Economist Joseph Stiglitz: 'Europe is on the brink'


In an interview with Mediapart the celebrated Nobel Prize winner for economics, Joseph Stiglitz, says he is worried about the continuing pursuit of austerity policies in the Eurozone. The economist say he is concerned, too, about President Donald Trump's policies and the explosion in inequality since the financial crisis of 2008. More than ever, he tells Mediapart, there is a need for wages to rise, for better regulation of the financial world and for a war on huge “monopolies”. Mathieu Magnaudeix reports.

On Tuesday September 4th, some ten years after the start of the 2008 financial crisis, a gathering took place in New York which included members of ICRICT, the Independent Commission for the Reform of International Corporate Taxation, which was set up ten years ago and which among others things wants to change the tax system for multinationals. Leading economists and supporters of greater financial regulation also took part in the meeting. Among them were French economist Gabriel Zucman, an assistant professor of economics at University of California, Berkeley, the French green Member of the European Parliament Eva Joly and Indian economist Jayati Ghosh, who came to voice her fears that the emerging countries' debt bubble might “burst soon, perhaps this year”.

Members of the ICRICT who were present included the Nobel Memorial Prize winner for economics, Joseph Stiglitz, a professor of economics at the University of Columbia and former chief economist at the World Bank. He spoke with Mediapart's Mathieu Magnaudeix.

Joseph Stiglitz in Mexico, June 2017. © Reuters

Joseph Stiglitz in Mexico, June 2017. © Reuters

Mediapart: The Panama Papers, Paradise Papers, Swiss Leaks, LuxLeaks, Malta Files and so on. Since the financial crisis of 2008, major international investigations have shown the scale of tax evasion in the world. But has the situation really changed?

Joseph Stiglitz: I certainly think that the Panama Papers, Paradise Papers have increased the awareness of the magnitude and the seriousness of the tax avoidance and tax evasion problem. The 2008 crisis and the resulting budgetary shortfalls also make people very sensitive to the consequences of tax evasion and tax avoidance.  As a result national governments have started to ask what can we do to reduce the scope of it. While developing countries  were probably much more aware of this they often felt powerless.  So perhaps one of the things that has been a positive development in what I thought was probably one of the worst tax bills ever [editor's note, the late 2017 billin the United States under President Trump] were the provisions that attempted to pay for the tax cuts by reducing the scope of tax avoidance by multinationals. It has opened the door for wider discussions.

The other thing that has happened - because you might characterize the president of the United States as the money launderer in chief - is that it has made people very aware that there are people making money out of money laundering. The Trump model is a money laundering model. When people look at why was there this connection with Russia, why were Russians buying apartments and selling apartments all over, it makes one aware that there's a big market there. It reinforces what the Panama Papers and the Paradise Papers had already brought home.

There was a very influential article in The New York Times that identified the problematic nature of the ownership of some of the new buildings, which interacted with a widespread sentiment in New York that something was wrong.  It's hard for ordinary people to buy real estate in New York city.  And yet in the centre of the city there are thousands and thousands of square metres of property that is empty, which is owned by rich speculators that are often simultaneously money laundering. It's enough to make a lot of people very, very angry. 

Mediapart: Has there been progress in reducing the number of tax havens and in regulating the markets over the last ten years?

J.S.: If you were to ask the question  is the global financial system more stable now than it was in 2007 I would say 'probably'.  I think capital requirements have been increased and there is more intense supervision. If you ask if it is enough - clearly not.  It is also clear that over the last three to four years there has been significant backsliding.  The pressure of the big banks in the United States to repeal some of the key measures in Dodd Frank  [editor's note, consumer protection legislation passed in 2010] has proven successful.  The most famous example was an amendment to a bill that effectively repealed a provision in the Dodd Frank bill that limited the ability of government insured institutions - like banks - to issue derivatives.  This particular repeal was called the Citibank amendment because it was written  by the lobbyists from Citibank.  It was one of those cases where the fingerprints of who was writing the legislation were clear. It was always clear who the beneficiaries were -   in this particular case it seemed even the writing of it was transparently by a lobbyist. 

On the issue of the transparency of the financial system I think there  has been progress  without the kind of backsliding that we have seen elsewhere. It's far from being what is enough and there is much more to be done, but this is one area where we can see that the glass is maybe a quarter full and three quarters empty.

Mediapart: Isn't the difference with the world in 2008 that the urgency has got even greater now? There is the challenge of the climate, the emergence of massive monopolistic entities such as Apple and Amazon (whose stock market capitalisations have now passed a trillion dollars) and an explosion in inequality. The socialist senator Bernie Sanders often cites this striking fact: in the United States three billionaires, Warren Buffett, Bill Gates and Jeff Bezos own as much wealth as the bottom half of the US population, or 160 million people.

J.S.: I think the issue of inequality is one of the major differences [between now and then]. When I wrote my well-known paper in Vanity Fair - entitled 'Of the 1%, for the 1% by the 1%' - in March 2011 I don't think there had been an awareness of the magnitude of inequality in the United States. So  here we have a crisis in capitalism in which inequality was a major culprit, we have the recognition that over the last 30 to 40 years  almost all of the benefits of the growth that has occurred have gone to the top 1%.  Average incomes of the bottom 90% have gone up a little bit but have basically stagnated. We have the realisation I think in America that capitalism is failing, that life expectancies are declining, an amazing fact, not because we don't have advances in medical science doing great research but because of inequality. So I think there is an urgency that something be done.  The American dream is looking more and more like a myth.  And the consequences in terms of the alienation of large fractions of America so evident in the 2016 election has shown that it is having not just economic consequences but political and social consequences.

Guaranteed jobs

Mediapart: Donald Trump, whose slogan is “Make America Great Again”, was elected two years ago. He often boasts that the employment rate is at its lowest for 18 years and points to record highs on the stock markets as proof of his success. What should one make of his economic policies?

J.S.: First, it is not working for most Americans.  The stock market can go up because wages are low and because the economy has been relatively weak and interest rates are low,  and of course by suppressing wages and transferring money to profits, that makes stock markets go up.  Even more so if you lower corporate profits taxes, a gift of a few billion dollars to the stock market. If it had not gone up you would have been surprised.  

The second point I make is that standard Keynesian economics holds that if you give a fiscal stimulus to the economy it works.  What happened in the span of three weeks in the United States was that we had a massive tax cut for the billionaires, for the corporations,  we had a large increase in expenditure.  What is remarkable is that given the size of the stimulus that there has not been even more growth.  I attribute that to the fact that they recognised that it was a very badly designed tax bill, the impact of which will be relatively short-term and it was displacing investment. So in terms of long term growth it was actually a very bad tax bill.  Combine that with other flaws in Trump economic policy, in particular his protectionism which is leading to global uncertainty in the rules of the game...

Mediapart: What do you think of the 'trade wars' that Trump has launched with China, Europe and so on?

J.S.: You have to realise that in a trade war everyone is going to be losing.  The question here is will he [Donald Trump]  succeed in rewriting the international rules in ways which significantly advantage the United States and which lower the US trade deficit, which is what he began with.  This latter issue really illustrates his total ignorance of economics. Because what determines the trade economics is the disparity between aggregate investment and aggregate savings and the tax bill almost certainly will lead to a significant increase in the trade deficit. So that no matter what he does on the battlefield of trade,  the trade deficit is going to get worse.  So for all the scars that we and other countries may have, there is no victory in sight.

But beyond that, you see the futility of  what he is going after in the negotiations with Mexico,  the only significant one that has been completed. And the only touted success is a minor revision of the fraction  of a car that has to be built in North America and the fraction that has to be built at certain levels of wages to qualify for the NAFTA free trade agreement. That is minor. Many in the auto industry believe that the net effect will be to destroy jobs in automobiles, because it will raise the cost of production. There's one other  agreement that he negotiated which has not been ratified  and that is the agreement with [South] Korea.  The main provision there that was touted was that Korea  agreed  that it would allow in  more American cars even if they failed the safety provisions that Korea normally imposes.  It was increasing the number of unsafe American cars from 25,000 to 50,000. But Koreans didn't want to buy the 25,000 in the first place! So saying you could buy more when they didn't want to buy the 25000 has zero effect.  He began with this rhetoric about it being the worst trade agreement ever and out of that roar comes a peanut. It was a sop  that doesn't cost them anything or almost nothing just to get him off their back.

Mediapart: In the American press you frequently see analyses that warn of a coming new financial crisis. Some point to the excess of the financial world, others the looming energy bubble in the United States and yet others single out the unsustainable nature of the debt of American families. Should we fear a new crisis?

J.S.: We all anticipated that when  interest rates started to rise that those emerging markets with high current account deficits and large debt would start facing a problem. We see that in Argentina and Turkey.  We just don't know the extent of contagion that will result. So to me, from a global perspective, that is the most imminent crisis.  Those countries are already in it. 

There are a lot of excesses in America's financial markets, auto loans and so on – it [the debt] has now reached 1.5 trillion dollars,  which is already having a negative effect on the macro economy. People postpone having a family. It's having a macro, societal  effect.  Whether these are yet at the point where you would call it a crisis or rather  just weakening the economy I think that's hard to tell. I think that where we will see a problem is that the badly-designed tax bill is likely to start exerting a negative effect on on the US economy when the 'sugar high' is taken away. I think that  economists are expecting a significant slowdown in 2019/2020. That is when financial excesses interact with macro  slowdown to accelerate the problem.

Mediapart: You have warned for a long time about the absence of reform of the euro and the politics of austerity in the eurozone. Is Europe in the process of foundering?

J.S,: The disappointment is that with the imminent crisis of Greece having diminished, the efforts to reform the eurozone seem also to have diminished and there's a lot of austerity and Greece is still in depression. This so-called celebration of Greece exiting from the [economic] program - the program continues, with a set of requirements of  primary surpluses that will choke the country.  The most talented young people are leaving, it's killing the country.  Europe has turned  a blind eye to this. 

Italy is clearly a potential for crisis. The new government is a concern because it has elements of the extreme right and has raised questions about commitment to the euro and if Europe does not reform the euro then I think one needs to anticipate a political crisis of one kind or another.  Whether they will leave, or stay in but actually create a parallel currency which is a de facto leaving,  forcing the burden on the rest of Europe to take the ultimate action. I think it was always clear that unless there were significant reforms Europe was living in a world of brinkmanship, and when you live in a world of brinkmanship there is a good chance you will go over the brink. 

Mediapart: The French president Emmanuel Macron has made clear his intention of reforming Europe. Domestically he is pursuing orthodox economic polices.

J.S.: His European policies that that he has enunciated in a couple of important speeches were a very impressive vision of Europe.  But it's a vision which doesn't seem to have been able to convince Germany and other countries.  I think it's really important that there be that vision out there, it's also important that that vision be brought into practice.  I think unless there are reforms in the eurozone, the scope for pursuing expansionary policies is very limited. 

There is one tax that [Macron] has talked about introducing but he has been very slow to introduce … and that is a carbon tax. It would raise a lot of revenue obviously  but it would stimulate the economy  unlike a lot of the other taxes that have been discussed because firms would have to retrofit themselves for the new reality of climate change.  It would simultaneously provide the stimulus that France needs and the revenues that it needs.

Mediapart: In France, in Europe in general and in the United States, progressives are searching for policies to resolve the issue of inequality, respond to the challenge of climate change and fight against authoritarianism and the extreme right. What can you suggest?

J.S.: In the United States we have a regressive  tax system and other countries also are not very progressive.  One of the important mechanisms or policies is recognising that one of the sources of inequality  is monopoly power on the one hand and weak workers'  power on the other. 

One of the important things that we ought to be doing is focusing on how we make  the market distribution of income more equal.  We focus a lot on redistribution - we should do more on that - but we also ought to focus on something which is called 'pre-distribution'. How do we make market distribution more equal?  How do we get wages up and monopoly profits down?  So before we redistribute the pie we want workers to have more income. That entails reforming corporate governance laws, financial policies, the rules governing globalisation, investment agreements,  all of those things are part of this broader package which says that we have to do three things on inequality:  more redistribution,  more pre-distribution -  improving the market distribution - and  doing a better job of insuring that there is not as much intergenerational transfer of advantage and wealth. So an inheritance tax  and strong public education.  That is one set of packages. 

The other set of packages begins by saying that  one of the reasons there is such discontent is that the ability of those in the middle to get what we thought was a middle class lifestyle as we defined it 30 or 40 years ago has been eroded. In America we begin with health, retirement, education, housing, jobs for all. Those are the five perquisites. In a forthcoming book I try to lay out how you get those five things for all Americans. 

Mediapart: In the United States several emerging figures in the Democratic Party are proposing a “jobs guarantee” for workers. It could even become one of the central ideas of the candidate who stands against Trump for the presidency in 2020. What do you think of it?

J.S.: It's one of the ideas that I am supporting, as a fallback.  If the market is working well it should be providing jobs and if we are doing a good job at managing the market the market should be providing the jobs.  But we haven't been doing that,  in particular we haven't been doing that for certain minorities, certain people at the bottom.  So we have to recognise that the market has not been working.  Blind faith that the market will work seems misplaced.  The point is that we are in a situation where there are many jobs that need to be done, creating parks, beautifying our cities, taking care of our aged, there are lots of things to be done. And so the idea is at the beginning one of efficiency – bringing together people who want to work with jobs that need to be done.  Beyond that, doing that will not only create more equality but will also stimulate the economy and it will be something from which our society will benefit. 

Mediapart: Trump is in power, Europe is being eroded by the extreme right and yet you remain optimistic....

J.S.:  I have never seen young people as energised  as they are now in the United States and to some extent abroad but especially in the US.  They are really energised.  They realise that their future, our future, is at stake. Our democracy has failed, the economy has failed, but they still have faith that our democratic processes can work.  If they don't, the direction in which the Republicans have been pushing us is really a black hole. I think that is the hope. I also get that feeling when I travel in Europe.

ICRICTJoseph E. Stiglitz