Growth and Equity in a World of

Deficits:

An Alternative to

Austerity

Joseph E. Stiglitz

Copenhagen

May 13, 2011

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

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.

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

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.

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

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

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

WHAT IS THE POSITIVE ALTERNATIVE?

Investments in education and technology and infrastructure, leading to a more productive society and labor force, higher incomesRecognizing that debt is only one side of a

balance sheetA country's most important asset: its peopleGood investments in people short-circuit the

equity-efficiency trade-offCompetitive 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)

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 laborhigher wagesmore risk takingmore acceptance of openness

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)

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

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

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