Joe Stiglitz is almost always interesting to read. A Nobel-winning former chief economist at the World Bank, he is, says Wikipedia, “famous for his critical view of globalization, free-market economists (who he calls ‘free market fundamentalists’) and some international institutions like the International Monetary Fund and the World Bank.” Right now, he’s worried about the recurrence of stagflation.
Until now, three critical factors helped the world weather soaring oil prices. First, China, with its enormous productivity increases — based on resting on high levels of investment, including investments in education and technology — exported its deflation. Second, the US took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble, with mortgages available to anyone not on a life-support system. Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP.
So is he optimistic? “For America today, the real question is only whether there will be a short, sharp downturn, or a more prolonged, but shallower, slowdown.”
As to winners and losers,
…there has been a massive global redistribution of income from oil importers to oil exporters — a disproportionate number of which are undemocratic states — and from workers everywhere to the very rich. It is not clear whether workers will continue to accept declines in their living standards in the name of an unbalanced globalisation whose promises seem ever more elusive. In America, one can feel the backlash mounting.
Fortunately the first commenter, PresidentD, sets our minds to rest with three sentences.
The sky is not falling. America will survive and prosper. Sorry to disappoint you nervous nellies.
Oh, well, that’s a relief then.
I think inflation is a given. The only way to prevent the collapse of our banking system and subsequent deflationary spiral (i.e. Great Depression II) is for the Federal Reserve to step forward and monetize the sub-prime mortgage securities that are collapsing in value by buying them at face value, i.e., trade currency for worthless paper. Otherwise the banks that issued this worthless paper or hold it as collateral for bad loans collapse. The result of ramping up the printing presses this way is (duh) inflation. But the fundamentals of the economy haven't changed -- we still don't make much that the rest of the world cares about and import far too many essentials, not to mention the spiral in the price of oil -- so there will be little economic growth caused by suddenly-cheaper dollars prompting greater exports. Especially since we'd need to import the oil to create those greater exports, pretty much kibashing the "cheaper" portion.
I disagree, however, with the notion that this will be "70's-style" stagflation. During Gerald Ford's presidency, the printing presses were turned up to try to stimulate the economy out of an oil-price-induced slump, but the fundamentals of the economy were still sound then. What is going to happen is that we're going to have inflation and an accelerated *decline* in our standard of living, not a simple stagnation as happened in the 1970's.
-- Badtux the Economy Penguin
In fact I agree on the future not looking like a repeat of the '70s. I was just grasping for a snappy title.
The economy back then was headed for better times because we were ending the war in Vietnam. There was a painful readjustment period while we switched from weapons to electronics, etc., and the temptation to go back to the enormous profits of war remained, but there were hopeful signs. Now, not so much.
We're certainly going to have a declining standard of living over the next couple of decades in some senses, because the empire's on its way out and the fundamentals of the economy are weak. It's possible, I believe, that intelligent planning and action can minimize the decline, and relatively quickly generate a better world (I'm not saying it'll happen). For example, if somehow we managed to realize that spending a shitload on maglev bullet trains made a lot more sense than building more highways and cars, we could do it. But that's gonna take fighting the corporations.
Posted by: Chuck Dupree on January 3, 2008 1:42 AM