Growth and Equity in a World of Deficits: An Alternative to Austerity

1. Growth and Equity in a World of Deficits: An Alternative to Austerity Joseph E. Stiglitz Copenhagen May 13, 2011

2. Outlook: a difficult time • World—and especially Europe and America—is going through a very difficult period • There are some important choices about how to respond • The choices that are made today will not only determine what happens now, but are also likely to have long-run consequences

3. How to respond? • One alternative promises: • stronger growth and higher employment today • faster growth tomorrow • sustainable growth—consistent with fiscal responsibility • it is also consistent with broader social values, including social solidarity. • The other alternative: • promises weaker growth, higher unemployment, and a more divided society.

4. Denmark can draw on its strengths • Denmark is lucky in several respects: its social model has worked well, it has enabled the country to avoid the worst effects that afflicted other countries. All models need constant readjustment. • As Denmark thinks about the choices it faces, it should think about preserving what it has worked so hard to achieve, and think about how the world got into the mess tin which it finds itself—basically by following the ideology and interests and policies of that so-called alternative

5. Lessons from America’s experience • The crisis originated in the U.S. • Pre-crisis policies and the response show one "alternative"—a model based on austerity, privatization, deregulation.

6. Lessons from America’s experience • These policies led to the most serious economic crisis in 75 years—it was man-made • Decreasing incomes for most Americans • A more divided, contentious, society • And the largest peacetime deficits—going from 2% surplus at the end of Clinton to 10% deficits today

7. What caused U.S. deficits? What to do about them? • Economic downturn • Put America back to work • Tax cuts for rich • Even though they are the only group that has prospered over the past thirty years • Mismanagement of health care in the name of "privatization”—no bargaining with drug companies • If America had Europe's public health care system, we would not have any deficit

8. What caused U.S. deficits? What to do about them? • Expensive wars • Exacerbated by corporate welfare that encourages investment abroad but does not encourage it at home • Including giveaways of nation's resources

9. What is the positive alternative? • Investments in education and technology and infrastructure, leading to a more productive society and labor force, higher incomes • Recognizing that debt is only one side of a balance sheet • A country's most important asset: its people • Good investments in people short-circuit the equity-efficiency trade-off • Competitive advantage with high standards of living is achieved not throw low wages, but through high investments (US South—it was minimum wage that changed growth strategy)

10. What is the positive alternative? • Flex-security—combining flexibility with security, including: • Investments in helping people move from job to job—an active labor market policy—leading to • more efficient use of labor • higher wages • more risk taking • more acceptance of openness

11. What is the positive alternative? • Changing times may require an adjustment in the social contract—but adjustments should be done on basis of "solidarity" • Taking into account how the economy has been changing • Implying some adjustments in taxes, especially among those at the top (who have done so well), some adjustments in social security (retirement ages—but taking note of the disparate circumstances of different individuals)

12. The other alternative: austerity, a divided society • Not a more efficient or faster-growing economy • Crisis destroyed myth of market fundamentalism • US social security most efficient insurance company • Medicare—keep government hands off of it • No government has ever wasted money on the scale of US financial sector • New York State Public Housing Authority part of the housing sector that did well—did not engage in predatory lending

13. The other alternative: austerity, a divided society • Markets are important, but markets alone do not solve our problems • Austerity will bring decline—experiment that has been tried (Hoover, IMF) • Even the IMF has realized the mistakes of its past

14. VALUES:beyond GDP fetishism • GDP is not a good measure of well being • Doesn't reflect sustainability • Doesn't reflect what is happening to most citizens • Doesn't reflect the broadest aspirations of our society