Joseph Stiglitz, the Nobel-winning economics professor at Columbia University, told CNBC yesterday that the Fed’s current policies threatened to undermine its recovery unless it embarked on fiscal expansion.
Stiglitz said the problems faced by Western economies could only be halted by direct government spending increases to ease the spiral of declining investment and falling income.
As evidence for his concern he pointed to America’s current unemployment figure, which stands at 9.5%, with one in six Americans who want a full-time job unable to gain one. This, he said, is significantly worse than during Japan’s post-1980s recession where, at its peak, unemployment reached 5%.
The present discussion on unemployment betrays an underlying bias in the narrative of the global financial crisis. What it suggests is that structurally America, along with other Western economies, were adequately productive and efficiently structured to guarantee long-term growth prior to the crisis. (article continues below)
What is not mentioned by Stiglitz, along with a number of other self-proclaimed Keynesian economists, is the debt built up to fund the economic expansion of these economies and the productivity shift from west to east over recent decades.
“If what is needed is a profound reorientation of the global economy, it is unlikely to be achieved by using borrowed funds”
The anger over China’s supposed currency manipulation from the Obama administration echoes this one-sided faith.
If what is needed is a profound reorientation of the global economy, it is unlikely to be achieved by using borrowed funds to prop up inefficient or uncompetitive industries.
A large, underused labour force could be just the resource developed markets need to shift their economies from the demand and onto the supply side of the equation.
High unemployment increases labour flexibility, puts downwards pressure on wages and prevents some of the career discrimination that causes prospective employees to shun possible employment opportunities.
Moreover, it allows greater resources to be channelled to labour intensive export industries and infrastructure projects, where investment is more efficient.
While advocating short-term increases in unemployment may be politically unpalatable, it could also prove the most sustainable way to guarantee future employment prospects.