Mon, Jan 16, 2012 - Page 9 News List

Economic slowdown likely to fuel rebalancing

The US and Europe are unlikely to implement the growth-oriented policies they need for ideological reasons, while global economic rebalancing will almost inevitably leads to tensions

By Joseph Stiglitz

Illustration: Mountain People

Last year will be remembered as the time when many ever-optimistic Americans began to give up hope. Former US president John Kennedy once said that a rising tide lifts all boats, but now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. By last year, the savings of those who had lost their jobs in 2008 or 2009 had been spent. Unemployment checks had run out. Headlines announcing new hiring — still not enough to keep pace with the number of those who would normally have entered the labor force — meant little to the 50-year-olds with little hope of ever holding a job again.

Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired. Young people who graduated from college with tens of thousands of dollars of education debt cannot find jobs at all. People who moved in with friends and relatives have become homeless. Houses bought during the property boom are still on the market or have been sold at a loss. More than 7 million American families have lost their homes.

The dark underbelly of the previous decade’s financial boom has been fully exposed in Europe as well. Dithering over Greece and key national governments’ devotion to austerity began to exact a heavy toll last year. Contagion spread to Italy. Spain’s unemployment, which had been near 20 percent since the beginning of the recession, crept even higher. The unthinkable — the end of the euro — began to seem like a real possibility.

This year is set to be even worse. It is possible, of course, that the US will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to between 6 and 7 percent (the pre-crisis level of between 4 and 5 percent is too much to hope for). However, this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis — and the euro crisis — will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.

Moreover, the major emerging-market countries, which steered successfully through the storms of 2008 and 2009, might not cope as well with the problems looming on the horizon. Brazil’s growth has already stalled, fueling anxiety among its neighbors in Latin America.

Meanwhile, long-term problems — including climate change and other environmental threats, and increasing inequality in most countries around the world — have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.

The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.

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