America’s Global Election

Joseph E. Stiglitz

01 November 2012


NEW YORKMost people around the world will not be able to vote in the United States’s upcoming presidential election, even though they have a great deal at stake in the result. Overwhelmingly, non-US citizens favor Barack Obama’s re-election over a victory for his challenger, Mitt Romney. There are good reasons for this.

In terms of the economy, the effects of Romney’s policies in creating a more unequal and divided society would not be directly felt abroad. But, in the past, for better and for worse, others have often followed America’s example. Many governments quickly subscribed to Ronald Reagan’s mantra of deregulated markets policies that eventually brought about the worst global recession since the 1930’s. Other countries that followed America’s lead have experienced growing inequalitymore money at the top, more poverty at the bottom, and a weaker middle class.

Romney’s proposed contractionary policies – the attempt to reduce deficits prematurely, while the US economy is still frail – will almost surely weaken America’s already anemic growth, and, if the euro crisis worsens, it could bring on another recession. At that point, with US demand shrinking, the rest of the world would indeed feel the economic effects of a Romney presidency quite directly.

That raises the question of globalization, which entails concerted action on many fronts by the international community. But what is required with regard to trade, finance, climate change, and a host other areas is not being done. Many people attribute these failures partly to an absence of American leadership. But, while Romney may summon bravado and strong rhetoric, other world leaders would be unlikely to follow him, owing to the belief (correct in my judgment) that he would take the US – and them – in the wrong direction.

Americanexceptionalism” may sell well at home, but it does poorly abroad. President George W. Bush’s Iraq wararguably a violation of international lawshowed that though America spends almost as much on defense as the rest of the world combined, it could not pacify a country with less than 10% of its population and less than 1% of its GDP.

Moreover, it turned out that US-style capitalism was neither efficient nor stable. With most Americans’ incomes stagnating for a decade and a half, it was clear that the US economic model was not delivering for most citizens, whatever official GDP data said.

Indeed, the model blew up even before Bush left office. Together with the abuses of human rights under his administration, the Great Recession – the predictable (and predicted) consequence of his economic policiesdid as much to weaken America’s soft power as the wars in Iraq and Afghanistan did to weaken the credibility of its military power.

In terms of valuesnamely, the values of Romney and his running mate, Paul Ryanthings are not much better. For example, every other advanced country recognizes the right to accessible health care, and Obama’s Affordable Care Act represents a significant step toward that goal. But Romney has criticized this effort, and has offered nothing in its place.

America now has the distinction of being among the advanced countries that afford the least equality of opportunity to their citizens. And Romney’s drastic budget cutbacks, targeted at the poor and middle class, would further impede social mobility. At the same time, he would expand the military, spending more money on weapons that do not work against enemies that do not exist, enriching defense contractors like Halliburton at the expense of desperately needed public investment in infrastructure and education.

While Bush is not on the ballot, Romney has not really distanced himself from the Bush administration’s policies. On the contrary, his campaign has featured the same advisers, the same devotion to higher military spending, the same belief that tax cuts for the rich are the solution to every economic problem, and the same fuzzy budget math.

Consider, for example, the three issues that are at the center of the global agenda mentioned earlier: climate change, financial regulation, and trade. Romney has been silent on the first, and many in his party are “climate deniers.” The world cannot expect genuine leadership from Romney there.

As for financial regulation, while the recent crisis has highlighted the need for stricter rules, agreement on many issues has proven to be elusive, partly because the Obama administration is too close to the financial sector. With Romney, though, there would be no distance at all: metaphorically speaking, he is the financial sector.

One financial issue on which there is global agreement is the need to close down offshore bank havens, which exist mainly for purposes of tax evasion and avoidance, money laundering, and corruption. Money does not go to the Cayman Islands because sunshine makes it grow faster; this money thrives on the absence of sunshine. But, with Romney unapologetic about his own use of Cayman banks, we are unlikely to see progress even in this area.

On trade, Romney promises to launch a trade war with China, and to declare it a currency manipulator on Day One – a promise that gives him little wiggle room. He refuses to note the renminbi’s large real appreciation in recent years, or to acknowledge that, while changes in China’s exchange rate may affect the bilateral trade deficit, what matters is America’s multilateral trade deficit. A stronger renminbi would simply mean a switch in the US from China to lower-cost producers of textiles, apparel, and other goods.

The ironyagain lost on Romney – is that other countries are accusing the US of currency manipulation. After all, one of the main benefits of the Federal Reserve’s policy of “quantitative easing” – perhaps the only channel with a significant effect on the real economyderives from the depreciation of the US dollar.

The world has a lot riding on America’s election. Unfortunately, most people who will be affected by it almost the entire world – will have no influence on the outcome.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers our Future.

October 31, 2012 5:48 pm

Xi should draw up a new social contract for China

A few weeks ago, Xi Jinping, the man who will shortly become China’s next president, disappeared. Perhaps he was getting cold feet. That is not a very likely explanation for Mr Xi’s 13-day vanishing act. Far more likely he was ill or fighting a behind-the-scenes battle over the remaining slots on the Politburo’s all-powerful standing committee. But he would not be human if he had not paused to contemplate the enormity of the task before him.

Domesticallynot to mention internationally where China’s relations with Japan have strained to snapping point Mr Xi faces extraordinarily complex policy challenges. How he might tackle them and what room for manoeuvre he has within China’s system of collective leadership will be the subject of next week’s column. Here, let’s confine ourselves to examining what kind of China he will inherit.

Economically, the mood has palpably darkened in recent months. Growth has been slowing for seven straight quarters and, with expected annual growth of 7.5 per cent, the economy is growing at its slowest pace since 1999.

That is the official figure. Some observers on the ground, who talk to companies or comb through proxies for gross domestic product, estimate the economy is doing worse than that.

If he chooses, Mr Xi can rev up the stimulus engine once more. By most estimates the combination of state and local debt is no more than 70 per cent of GDP. Restrictions on property and bank lendingdesigned to tame inflation and cool the economy – can be lifted. Since some of the slowdown has been deliberately engineered, it follows that, if necessary, it can be reversed.

Yet that would be to swallow the poison Beijing has been trying to spit out for a decade. The current government, headed by Hu Jintao, has long recognised the need to rebalance the economy away from investment and towards consumption. Those plans had not been going well even before 2008. After the Lehman shock, they were junked altogether as Beijing mounted what Goldman Sachs called the biggest stimulus package in economic history.

The inevitable side effects of that stimulusnon-performing loans and potentially deflationary overcapacity – have not yet taken hold. As the economy slows, the bill from the last spending binge will come due. To double down on stimulus would be to take precisely the wrong course. No economy can productively invest more than half its GDP year after year. One economist calculates that half of all China’s physical assets have been built in the past six years.

Mao Yushi, one of China’s most venerable economists, says that, after three decades of fast growth, the country stands at a crossroads. Sooner or later there must be a crisis,” he says. Mr Mao, who was this year awarded the Cato Institute’s Milton Friedman Prize, says many of the investments rushed out after 2008, including the high-speed rail network, will never make a profit.

Based on electricity-metre readings, he estimates that almost 30 per cent of China’s housing stock is empty. Even if the proportion is half that, it is worrying.

Too many houses is just the start. HSBC says that the steel industry has record debts, huge losses and rising inventories. Even so, it is continuing to crank up production.

As growth slows, unpaid bills to Chinese companies have increased and some local governments have run into financial difficulties. In the financial system, an eruption of wealth management products, sold as a high-yielding alternative to regular deposits, has drawn comparisons with US subprime loans.

Stresses in the economy are bringing more social friction. Capital flight has picked up as people seek a bolt-hole. There is widespread anger at corruption. 

Allegations in The New York Times about the wealth of Premier Wen Jiabao’s family is but the most spectacular example. Cyberspace is seething with stories of arrogant officials caught wearing expensive watches or lording it over ordinary Chinese. Middle-class anger has risen too. Expectations are outstripping the ability of authorities to deliver the safer environment or justice people seek. Recent demonstrations in the city of Ningbo against the expansion of a petrochemical plant were the latest in a series of not-in-my-backyard protests. Local governments have been surprisingly quick to yield to popular demands.

Even that may not be enough. “You must politicise your request,” says an academic at one of China’s most prestigious universities. “You must demand power, not just fix a specific grievance,” he says, predicting that anger could boil more forcefully on to the streets. If people are as disgruntled as he says, Mr Xi will have to conclude a new social contract that goes beyond trading political monopoly for economic liberty.

It is said that the Chinese Communist party is the world’s most competitive political system. No country prepares its leaders more diligently,” says one admiring diplomat. “This is the world’s best management school.” For China’s sake, one must hope Mr Xi really has been its most brilliant student.

Copyright The Financial Times Limited 2012.


October 31, 2012, 7:19 p.m. ET

A Slow but Steady Climb to Prosperity

The U.S. economy is improving. After the worst recession since the 1930s, healing takes a long time.



'Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence." When John Adams penned those words in 1770, he probably didn't anticipate modern presidential campaigns, where wishes, inclinations and passions—even outright denialsoften run roughshod over facts.

Two indisputable economic facts are highly relevant to the current campaign. First, more than four years after the frightening financial panic and deep recession triggered by the collapse of Lehman Brothers in September 2008, the U.S. economy is still not healthy. Second, however, the economy is improving. Notice that the second fact doesn't contradict the first. When you suffer through the worst recession since the 1930s, healing takes a long time.

The first fact (the economy is weak) is damaging President Obama's prospects for re-election while the second (it's getting better) is boosting them. So it is natural, I suppose, that some supporters of Mitt Romney, and even Mr. Romney himself, sometimes dispute the second fact.

Indeed, some fanatics on Mr. Romney's side—but not the candidate himselfwent so far as to suggest that the U.S. Bureau of Labor Statistics cooked the books when it said the unemployment rate fell to 7.8% in September. That reckless charge isn't just baseless; it would have been virtually impossible to pull off, even had the White House tried. You may be interested to know, by the way, that while the government's two independent employment surveysone of households, the other of payrollsfluctuate from month to month and were miles apart in September, they show quite similar total job increases over the past 24 months. Yes, facts are stubborn things.

The late Sen. Daniel Patrick Moynihan used to say that everyone is entitled to his own opinions, but not to his own facts. What are the facts here?

Mr. Romney repeatedly says the economy is growing more slowly this year than last year, and grew more slowly last year than the year before. If he's referring to real GDP, as I suppose he is, he's right. GDP growth averaged 2.4% over the four quarters of 2010, 2% over the four quarters of 2011, and only 1.7% so far this year. That's not good.

But most people care much more about jobs than GDP. According to both the household survey and the payroll survey, more jobs were created in 2011 than in 2010. So far, the household survey finds much faster job creation in 2012 than in 2011, but the payroll survey doesn't. In each case, however, three monthly measurements for 2012 are yet to come—the next on Friday.

On the unemployment front, progress since 2010 has been slow but palpable. The national unemployment rate peaked at 10% in October 2009, dropped to 9.4% at the end of 2010, fell to 8.5% by the end of 2011, and to 7.8% in September 2012. No one knows what Friday's report on October will bring, but we have finally struggled back to the unemployment rate of January 2009.

What of the future? Forecasts aren't facts—and the more so when a dangerous "fiscal cliff" (tax increases and spending cuts amounting to 3.5%-4% of GDP) looms ahead. But there are definitely positive signs. The stock market is near a five-year high. Recent data on consumer spending and confidence show improvement, though we need more data before declaring victory. At long last, the housing market is growing rapidly, albeit from a very low base.

Meanwhile, government purchases of goods and services declined for eight consecutive quarters before a surprising uptick in federal spending (largely for defense) in the third quarter of this year. Falling government demand is the opposite of what we need in a weak economy.

On balance, the U.S. economy is healing its wounds—that's another fact. But none of this puts us on the verge of an exuberant boom. Still, if the fiscal cliff is avoided and the European debt crisis doesn't explode in our face, both GDP growth and job growth should be higher in 2013 than in 2012—even under current policies. But that's a forecast, not a fact.

To grow even faster, we'll need either good luck or more help from policy. It would be nice to get both. For its part, the Federal Reserve is doing whatever it can. It isn't that much any longer, but the Fed keeps trying. The central bank's latest round of quantitative easing, QE3, was announced last month, and it has the Fed purchasing $40 billion of mortgage-backed securities each month until the labor market improves. The Fed hasn't ruled out a QE4 or QE5 if necessary.

But lawmakers can and should be doing more. As I've said on this page before, fiscal policy should be giving us a combination of sizable stimulus right now and thoroughgoing deficit reduction starting in a year or two. (That's an opinion.) Instead, it's doing neither. (That's a fact.)

For stimulus, we could do a lot worse than to enact President Obama's American Jobs Act, which he proposed about a year ago. It consisted of about $250 billion in tax cuts and about $200 billion in spending, most of it well targeted on creating jobs. But Republicans rejected the act outright.

For deficit reduction, I believe the nation eventually will come around to something resembling the Simpson-Bowles plan, which was rejected by both parties (with Rep. Paul Ryan voting against it) when Alan Simpson and Erskine Bowles proposed it in 2010. Although President Obama didn't embrace Simpson-Bowles in 2010, his current 10-year deficit-reduction plan is a first cousin. Any such plan would "pay for" the American Jobs Act many times over.

For his part, Mitt Romney rejects any short-term fiscal stimulus, attacks the Fed for trying to speed up the recovery, and proposes large, new, permanent tax-rate reductionsbeyond even the Bush tax cuts—which would almost certainly bust the budget again. He claims the rate cuts can be paid for by closing loopholes. But several neutral third parties have demonstrated that his numbers don't add up.

So the Romney plan would provide neither the short-run stimulus nor the long-run deficit reduction we need, while the Obama plan would provide both. Which plan is better? I guess the answer to that is an opinion, not a fact.

Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.


Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Hurricane Sandy and Climate Change

J. Marshall Shepherd, John Knox

31 October 2012


ATHENS, GEORGIAIn the waning weeks of the North American hurricane season – a time when a superstorm is not expected to cause widespread damage to the eastern coast of the United StatesHurricane Sandy is a grim reminder of the menace of extreme weather events. With the lowest central pressure of the 2012 hurricane season, Sandy may have caused up to $20 billion in damages, making it one of the costliest superstorms in history.
Sandy interacted with a weather system moving toward it from the east, posing difficult challenges for forecasters and nearly unprecedented weather conditions for the region. A similar storm hit New England 20 years ago. But Sandy was worse, delivering hurricane-strength winds, drenching rains, and severe coastal flooding throughout the populous mid-Atlantic and northeast corridor.
Some people will, of course, try to link Sandy with climate change. A similar rush to judgment occurred in the wake of massive tornado outbreaks in the US in recent years, even though the scientific literature does not offer strong support for such a connection. So, from the perspective of climate change, it is best to take a measured view of Sandy, lest hasty reaction harm scientific credibility.
But that is little cause for comfort. According to the giant insurance company Munich Re, weather and climate disasters contributed to more than one-third of a trillion dollars in damage worldwide in 2011, and this year’s total may rival that amount. There is growing evidence of links between climate change and sea-level rise, heat waves, droughts, and rainfall intensity, and, although scientific research on hurricanes and tornadoes is not as conclusive, that may be changing.
Indeed, recent reports by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) and other scientific literature suggest that the intensity of tropical cyclones (that is, hurricanes) will increase as a result of warmer waters. And our atmosphere and oceans are, indeed, warming, with substantial residual heat stored in the ocean, to be released at some future time. A few studies have even suggested that tropical cyclones may be “wetter.” It is quite certain that sea levels have risen over the last century, and continue to rise, in response to changing climate. And storm surges now ride on these elevated sea levels, amplifying flooding losses where they strike.
Sea surface temperatures along the US northeast coast are about five degrees Fahrenheit above average, which helped to intensify Sandy just prior to landfall. At this point, it is premature to link the storm’s severity to warmer sea-surface temperatures, because regional variability is known to occur. But the link certainly is plausible.
Moreover, sea levels along the US northeast coast are rising up to four times faster than the global average, making the region more vulnerable to storm surges and flooding. And here the bottom line is that any coastal storm system will produce more flooding because of sea level rise.
It should also be noted that an atmospheric weather pattern known as a “block,” a persistent area of high pressure that may have led to record melting in Greenland, was most likely the reason that Sandy moved inland rather than out to sea. It is too early to tell whether this blocking pattern is a manifestation of weather variability, a short-term climate variation, or the result of climate change.
Advances in numerical weather forecasting during the past several decades have extended our ability to “see” into the future. In September 1938, before all of these advances, a hurricane devastated much of New England. No warnings were issued prior to its arrival. Today, thanks to satellites, weather balloons, supercomputers, and skilled forecasters, we can anticipate hazardous weather up to a week in advance. Similar advances in climate modeling are occurring, thanks to methodological improvements and better data.
At a minimum, we must ensure that world-class weather and climate-modeling centers have the necessary funding and manpower to implement the most advanced forecasting techniques. Numerical weather forecasting was invented in the US, but today other countries have developed extremely high modeling capacity. For example, the European Center for Medium-Range Weather Forecasts, in Great Britain, was targeting an East Coast landfall for Sandy days ahead of the best American model.
The world will need more cooperation in the coming years, as climate change begins to interact with and exacerbate extreme weather events, in order to gain the lead-time needed to prepare for disasters. We will also need the collaboration among governments, the private sector, and academia that often leads to improvements in forecasting.
Scientific meetings are key forums for sharing research, vetting new methodologies, and forging new partnerships. Many occur on an international basis, and we need to encourage such discourse, even in tough times for government budgets. It is reasonable to ask how well we would be able to predict or assess a storm like Sandy without the knowledge and capacity gained through such international collaboration.
We do not know whether superstorms like Sandy are harbingers of a “new normal” in the uneasy and unpredictable relationship between climate change and extreme weather events. That does not mean that there is not or cannot be such a connection, but rather that the scientific research needed to prove (or disprove) it must still be conducted. That is how good science works. Sandy has provided a powerful demonstration of the need to support it.