Understanding how the global economy got into its present state, said economist Joseph Stiglitz, is key to coming up with a solution. That solution, he declared, is to “spend, spend, spend,” and he added that government must take the lead, since corporations won’t and private citizens can’t.
In a Monday opinion piece in Slate, Stiglitz said that three things led to the current state of financial crisis. While the financial sector’s “inexcusable recklessness, given free rein by mindless deregulation, was the obvious precipitating factor” in launching the crisis, the economy had problems before that, making it vulnerable to continued woes. In fact, declared Stiglitz, it was “very sick,” with the housing bubble masking its true ailments as people spent more than they made.
The economies in America and Europe were, he explained, “victims of their own success,” with increases in productivity outpacing increases in demand. Manufacturing slowed and jobs began to shift to the service sector. Since manufacturing jobs were also being outsourced to cheaper economies, fewer local jobs remained for the formerly employed.
The second problem he cited is that of growing financial inequality, in which income shifts from those who will spend it to those who won’t. Energy prices also increased, shifting buying power to oil exporters who saved much of what they made against potential losses brought by volatility.
The third, said Stiglitz, is the buildup of foreign exchange reserves by emerging economies in such quantity that, while they were shielded in varying degrees from the crisis, that money was also not being spent.
Pointing to the return of banking bonuses and the erosion of ordinary wages as an indication that income inequality is still growing, and to the continuing dependence of the U.S. on foreign oil, with the resulting transfer of wealth, Stiglitz said the only way out of the current situation was for governments to spend heavily on restructuring, energy infrastructure, and reducing inequality—coupled with reform of the financial system to eliminate the necessity for such huge reserves.