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The 2001 Nobel
Prize in Economics winner, Columbia econ Prof. Joseph Stiglitz How to fix the global economy NYT OpEds, October 3, 2006 THE International
Monetary Fund meeting in Singapore last month came at a time of increasing
worry about the sustainability of global financial imbalances: For how long can
the global economy endure America’s enormous trade deficits - the United States
borrows close to $3 billion a day - or China’s growing trade surplus of almost
$500 million a day? These imbalances
simply can’t go on forever. The good news is that there is a growing consensus
to this effect. The bad news is that no country believes its policies are to
blame. The United States points its finger at China’s undervalued currency,
while the rest of the world singles out the huge American fiscal and trade
deficits. To its credit, the
International Monetary Fund has started to focus on this issue after 15 years
of preoccupation with development and transition. Regrettably, however, the
fund’s approach has been to monitor every country’s economic policies, a
strategy that risks addressing symptoms without confronting the larger systemic
problem. Treating the symptoms
could actually make matters worse, at least in the short run. Take, for
instance, the question of China’s undervalued exchange rate and the country’s
resulting surplus, which the United States Treasury suggests is at the core of
the problem. Even if China strengthened its yuan relative to the dollar and
eliminated its $114 billion a year trade surplus with the United States, and
even if that immediately translated into a reduction in the American
multilateral trade deficit, the United States would still be borrowing more
than $2 billion a day: an improvement, but hardly a solution. Of course, it is even
more likely that there would be no significant change in America’s multilateral
trade deficit at all. The United States would simply buy fewer textiles from
China and more from Bangladesh, Cambodia and other developing countries. Meanwhile, because a
stronger yuan would make imported American food cheaper in China, the poorest
Chinese — the farmers — would see their incomes fall as domestic prices for
agriculture dipped. China might choose to counter the depressing effect of
America’s huge agricultural subsidies by diverting money badly needed for
industrial development into subsidies for its farmers. China’s growth might
accordingly be slowed, which would slow growth globally. As it is, however,
China knows well the terms of its hidden “deal” with the United States: China
helps finance the American deficits by buying treasury bonds with the money it
gets from its exports. If it doesn’t, the dollar will weaken further, which
will lower the value of China’s dollar reserves (by the end of the year, these
will exceed $1 trillion). Any country that might benefit from China’s loss of
export market share would put its money into a strong currency, like the euro,
rather than the unstable and weakening dollar — or it might choose to invest
the money at home, rather than holding more reserves. In short, the United
States would find it increasingly difficult to finance its deficits, and the world
as a whole might face greater, not less, instability. Nothing significant
can be done about these global imbalances unless the United States attacks its
own problems. No one seriously proposes that businesses save money instead of
investing in expanding production simply to correct the problem of the trade
deficit; and while there may be sermons aplenty about why Americans should save
more — certainly more than the negative amount households saved last year — no
one in either political party has devised a fail-proof way of ensuring that
they do so. The Bush tax cuts didn’t do it. Expanded incentives for saving
didn’t do it. Indeed, most
calculations show that these actually reduce national savings, since the cost
to the government in lost revenue is greater than the increased household
savings. The
common wisdom is that there is but one alternative: reducing the government’s
deficit.
Imagine that the Bush
administration suddenly got religion (at least, the religion of fiscal
responsibility) and cut expenditures. Assume that raising taxes is unlikely for
an administration that has been arguing for further tax cuts. The expenditure
cuts by themselves would lead to a weakening of the American and global
economy. The Federal Reserve might try to offset this by lowering interest
rates, and this might protect the American economy — by encouraging debt-ridden
American households to try to take even more money out of their home-equity
loans to pay for spending. But that would make America’s future even more precarious.
There is one way out
of this seeming impasse: expenditure cuts combined with an increase in taxes on
upper-income Americans and a reduction in taxes on lower-income Americans. The
expenditure cuts would, of course, by themselves reduce spending, but because
poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending.
If appropriately designed, such a combination could simultaneously sustain the
American economy and reduce the deficit. Not surprisingly,
these recommendations did not emerge from the International Monetary Fund
meetings in Singapore. The United States retains a veto there, making it
unlikely that the fund will recommend policies that aren’t to the liking of the
American administration. Underlying the current
imbalances are fundamental structural problems with the global reserve system.
John Maynard Keynes called attention to these problems three-quarters of a
century ago. His ideas on how to reform the global monetary system, including
creating a new reserve system based on a new international currency, can, with
a little work, be adapted to today’s economy. Until we attack the structural
problems, the world is likely to continue to be plagued by imbalances that threaten
the financial stability and economic well-being of us all. http://www.nytimes.com/2006/10/03/opinion/03stiglitz.html |
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