a good functioning financial sector should be small. It is a mean to reach a goal, not the actual goal on itself.  
The moral problem is not only a matter of the morality of individuals. Banks which are too big to fail, know that they can gamble. If they win, they walk out with the cash in their pockets. If they lose, tax payers will pay their bills. And the bad news is that this problem has become much bigger because of the crisis and the way it has been handled. The banking world is now more concentrated, today we have bigger banks than before the crisis. Furthermore, their conviction that they will be rescued is now bigger than two years ago. The idea that shareholders deserve as much protection from the government as depositors and institutions, is a completely new economical concept.
Does a thorough reform ask for a discussion on the whole economical system?
Joseph Stiglitz: Indeed. On a global scale, the disproportion originated from the mismanagement of the Asia and Latin-American crisis’s in the late nineties. In those days, many countries from these regions decided to build up a large financial reserve, resulting in vast savings of 500 billion dollar annually. But as they didn’t spend that money, the demand on the global market decreased. Only the debt-driven American consumption could keep the global demand growing. A possible solution to this paradox is the creation of a worldwide reserve system, because it would allow the new economies to release more capital on the market. America is opposed to this, but as China, the country with the biggest financial reserves, wants to put it on the agenda, even Washington is not able to just block such a system. However, they do think that the 1.5 trillion dollar reserve which the Chinese currently hold on to is a risk factor. If the world shifts away from the dollar, there will of course be serious consequences for the US. At the same time, the US has paid a high price for  the system: the combination of debt-driven consumption inside the US and the balances in countries like China turned the global economy less stable. In stead of cars, we are exporting treasury certificates, which don’t create employment. In addition, the current system allows the US to loan billions of dollars from the development countries, without any interest. In other words: in a way, the Third World is providing the US with developmental aid.
In the report you published for French President Sarkozy you pled for new economical abd social measurement instruments. Is there more behind this recommendation than a contribution to the academic debate?
Joseph Stiglitz: Policy makers take measures based on facts and figures. But if your measurement instruments – and results are wrong to begin with, your policy based on it is likely to make mistakes. To a certain extent, the current crisis demonstrates this. Before the crisis, everybody was supposed to imitate the economic policy of the US, because our statistics looked so successful. But what escapes the gross national income measurement instruments, is its sustainability. Argentina scored very well according to our measurement instruments in the period 1996-2000. However, these impressive growth figures were hiding a debt-financed consumption explosion, just like it was the case in the US in the last years. 
And how could this be corrected?
Joseph Stiglitz: One must consider the prosperity of the “typical citizen”, the person finding himself in the exact middle of the scale of prosperity. In a world of growing inequality, the typical citizen’s reality is completely different from the one of the “average citizen”. In mathematical terms: one should measure the median, not the average. Recent figures from the US reveal for instance that the median family income in 2008 was four percent lower than in 2000. In other words: even before the crisis stroke, most of the Americans came out poorer after eight years of economic growth. The growing gap between the GNI per capita and the median family income also explains the gap between the policy makers’ conviction that the country is progressing and most people’s experience that they are actually doing worse.
You also have a problem with the absence of ecological factors in the GNI calculation.
Joseph Stiglitz: From an ecological point of view, one of the problems so far is that we pretended that the price of the atmosphere – in fact a very rare good – equals zero. We are not really sure how much a ton of carbon should cost, but we do know that the correct price will be closer to $ 100 per ton than to $ 0. This “calculation mistake” deforms our whole image of economical performances. That is why it is crucial to introduce the ecological footprint as of this moment as one of the indicators.  
Another shortcoming of the current GNI is that it doesn’t allow an easy and correct interpretation of the government’s expenses.
Joseph Stiglitz: In France, (mainly public) health care represents 11 % of the GNI. In the US, health care (mainly private) represents 16 % of the GNI. The French system has far better results, but the inefficiency of the American health care does contribute to the growth of the GNI, because for the governmental sector, we only take inputs into consideration, not outputs. This kind of figure “errors” increases when the share of the government in the economy grows. Ad of course, in the OESO countries this share went up in the past fifty years from an average of 25 % to an average of 45 %.   
Do you have a tangible proposal on how to replace the GNI by a more adequate measurement instrument?
Joseph Stiglitz: The GNI doesn’t need to be replaced by a new measurement instrument, but by a series of measurements which enable a comparison in time between different countries, but also make more differentiation possible inside one country. The median family income is one such factor. Just as reliable poverty figures are necessary, because at the same time it is necessary to measure which were the consequences of the chosen policy for the less fortunate part of the society. And sustainability criteria need to be introduced in order to know whether the chosen policy was sustainable and effective in the long term. 
To which countries it would be most important to readjust the way of calculating their GNI?
Joseph Stiglitz: Especially for the economies which are mainly built on basic products. They survive namely on their own future, which makes their economy by definition unsustainable. Also for countries basing their consumption growth on debts, the GNI is clearly a bad measurement instrument. Both groups of countries will be able to provide lovely GNI-stats, but the first group faces ecological sustainability problems and the second group will have an economical sustainability problem. In the future, we must prevent that a wrong policy is being presented as an exemplary one.   

This interview is the result of three meetings with dr. Stiglitz in a short span of time. On 21 September in New York at the final presentation of the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial Systems voor. On 22 September at the French consulate in New York, at the presentation of the Report by the Commission on the Measurement of Economic Performance and Social Progress. And on 12 October in Brussels, at the invitation op of the Party of European Socialists and the think-tank Friends of Europe.