10 juli 2008

Prophet Joe (The Flemish Beerdrinker)

Joe Stiglitz that is. Joseph Stiglitz is a man with an obsession. His obsession is neo-liberalism and market fundamentalism. Again, and again and again, every time something goes wrong with the economy (which is to say, always) it’s the fault of neo-liberalism and of the market fundamentalists. As Robert Skidelsky has noted, Stiglitz has become a preacher lately. But he has become more than that: an exorcist, trying to exorcise the demons of neo-liberalism and market fundamentalism. Unfortunately, his reasoning has become also rather messy. Let’s roll the tape:

The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called "Washington Consensus" in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.

It’s kind of strange that a "grab-bag" of idea’s can have such a hold on the world economy for over three decades. Even now many countries try to follow the recipes of neo-liberalism, not always successfully to be sure, but it doesn’t always end in failure either. In fact, there is no reason to assume that neo-liberalism has been a bigger failure than other cures that have been used and advised in the past. But we come back to that. The problem with this quote is that Stiglitz erroneously equates neo-liberalism with market fundamentalism. He correctly describes some of the ideas of neo-liberalism, but surely "independent central banks" are not the favorite toys of market fundamentalists? Alan Greenspan was their enemy. If anything market fundamentalists want central banks to be abolished. At the same time being in favor of independent central banks AND believing that markets are self-correcting is inconsistent. This may be a minor quibble but it shows how little Stiglitz really understands about the idea’s he’s attacking. He continues:

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

Stiglitz often points to the policies followed by many Latin-American countries at the beginning the 1990’s which in many cased indeed did end in failure (but not always – take Chile, a country that did make neo-liberal reforms – privatizing its pension system, liberalizing trade, and an independent central bank focusing, though not single-mindedly, on inflation). Below we will further discus and demolish Stiglitz contention. Here I just want to point out that Latin-American reforms were less neo-liberal than Stiglitz seems to think. Take just one example : inflation. During the 1991-1997 boom inflation averaged 21 percent per year. This is hardly the case of a central bank single-mindedly focusing on inflation isn’t it? And while the Washington Consensus also counsels fiscal conservatism many Latin-American countries had a fiscal deficit, even during growth years.

Though neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990’s, with 97% of investments in fiber optics taking years to see any light. But at least that mistake had an unintended benefit: as costs of communication were driven down, India and China became more integrated into the global economy.

At this we can only sigh and say: but that is exactly why we believe in markets! They fail, and that’s why we need them. The unintended benefit of market failure was huge in this case. In fact, in general it isn’t even clear that bubbles are all that bad:

the journalist Daniel Gross argued that in bubbles, investors’ money is used to build infrastructure that can’t possibly repay its upfront costs, but ends up being beneficial for companies and consumers in the long run - particularly after more-efficient companies have picked up the pieces on the cheap. To take a recent case, most investors in "dotcoms" lost their shirts - but their money built the software and infrastructure that runs today’s internet. There are plenty of historical precedents, too: for example, a bubble in the 1840s rendered shareholders in train companies penniless but left Britain equipped with the world’s best railway network.The social economist Carlota Perez believes that bubbles inevitably precede each of the "techno-economic paradigm shifts" by which society advances. And Didier Sornette, a physicist who is now a risk specialist at the Swiss Federal Institute of Technology in Zurich, argues in a paper in press at Journal of Economic Interaction and Coordination that it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns. That turns into "super-exponential" growth rates - of the kind Sornette says are now observable in the oil market.

W. Brian Arthur shows that benefits of the information revolution to society came after the bubble bursted. Stiglitz here is actually defending markets: ultimately they serve the public intrest rather well.

But it is hard to see such benefits to the massive misallocation of resources to housing. The newly constructed homes built for families that could not afford them get trashed and gutted as millions of families are forced out of their homes, in some communities, government has finally stepped in – to remove the remains. In others, the blight spreads. So even those who have been model citizens, borrowing prudently and maintaining their homes, now find that markets have driven down the value of their homes beyond their worst nightmares.

Now of course there are economists who will admit that de housing bubble and the massive misallocation of recourses were not the result of a pure free market. In fact, it’s almost certainly the case that market fundamentalism is not the culprit here. What was it again? A central bank single-mindedly focusing on battling inflation? Does that seem to be an accurate description of Alan Greenspan and his Federal Reserve to you? No? Join the club. The fact is that inflation was not really a single-minded concern of the FED and that monetary policy was rather loose, contributing to the housing bubble. If only Washington had followed its own consensus a little more, the massive misallocation would have been less devastating. And what to say about that other financial market where currencies are being exchanged? Is the lowering of the price of dollars not a boon for the export sectors? Or is the market here misallocating resources as well?

Nor did markets prepare us well for soaring oil and food prices. Of course, neither sector is an example of free-market economics, but that is partly the point: free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not.

Well, duh! Of course free-market rhetoric has been used selectively. Especially market fundamentalists themselves have that pointed out again and again. It’s the reason why I don’t call myself a neo-liberal while wearing the badge of market fundamentalist with honor, especially when I read people like Stiglitz. Market fundamentalists will be the first to point out that there is a huge difference between being pro-market and being pro-business. Stiglitz remark anyway is entirely beside the point. Serving special interests: it’s precisely what governments are good in, not markets. And politicians will use any kind of rhetoric which will serve them and these special interests. Nowadays it happens to be free-market rhetoric. But other kinds of rhetoric will do just fine. Take the rhetoric about global warming which is used by the U.S. and European governments to provide huge handouts to the agricultural industries to develop bio-fuels. Of course markets did not prepare us well for soaring food prices. How could they with governments intervening on such a massive scale. With oil it’s the same. A few years ago Stiglitz told us that markets failed to prepare us for global warming. You see, in a free market energy prices, especially those of fossil fuels, were too cheap, according to Stiglitz anyway. When fossil fuels are cheap, they are overused, so contributing to global warming. Markets fail. Now the same Stiglitz is telling us that markets are responsible for oil prices which are too high.But of course if oil sheiks make are presiding over a cartel between governments and refuse to produce more oil when demand is rising, it’s hard to see how markets will be capable of preparing us well for soaring oil prices.Anyway, what is it? Are prices too high, or too low? In both cases markets fail, according to the preacher. Probably only Stiglitz himself knows which price is right. One wonders who the fundamentalist really is here.

Perhaps one of the few virtues of George W. Bush’s administration is that the gap between rhetoric and reality is narrower than it was under Ronald Reagan. For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles. Bush’s policies have been worse, but the extent to which he has openly served America’s military-industrial complex has been more naked. The only time that the Bush administration turned green was when it came to ethanol subsidies, whose environmental benefits are dubious. Distortions in the energy market (especially through the tax system) continue, and if Bush could have gotten away with it, matters would have been worse.

Ok, fine with me. But this only contributes to the confusion. There are few market fundamentalists who will support G.W. Bush. And even Ronald Reagan has been the target of much libertarian criticism.

This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries. They were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe. Their farmers might have been able to compete with American and European farmers, but they could not compete with US and European Union subsidies. Not surprisingly, investments in agriculture in developing countries faded, and a food gap widened.

The confusion only deepens. What is he attacking now? Market fundamentalism? Free-market rhetoric? Or a particular mix between market and government policies? These are three very different things, as shown above.As for his factual assertions, there are reasons to be skeptical. Even before the era of neo-liberalism Europe and the U.S. were dumping food in the Third World. If anything export subsidies are declining. And as economists Jagdish Bhagwati and Arvind Panagariya have shown developing countries are more protectionist than developed countries. Maybe they were told to stop, but many of them didn’t. If anything we see more protectionism today as developing countries are taxing, limiting and even banning agricultural exports – government intervention that leads to higher prices for food. Why Stiglitz does not point to these government policies should be clear by now: it does not correspond to his view that neo-liberalism/market fundamentalism/free market rhetoric is the root cause of all evil.

Those who promulgated this mistaken advice do not have to worry about carrying malpractice insurance. The costs will be borne by those in developing countries, especially the poor. This year will see a large rise in poverty, especially if we measure it correctly. Simply put, in a world of plenty, millions in the developing world still cannot afford the minimum nutritional requirements. In many countries, increases in food and energy prices will have a particularly devastating effect on the poor, because these items constitute a larger share of their expenditures.

Again one can only sigh and shake his head in disbelieve. Markets are attacked because they could not prepare us for high food prices. The poor are paying the price. Now there is a government policy that could lower food prices, because it stimulate output, (export) subsidies. But it’s exactly the one government policy Stiglitz is attacking.

The anger around the world is palpable. Speculators, not surprisingly, have borne more than a little of the wrath. The speculators argue: we are not the cause of the problem; we are simply engaged in “price discovery” – in other words, discovering – a little late to do much about the problem this year – that there is scarcity. But that answer is disingenuous. Expectations of rising and volatile prices encourage hundreds of millions of farmers to take precautions. They might make more money if they hoard a little of their grain today and sell it later; and if they do not, they won’t be able to afford it if next year’s crop is smaller than hoped. A little grain taken off the market by hundreds of millions of farmers around the world adds up.

Quite so. But then government limitations and taxes on food exports that take grain of the market should be in for criticism too. But here again Stiglitz remains silent. Oh of course, speculators are evil. Governments are good. But nevertheless it are the same poor who pay the price.

Defenders of market fundamentalism want to shift the blame from market failure to government failure. One senior Chinese official was quoted as saying that the problem was that the US government should have done more to help low-income Americans with their housing. I agree. But that does not change the facts: US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation.

Now it’s Stiligtz turn to be disingenuous. He agrees that there is government failure. But it is not allowed to say that. Again, markets are evil, government is good. Why? Because he says so. The FED is not to blame. Neither is the American government. Tyler Cowen for one thinks that Stiglitz let’s the government of the hook too easily. In fact with each example Stiglitz gives – housing, oil, food – there is massive government intervention and there is government failure, big time. Still, he argues:

Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well.

So presumably there are non-market institutions that can identify those mismatches, can measure how large those are and can device the optimal policies so that social and private returns can be closely aligned, with the result that resources are allocated efficiently and the public interest is served well. One really wonders who is the fundamentalist here. He ends:

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.

My head is tolling now. The term neo-liberal market fundamentalism is utter nonsense. Either Stiglitz has a problem with a particular mix of market and government policies, but then it’s not market fundamentalism (because if markets work well, we don’t need government at all). Or Stiglitz has a problem with pure free markets but in that case it’s not neo-liberalism. And in any case market fundamentalism is not a political doctrine serving certain interests. On the contrary, it’s a reaction against governments serving certain interests. Market fundamentalists believe that markets serve the public interest maybe not well, but in any case better than governments, exactly because they tend to be captured by special interests.As far as the historical experience is concerned, let me concentrate on neo-liberalism, because well, market fundamentalism never has been tried. Where better to start in the country where neo-liberal reforms were first implemented: Great-Britain. Here is the conclusion from a number of economists, by no means neo-liberals or market fundamentalists:

During the reform period, the secular decline of the United Kingdom in productivity and gross domestic product (GDP) per capita relative to other advanced countries-including such major European Union (EU) competitors as Germany, France, and Italy-came to an end. By the 1990s, the country was outperforming most other advanced economies in the level of unemployment and in producing a high employment to population rate. At the same time, there was a large rise in income inequality, which was the result of rapidly growing incomes for persons at the top of the income distribution rather than of falling incomes for persons at the bottom of the distribution. This meant that the United Kingdom avoided the U.S. problem of falling real earnings for lower-paid workers.

So engineering an economic turnaround whereby everyone gained, only those at the top gained more. One can implore that last element and try to learn a lesson from it, but it’s not the lesson Stiglitz wants us to learn. Britain, because of it’s neo-liberal policies became not a loser. It became a winner.

Second example, Ireland. Corporate taxes where cut dramatically. Now you can’t get more neo-liberal than that. It’s the ultimate pro-business policy, although at the same time it’s difficult to see which special interests were served in this case. Business yes, but the winners ultimately were the Irish people. It is they who in the end benefited from the surge in foreign direct investment:

Over the past generation it enjoyed some of the world’s fastest GDP growth. Today Irish per capita GDP is among the highest in the world, at about $46,000. This astonishing growth success was driven largely by a surge in inward FDI—and thus in technologies and capital investment—concentrated in high-technology sectors like computers and pharmaceuticals. Much of this investment was American. In 2005, majority-owned foreign affiliates of U.S. multinational firms accounted for 18.5 percent of total Irish GDP. At the same time, subsidiaries of U.S. firms accounted for about 75 percent of employment generated by Irish manufacturing affiliates of foreign companies.

In general, Andrei Schleifer argues:

In the Age of Milton Friedman, the world economy expanded greatly, the quality of life improved sharply for billions of people, and dire poverty was substantially scaled back. All this while the world embraced free market reforms.

And he provides lot's of figures to back this up (I urge everyone to read his paper). So much for Stiglitz assertion that countries that pursued neo-liberal policies were the clear losers. In fact, in his piece, he does not give a single example of a country that did lose. The only thing he actually showed is that a particular combination of government policies (that are pro-market or just pro-business, it’s hard to tell from his confusing piece) can be very damaging. And so in the end he comes to the conclusion that there is another combination of government policies that this time will prove beneficial because private and social returns will be closely aligned. How do we know? We don’t, because he doesn’t provide any evidence. We just have to take his word for it.One wonders...no, one knows who’s the fundamentalist here. It’s Stiglitz himself. He’s not just a preacher, he’s the Messiah. Prophet Joe.

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2 Comments:

At 10/7/08 22:01, Anonymous Anoniem said...

Schitterend artikel!

 
At 11/7/08 13:53, Anonymous Anoniem said...

ja prachtig artikel van Joe Stiglitz, het blijft een schitterende analist van de Amerikaanse ziekte!

 

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