Turbulence Ahead

Monday, 24 January 2011 12:21 By Joseph E Stiglitz, News Analysis | name.

Turbulence Ahead
(Photo: code poet)

Another year of malaise along the Atlantic.

By the numbers, the great recession's long gone. The World Bank forecasts that developing countries -- chugging along at an average growth rate of 6 percent -- will expand the global economy by more than 3 percent this year. In the last six months, London's FTSE 100 is up more than 15 percent, and Wall Street's Dow Jones index is up nearly as much. It's just about enough to say the good times are back.

All this good news, however, provides little comfort to workers in the U.S. and Europe. Because even in the rosiest scenarios, job prospects there will continue to be few and far between. And more broadly, on jobs, austerity, and currencies, both sides of the Atlantic may spend the year caught in an ill-informed policymaking spiral that means, though it's frustrating to say it, more malaise.

No recovery can be called real without bringing down unemployment. As in the euro zone, the haunting number in the U.S. hovers around 10 percent. (In Spain, it's twice that.) And there is a wide consensus among economists that something like the pre-crisis unemployment level of 5 percent remains years away, at least.

But rather than putting people back to work, economic leaders have embarked on a misguided austerity mission. Stimulus cash in Europe and America is now fading away, with no real robust recovery to take its place. And we've been here before. From President Hoover in the Great Depression, to global responses to the East Asia crisis in the late 1990s, it's clear that government cuts weaken economies rather than alleviating malaise. Slashing spending hobbles economic growth; we already see the effects in Ireland, Greece, and other countries on the vanguard. And after the cuts, the cycle takes hold: those out of work for extended periods see their savings accounts eroded and their skills attenuate. Less spending means a slower economy. Anemic growth further hobbles state fiscal positions, sparking more cutbacks.

But the seeming contradictions of this "recovery" go further. Big banks may be booming back (JPMorgan just posted a $4.8 billion quarterly profit; Goldman Sachs and Morgan Stanley are comfortably in the black, too), but the financial sector remains dysfunctional. Pre-crisis, high finance failed its societal functions of allocating capital efficiently and managing risk -- it did neither. After the crash, some indulged a momentary fantasy that regulations would curb excessive risk taking, do something about too-big-to-fail banks, and otherwise incentivize banks to return to the essential business of providing capital to small and medium-size enterprises. Instead, today we have a less competitive banking system with hundreds of firms still in deep trouble.

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Disarray in currency markets, too, will boost uncertainty in 2011. Europe's sovereign-debt problems are far from over. But if another small European country collapses and a big one needs a bailout, will leaders across the continent be inclined to save the euro? In Washington, the Fed's struggle to remain relevant by using quantitative easing -- trying to push down long-term interest rates, since short-term rates can't be pushed lower -- is already leading to a fragmentation of global capital markets. At best, quantitative easing is unlikely to help the U.S. much; at worst, it could lead to asset bubbles and high commodity prices that could bring the dreaded stagflation back to America.

To be fair, there are a few potential upsides. Off-the-charts growth in Asia is fueling Latin America and Africa. Much of the developing world is now strong enough to grow even in the face of a weak Europe and America. Unfortunately, however, they just do not make up for the inadequacies in global economic demand; they can't compensate for the deficiencies in policies in the U.S. and Europe. On a different note, Washington's payroll-tax cut will help the states along -- but the legislation covers just a year, and that's too short a time to make a lasting impact.

All hope is not lost, however. Large enterprises, with all their money, might see the glass as a quarter full rather than three quarters empty. Political leaders will give speeches trying to instill confidence, touting their resolve to fix the deficit and correct the political and economic ills of the past. A wave of optimism could sweep over the business community, inducing it to invest the cash in its coffers. Investment could recover, and so would the economy. Sure, anything is possible. But I would bet on a very bumpy ride.

Joseph E. Stiglitz, a winner of the 2001 Nobel Prize in economics, recently wrote Freefall: America, Free Markets, and the Sinking of the World Economy.

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Last modified on Monday, 24 January 2011 13:45