FIN Interviews Joseph Stiglitz
The Nobel laureate weighs in on stimulus, growth and inequality.
Number of the Week: $850 million (explanation below)
FIN Interviews Joseph Stiglitz
It was a tremendous honor for FIN editor and publisher James Ledbetter to conduct a live, exclusive interview with the Nobel Prize-winning economist Joseph Stiglitz, as part of Clarim Media’s Health and Wealth of America conference. The conversation wasn’t about fintech per se, but we know that FIN readers value the big picture of economics and politics. An edited transcript follows:
FIN: What's your assessment of the $1.9 trillion COVID stimulus program and the proposed infrastructure plan? On their face, these seem like much stronger policy responses than we got during the Obama administration to address the Great Recession. Assuming you agree with that, what do you think accounts for the change?
Stiglitz: I think partly the failure of the previous response to the Great Recession. I was involved in a lot of those discussions and many of us said back in late 2008, early 2009, you need to do something bigger. And there were people in the administration, [former chair of the Council of Economic Advisers] Christina Roemer, who agreed that it needed to be bigger, but in the end a combination of some economists who got it wrong and really bad political judgment won out. “If we need more, we can come back and get more.” That never happened. And so I think they've learned that lesson and said, this downturn is worse. The thing I really appreciate about Biden is saying “at the same time that we're addressing this economic downturn and helping revive the economy, let's think about priorities and where we want to be in the future.”
So one of the things that's very big in this bill is addressing the health issues that should have been number one from the start. This is a health crisis, a pandemic. And the first thing you want to make sure is that you address the health needs of the country. And I think it's shocking that during the Trump administration more wasn't done. The second thing is protecting the most vulnerable. And again, it was shocking that from June to December, nothing was done about the unemployed. The original CARES Act anticipated a short downturn. I thought that was wrong. The programs were designed to phase out in June and we didn't get a second act until December.
And this obviously addresses that. I would have liked to have seen an “automatic stabilizer” that the unemployment insurance would continue so long as the unemployment rate remains elevated. Most economists would say that was what we needed, but it’s still so much better than what we have before. And the third thing is a real problem facing America that was both exposed by the pandemic, but also aggravated: our great inequalities. It is really, truly amazing that my colleagues here at Columbia estimated that the childhood poverty rate will be reduced by 40% as result of this one bill. So this is a real achievement, echoing the the New Deal, really trying to address some of those longstanding problems the country faces.
FIN: There are several remarkable things in your response, and I want to underscore them. One is that economists and politicians can actually learn from the recent past! That has not always been obvious, to say the least. The second is you just made a comparison to the New Deal, which is a big cudgel to bang down on the table. I wonder to what extent you think we are really experiencing a watershed moment, a change in our politics and our embrace of government spending. In the early days of the Biden administration, it really can feel like that sometimes. And yet I wake up the next day and I look at how thin the Congressional margins are, both in the House and in the Senate. Do you think the politics around government spending have really been altered and altered permanently?
Stiglitz: The division in the House and the Senate does not reflect the division in America. If you look at opinion polls, what you see is something like 70 to 80% support an agenda that includes increasing minimum wages, tighter financial regulations, more infrastructure, even in the corporate community, gun control, climate change. Among the young people who have the most stake in America, again, the numbers are just overwhelming, addressing racial inequality, social injustices. So I would say looking at the country as a whole, there's a remarkable degree of consensus. We have to be open about the fact that there are disagreements, but it's nothing like the division in Congress. Politics is…you have to deal with what is possible. And here, I think again, Biden may have learned the lesson from Obama. Obama looking at the divisiveness of the previous Bush administration, said, “Let's try to act more like a civilized community. Let's try to bridge the gap.” And I gotta give him credit for that. But in the very beginning, Mitch McConnell said, “I'm committed to making sure you fail.” And he did everything to do that. And the lesson that Biden seems to have learned is “I'll go a long way, going across the aisle, to make common ground, but I'm not going to give up what the vast majority of Americans want. If I can get it within the rules of the game, I'm going to fight for it.”
And that's what he did in the rescue package. The Republicans said, “Oh, not $1.9 trillion, $600 billion,” and economists, rightly said, “That's not going to get you out of this hole.” And Goldman Sachs is now saying, we're going to have 8% growth this year. That's great. We're going to be the only country exceeding the forecasts that were made before the pandemic. This is not somebody inside the administration. This is Wall Street saying you're doing it.
I think he's committed to having an infrastructure bill. And I think he's committed to recognizing that in the 21st century infrastructure is not just bridges and roads. It's what we call “soft infrastructure”: our research institutions, education, health, healthcare, making a healthier and productive population reflecting 21st century economics.
FIN: You make a really good point about popular support for stimulus, and infrastructure as well. I'm wondering if that suggests the limits of what the Biden White House can accomplish. For example, there seems to be a lot more opposition to the proposed increase in a corporate tax. Do you think that Biden has the necessary leverage to get something like that passed? Or is that going to be one of those programs that just fades away?
Stiglitz: Most Americans think that corporations should pay their fair share. The large number of our richest corporations that are paying zero taxes is an outrage. I think he's with the majority of Americans saying, we gotta do something about this. My own theoretical and historical research, the best econometric research, says that raising the corporate income tax will not impede investment and not put at risk jobs. Very simple reason for that is the profits tax is a tax on profits. In other words, you deduct your labor costs. You deduct your capital costs, you deduct your investment. And so while your return is reduced, so will all these costs be reduced.
So you look at the balance between the government's paying in effect a part of your cost, and you're getting diminished returns by the same proportion—economists explain, it's not going to change your decision to any significant extent and the best statistical studies confirm this. When we lowered the corporate tax from 35% to 21%—and compounded that by all kinds of special provisions that accelerated depreciation—you should have had, according to the Republicans, a boom in investment. We didn't have that. This was 2017, December. We didn't have that, we got share buybacks, over $1 trillion in one year that went to the pockets of the richest Americans.
So the fact is we've done our own little experiment here, but there's a lot of data and theory behind it that raising the tax won’t have the negative effects that have been predicted. If you want my political forecast for what it's worth—I don't claim have any real insight—you'll get most of the corporate tax revenue that Biden wants through increased enforcement through closing loopholes, and raising the minimum tax. Then it may be possible to compromise from 28 to 25%. It's not the position I would advocate, but I think a lot of people in the corporate community would even agree to that. After all, among corporate CEO there's a lot of anger that some of them are paying full freight while a lot of their colleagues are getting off without paying any taxes at all. They think that's an unfair system.
FIN: With these massive spending bills, there have been some calls for concern that we might be stoking inflation. And there are some signs that inflation is maybe beginning to be something to be a little concerned about more than we have been in the last several years. Do you think those concerns are misplaced? And if so, why?
Stiglitz: I think excessive worry about that is misplaced. I think it's really good for us to have a tight economy. We've had insufficient aggregate demand, you know, hidden unemployment, for a very long time. Sometimes people will talk about the unemployment rate, but that doesn't really describe the real state of the labor market. One of the reasons wages haven't gone up is there's been slack in the labor market. If you look at other indicia like the fraction of working age population that's actually working, it's remarkably low in the United States compared to our past.
The only time in our history that we bring marginalized groups into our economy—minorities, women—and begin to see a compression in wages between bottom and top is when we run a really tight labor market. So I would like to see our economy be a little tighter. But if inflation starts to be a problem, we have tools. Before I come to that, we will see some prices going up right now, the price of oil is going up. The prices of some housing are going up in some places, going down where I live.
But overall, one of the reasons why there's not too much of risk of inflation is: we live in a global economy in which we're coming out of this downturn first and strongest, with China. That means there's a global excess supply, and we can tap into that excess supply. One of the reasons why there's not been inflationary pressures for well over a quarter century is all this supply from emerging markets. So that's another reason to not worry, but if it turns out that there is inflationary pressure, we can raise interest rates. We've had close to zero interest rates for a long time. It’s not good for the capital markets, nobody really thinks the right scarcity price of capital is zero. And when you have low interest rates, you get all kinds of distortions in capital markets, including the pricing risk, and that makes us vulnerable to instability. So I think it'd be better for the economy if we returned to a more normal regime.
And we have fiscal policy. We have a distorted tax system, for instance. Many people, I included, think we ought to have environmental taxes. We ought to have more progressive taxation in many different directions. Those at the top paid lower taxes than those below, there are a lot of inequities and distortions in our tax system. And there's a hesitancy to address them as long as the economy remains weak. If we got a strong economy, we would be to begin to address these distortions in our tax system. I hope that's one of the things down the line that we can can do as the economy gets back to normal.
FIN: You mentioned the environment: tomorrow's Earth Day, and I know that yesterday you testified before the Senate Budget Committee about the economic costs of climate change inaction. Can you give us a précis of what you told the Senate?
Stiglitz: The main point is that the cost of inaction is far greater than doing something. Dealing with climate change could be a real opportunity for the economy: it would stimulate innovation, which would help increase our standards of living. The littles encouragement that we've given over the last 20 years has led to enormous innovation in renewable energy. So the price of energy is coming down and it was projected to go way up, we're already the beneficiaries. We see it in the savings as we get into housing that's more energy, cars that are more energy efficient, and these electric cars will last a lot longer than the old gasoline cars. So many of these innovations will save money. What is our comparative advantage in the United States? One of our big sources of comparative advantage is innovation. And if we're leading it, we will be innovating in ways that will produce products that everybody in the world will want.
FIN: You mentioned the benefits to the United States; we spoke earlier today to Dambisa Moyo who was talking about de-globalization and how harmful that is to international cooperation. And I think everybody accepts that international cooperation is going to be necessary if we're going to effectively fight climate change. Are there any policy options available to us that would slow this process of sort of de-globalization and balkanization? You wrote a very influential book called Globalization and its Discontents in which you argued that the problem is not globalization per se, but the way that we were doing it up until that time. What should we be doing to create the right kind of globalization now?
Stiglitz: I think we are doing some of the things that we need to do. I think the world has become somewhat more complicated politically since I wrote that book. On the positive side, I think we've made enormous amounts of progress, maybe partly because of my book and because of events. So let me just flesh out a couple of those points very briefly. I think both the pandemic and climate change has made it clear: We have to cooperate, you know, we share our planet. The greenhouse gases don’t have passports, don't obey visas, the same thing about the virus. I'm pleased that Biden is working with the Chinese and dealing with climate change. There are some things where you have to work together; I sometimes give an analogy if you were on the Titanic and it was going down and you're on a lifeboat, there may be some people in that lifeboat who you really don't like, but you still are going to row together for safety.
Secondly, the international organizations have really, particularly the IMF, reformed a great deal, they put the issues of inequality to the top. They've abandoned this focus on austerity, or at least changed their perspective. They've changed their perspectives on capital controls. The head of the IMF is somebody from an emerging market and identifies with emerging markets, but the change began under Christine Lagarde and under Strauss-Kahn.
This has been a slow process of change, but it's real. There's obviously going to be some rethinking of globalization. The process of de-globalization actually began, to a large extent, after the Great Recession in 2008. And some of this has to do with the natural evolution of the economy. We're moving from manufacturing to a service sector economy, and the service sector economy is more local. That’s part of the story, part of the story is we saw that we had the instability brought by excessive loads of short-term capital. And so that has led to a reexamination of that. The pandemic itself showed a problem that a lot of people in the advances countries are now worrying about: the lack of resilience in the private sector, because the global supply chains were insufficiently diversified, and fragile. So, many Americans were shocked that we couldn't produce masks, that we couldn't produce simple products like protective gear, let alone complicated products like ventilators and tests. So there's a reexamination of how we can create more resilient about global supply chains. There's a lot going on in rethinking globalization right now, which entails both the need for more global cooperation, but also the need for having a resilient market economy.
FIN: You mentioned several times inequality, I'm eager to hear what kind of policy measures in the United States you think are politically possible to reduce inequality, given that the effort to pass a $15 minimum wage seems to have stalled on Capitol Hill?
Stiglitz: One of the things that's going on, say on that minimum wage, is continuing efforts all over the country at the state-community-local level. Biden is going to try to do a number of things. Maybe not be able to do them in this Congress, but there are some things that can be done through executive orders. One of the things that we will probably be able to do through reconciliation, is correct some of the inequities of the tax system that were put there by Trump, where the permanent tax cuts were all for the rich. It was one of the most dishonest pieces of legislation. It was called a tax cut, but you looked at the details, the bottom half of the population actually saw their taxes go up. So it wasn't a tax for most Americans that was a tax cut for the billionaires. And those are issues that will be dealt with in reconciliation.
You're going to have some work in making our tax system more progressive. The other kinds of measures, like increasing the bargaining power of workers, that's going to be more difficult. Some of that can be done through executive orders related to government procurement. We sometimes underestimate the tools the government has. The first best measures are straightforward legislation, but given the gerrymandering and the voter suppression, those measures are going to have to wait for a change in Congress.
Fintech Creates a Brand Crisis for the FDIC
There has been a flurry of presumably necessary but somewhat peculiar communications lately from the Federal Deposit Insurance Crisis (FDIC). Reading between the lines of the press releases, it seems like there has been an increase in financial institutions either saying or implying that they are members of the FDIC even if they aren’t. According to the agency, it sent 165 wrist-slapping letters in 2019 and 2020 to institutions it felt were misleading the public.
The agency is now formally requesting comments
regarding potential modernization of its official sign and advertising rules to reflect that deposit-taking via physical branch, digital, and mobile banking channels continues to evolve since the FDIC last significantly updated its rules in 2006.
It tried to do this last February, but COVID got in the way. As the agency notes, the proliferation of digital wallets, neobanks, fintech lenders etc. has great potential to confuse consumers about which institutions protect their savings and which don’t. FIN would not be surprised to see television ads in the next couple of years, touting the advantages of traditional banks (even as more of them close branches every month).
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FINvestments
🦈Number of the Week: Mastercard is not standing still while the payments world undergoes a revolution. This week the giant spent $850 million to acquire Ekata, a company with cutting-edge security and identity technology for mobile transactions.
🦈Even fintech companies are on an acquisition spree; the recently public Affirm spent $300 million this week to buy Returnly, which helps companies handle their returns.
🦈The Amsterdam-based startup Bux, which has been dubbed a European Robinhood, got an $80 million fundraising round this week.