Joseph Stiglitz has written a new book about the euro. At least that is what it says on the cover. But when I put it to the softly-spoken professor, who gives every impression of choosing his words with painful care, that the book is not really about the euro at all, he is only too happy to agree.
Your real target, I rather presumptuously suggest to the Nobel laureate and former World Bank Chief Economist, is not really the structural flaws of the single currency. No, your real game here—I press on—is an all-out assault on the “Margaret Thatcher/Ronald Reagan ideology which happened to have been in fashion when the euro was created.” To my relief, Stiglitz doesn’t take umbrage, but smiles, nods, and finally says “that’s right.”
In the amicable hour to come, I will hear this once über-respectable figure rail against the corporate “capture” of public institutions, hail the “progressive” credentials of Jeremy Corbyn, and explain that when it comes to the next spin of globalisation, a process which he once championed, that you might very well judge that “you don’t want to do it.”
Stiglitz first came to prominence in the field of information economics—if that is not a contradiction in terms. For decades, he was a world champion in this decidedly minority sport, picking up prestigious medals for scholarship as long ago as the 1970s, but he ploughed away in seclusion of the academy until Bill Clinton came knocking, and in 1993 enlisted the economist as a guru of the “Third Way,” the intellectual rationalisation of Clinton’s middle-of-the-road electoral strategy.
It was the start of a personal journey, which has taken Stiglitz from a life of academic obscurity, and transformed him into a familiar pundit and occasional power player. But it set him off, too, on a political journey, which reveals much about the shifting tides within economics and the polarisation of American politics.
A couple of decades ago, Stiglitz might have been described as a mainstream technocrat, albeit one more concerned with the poor than most. Indeed, his British collaborator Tony Atkinson says the pair of them used to joke that he was the “right-wing half of our partnership.”
By 2011, however, he was penning the Vanity Fair polemic on America’s “1 per cent problem” which has a good claim to be the intellectual spark that lit the fire of the Occupy Wall Street movement. And in 2016, it is soon clear to me, he is an ideological battler who, though he wages his war more meticulously than most, is nonetheless unrelenting about it. His worries about globalisation are no longer specialist quibbles about how, say, the integration of financial markets is working out. He is impatient with the international order as a whole, which he regards as short-changing not only poor peasant farmers, but also the toiling classes of the United States and Britain. And, as I’m about to discover, he relieves his frustration by taking aim against the great shibboleths of orthodox economic faith—including open-door immigration and free trade.
When we meet he is, in the ill-fitting cliché, “fresh off the plane” from Nairobi. The after-effects of a dodgy dinner there are compounding the challenge that Stiglitz’s globe-trotting schedule—lecture halls, television studios, and far-off places on the sharp end of policy—would pose to any man approaching his mid-70s. He looks utterly washed out. Glancing hopefully into a bag of lunch that his publisher has brought in from Pret A Manger, and looking—I thought—a touch disappointed that there was nothing in there but soup. But it takes only a few slurps, and a few minutes of extemporising on the myriad self-serving assumptions that the rich have smuggled into the technical rules of the global governance game for the Stiglitz eyes to begin to sparkle—and the man to come to life. He is soon ranging freely across all sorts of terrain, from Brexit to Bernie Sanders. At every turn, there is the unlikely sense that the great economist is now animated by one question above all others: which side are you on?
That is not a question one would have associated with the seer of the last great global slump. “The class war,” John Maynard Keynes remarked, “will find me on the side of the educated bourgeoisie.” But Keynes’s biographer, Robert Skidelsky, sees “a comparison with a lot of force” when it comes to “the radicalising power of events” in the two careers. Keynes then, like Stiglitz now, reacted with increasing ferocity against long years of stagnation and became ever-more sweeping in his critique of a failing conventional wisdom.
Keynes started out with particular failings in the market for money, and eventually widened his analysis into the famous “general theory,” his title grandly echoing Einstein’s move from special to the general theory relativity. The shyly smiling Stiglitz probably wouldn’t blow his own trumpet that hard, but his academic work did reveal a recurrent instinct to home in on the most significant failing in received theory, an instinct which has incrementally led him ever-further away from the orthodoxy.
Where Keynes was an old Etonian and the son of a Cambridge don, Stiglitz was born to a primary school teacher and an insurance salesman in Gary, Indiana. He is a child of middle America in both the social and the geographical sense. The city, he explains, had been an early citadel of US industrial muscle, “a boom town… with the largest integrated steel mill in the world.” These days, he likes to quip, it has sunk to the point where hotels routinely quote their room rates by the hour.
Back when young Sitglitz was at school in the 1950s, the US middle class was growing, America’s dominance in the world economy was at its very peak, and this descent a long way off. Many progressives of the same generation are spurred by the shrivelling of opportunities for the kids that came after them: the sociologist Robert Putnam recently returned to his own industrial, midwestern hometown to chart the fading of the American dream. But Stiglitz insists on discussing the post-war era only in terms of its injustices, rather than opportunities. “I wasn’t aware I was living in the golden age of capitalism… what I was aware of was a lot of racial discrimination, a lot of inequality, a lot of poverty.” Young Joe’s great sense, at least as Occupy Joe recalls it today, was that “something was wrong with this.”
This refusal to indulge even a little nostalgia might suggest a perennial malcontent, but that is not how Stiglitz appeared as he took all those career steps up through academic life, and on to the chairmanship of the Council of Economic Advisors. Nobody, at least outside his own profession, would then have considered him a disruptive force.
"The story Trump tells has more credibility for the hard-pressed than the tale peddled by the establishment"The early choice of Atkinson, now Britain’s leading expert on inequality, as a collaborator suggested a certain progressive bent. But as Atkinson himself recalls things, despite “some interests outside the mainstream, including inequality,” the young Stiglitz “remained very much a mainstream figure. He certainly wasn’t part of the radical set.” Over time, however, the ideas that he explored would begin to push him that way.
Much of his academic work has involved taking an acknowledged “wrinkle” in the standard theory, and demonstrating why it had wider implications than anyone had acknowledged before. Take the problem of so-called adverse selection, which screws things up whenever one side of the market—the buyer or the seller—knows more than the other about whether the product is any good. George Akerlof set out the problem in a celebrated 1970 paper, The Market for Lemons, in the decidedly specific context of flogging second-hand cars. A decade or so later Stiglitz applied the same thought to the market for credit, that is to say to the life-blood of any capitalist economy.
Another recognised glitch in the elegant mathematical proofs of the wisdom of the invisible hand was known as “the theory of the second best.” This qualifies the presumption for unfettered markets with the caveat that as soon as you’re dealing with an imperfect world, then there is no guarantee that taking away any single distortion will make things better, rather than worse. While a student I can remember asking a lecturer for an example of how it might work in practice: he couldn’t come up with any. Stiglitz, however, did—and in the politically-charged context of world trade. As long as economies cannot comprehensively insure themselves he said, which of course they can’t, then tearing down a tariff barrier may not enrich everyone, as the orthodoxy insists, but could instead make everyone poorer.
A third celebrated Stiglitz idea is known as the “efficiency wage,” the idea it may suit firms to pay more than the market dictates, in order to bolster the morale and effort of staff. Again, I put it to him, we have here a wrinkle around the ordinary theories of supply and demand that some boffin might have dreamed up, before you applied it in an intensely practical context. A disarming chuckle and an old-fashioned flip phone (all “my big fingers” can cope with) does not suggest too much of an ego, but there is just enough for him to pick me up here: “some of these [things] I discovered on my own.” He does, however, enthusiastically agree that his best work has often involved starting off with a glitch and then demonstrating why it is in reality much more.
In the estimation of Atkinson, these “individual moves away from the standard model, one step at a time, began to add up,” to the point where, all these years later, he has now “followed his own logic to a more radical place.” But Skidelsky is doubtful that the accretion of small steps adds up to the sort of fundamental theoretical reset that could explain the political journey. Where Keynes, he said, had tried to make sense of a real world where a great deal is not only unknown but also unknowable, Stiglitz’s focus on the way in which particular bits of missing information can warp the market is “narrower and more contingent.”
And indeed that is the feel of a 1994 book, Whither Socialism?, which drew together insights from information economics, to argue that many of the conventional models of economics gave the wrong explanation as to why central planning was doomed to fail. On the surface at least, then, the dispute here was about the way the conclusion should be reached, rather than what the conclusion should be. If Stiglitz was disrupting things back then, he was doing so in a distinctly specialist sense.
Even after he entered the Clinton White House, he was not seen as an intellectual trouble-maker. That status was to come later, after he did the job which at first seemed to confirm him in the establishment: Chief Economist at the World Bank. It was only after he left, in the first month of the 21st century, and wrote a book about the sins of the IMF in the East Asian financial crisis of 1997, Globalization and its Discontents, that he became known as an economist who rocked the boat.
But looking back at that book now, the striking thing is just how accommodating towards the mainstream he remained. In and among the critique of specific institutions, were all kinds of statements designed to soothe respectable readers: “I believe in privatisation”; “markets [are] at the centre of the economy”; “[I] was not so naive as to think that government could remedy every market failure.” These totems of the conventional wisdom often came caveated, and Stiglitz might deny that he has since shifted all that far on the substance. The point, however, is that in his new book, he no longer feels any need to say such things: the tone is now utterly different, and entirely unapologetic.
To see the difference consider what he has to say about milk. The Stiglitz of Globalization judiciously opines that “opening up the Jamaican milk market to US imports in 1992 may have hurt local dairy famers but it also meant poor children could get milk more cheaply.” By contrast, Radical Joe of The Euro holds up the Troika’s push to get north European milk into the Greek market, by forcing the debt-stricken nation to extend the allowable shelf life, as his favourite example of the tendency of creditors to push their own interests in an imperialist fashion.
The first 16 years of this century—the Iraq war (about which Stiglitz wrote another book), the financial crisis and America’s stubbornly widening inequality—have polarised American culture and society in many ways, and it would seem that they have also angered Stiglitz to the point where he is no longer concerned about respectability. Like his fellow Nobel laureate, Paul Krugman, one senses that after long years of dancing with a self-serving mainstream, he has had enough. As Krugman has sometimes put it: “I used to be sensible.”
The evolution of the Stiglitz mood has had implications for the Stiglitz method. If the starting point for the young economist was often a small theoretical wrinkle, the point of departure for Stiglitz the radical sage—and the ostensible subject of The Euro—is instead a great and very practical disaster. He speaks with quiet rage about how a depressed continent can feel complacent about Greece, because the desperate life there “is only gradually getting worse”; about how the central bank chief Mario Draghi can be hailed as a magician for averting an immediate meltdown in the markets, even while Europe endlessly stagnates; about how Spain can “call it a victory that unemployment is only 20 per cent.”
There are all sorts of specific problems with the single currency, many familiar from other books. There is, for example, the lack of a banking union that would be required to equalise the value of a euro deposited in Lisbon with a euro deposited in Berlin. There is a tunnel vision “mandate” that targets low inflation but disregards unemployment, something which is not, for Stiglitz, a technocratic omission, but a bias designed to protect the value of debts owed to the banks and the rich. But the failure at the heart of the euro which he’s keenest to talk about is the assumption that if “the government only did its bit—keep inflation low, no deficits—then the pretty picture would work out,” the assumption, in other words, that the private sector couldn’t go wrong. If the suffering of southern Europeans is Stiglitz’s emotional draw to the euro, this is the intellectual attraction.
“Because of that whole Reagan-Thatcher” way of thinking, still prevalent when the euro plans were signed and sealed in 1992, the architects relied on a “simplistic theory of investment.” The lure of higher returns was supposed to draw funds to places where local businesses had the most pressing needs. In this way, the living standards in the poorer parts of Europe were supposed to be raised to match those in the richest. In reality, investors have displayed a herd instinct to flee to safety, and “what I call private austerity” sets in, as local banks come unstuck whenever a local government got into trouble. That is because—as the world has learnt since 2008—there always has to be a government standing behind a bank. The upshot has been funds draining away from the poorer economies, back towards the rich, the antithesis of the original promise.
Instead of the hoped-for convergence, Europe is seared with deepening divides. Where German GDP was 11 times that of Greece in 2007, it was 17 times bigger by 2015. There was also a divergence of living standards when Germany is compared with Italy, Portugal and also Spain—where the government was in the black until a real estate bubble-and-bust blew a hole in its books.
Europe now has, Stiglitz suggests, three plausible ways forward—pool economic risk in a new spirit of solidarity, and thereby save the euro; split the eurozone into two or three currency blocs, with the hope that they might merge somewhere down the line; or, accept failure and calmly work out an amicable divorce. He prefers the solidarity option, but expresses equanimity about all three. The one thing he insists that Europe must not do is to presume that it can muddle through forever with institutions and rules that embody delusional right- wing dogmas.
Stiglitz talks slowly, with a fair few umms and errs, but he writes remarkably fast. Weeks before his new book was printed, we got the Brexit vote: he knocked out a dedicated chapter. Seeing as Britain has never been in the single currency, this rather confirms he has something else in his sights. Although his book is haughtily dedicated to “the European project upon which so much depends,” he seems to think the UK’s vote to leave is understandable, and—so long as potentially nasty “political dynamics” don’t get out of hand—may prove to be no disaster. He is keeping cheerful because he harbours increasing doubts about whether any of the basic nostrums of the EU, and of globalisation in general—the free movement of money, people and things—are what they were once cracked up to be.
He wrote 15 years ago that we “cannot go back on globalisation; it is here to stay.” He now says that the process is “taking a pause,” and doesn’t sound at all alarmed about that. Whereas he always acknowledged that there could be losers, “I would have said 20 years ago that you need trade adjustment assistance,” but the first thing he’s learned since is that this assistance is not going to be forthcoming. At the same time, the “sheer magnitude” of the China effect on the wages of routine workers in the US has become “so enormous… you can’t ignore it.” To cap it all, “there’s an emerging consensus that the growth effects, at where we are today, of trade liberalisation—because, you know, we’ve eliminated all the big ones, the big barriers—the growth effects are small.” Indeed, in the case of President Barack Obama’s Trans-Pacific Partnership, even the official estimates are “minuscule.”
The upshot? “You may not want to have trade globalisation… we have to assess, balance out, the benefits that are going to go to the very rich, with the losses to the poor. And if there already is a lot of inequality, then you say ‘well, maybe we don’t want this.’” In the context of Brexit, his book takes a similar line on immigration—something many American liberals have traditionally hailed as an unalloyed good—but Stiglitz now suggests that the “overall benefits” were “overestimated” while the knock-on effect on pay packets was unwisely dismissed. Either, he writes, “the leaders of Europe were criminally negligent in not taking into account… who would bear” the costs; or they were “working at the behest of corporate interests” who spotted that a influx of newcomers would produce “a more pliant labour market.”
There are aspects of this which one can imagine a UKIP or indeed a Donald Trump crowd cheering along with. I push Stiglitz on whether there is any part of him that thinks that the New York mogul just might end up having a beneficial effect on the way that America debates its economy. Stiglitz is, however, a man who knows which side he’s on—and he knows it isn’t Trump’s. So he starts by insisting that Trump “can’t win”; even if he did “he wouldn’t have enough people in Congress to go along with his plans”; and, anyway, those plans involve the delusion that America “negotiates badly,” when “the fact” is that the US negotiates very well, but does so on behalf of “corporate interests.” Besides, the Trump base is infected with “an element of racism... which he plays up.”
Eventually, though, he does concede that for the “large number” of squeezed Americans Trump “told a story that they bought. And that had more credibility than the stories that the establishment figures kept telling, that everybody’s going to be better off.” In his heart of hearts, I suspect that Stiglitz does regard that as progress of a sort.
He is keener, however, to discuss the Democratic side of the race where, despite what might look like a natural affinity with the Sanders insurgency, he has maintained strong ties with the Hillary Clinton camp. But he is polite about Sanders, whose strong showing has helped “people like me” push Clinton in a “progressive direction.” The final party “platform I think was a good platform, in representing most of the issues that Bernie wanted.”
"Europe's leaders were either criminally negligent over free movement—or they were working at the behest of corporate interests"So where, then, does he stand on the other socialist child of the 1940s, who is also fighting an internal party battle, on this side of the Atlantic? Some months ago Stiglitz, together with other prominent radicals in the field, including Thomas Piketty, was enlisted by Corbyn’s shadow chancellor, John McDonnell, for an economic advisory council. The word in the press has been that the council was never convened. Stiglitz qualifies insisting “No, it did meet. But… I didn’t go to that meeting because I couldn’t get there.” Although the whole thing “has now been put on hold,” he did have “a little bit of a sense” of what they discussed at the meeting he missed: “I saw one document they came out with, which I thought was clever… saying that when you reach the zero lower bound of monetary policy… the case for fiscal policy... was strengthened.”
So why did he sign up in the first place? “I got involved, in part, was to fight against austerity, the idea that if there was a more progressive agenda on both sides of the Atlantic it would be positive reinforcement for both, if they’re working in tandem. In the same way that Reagan and Thatcher helped each other, because it creates a momentum.” There was also a need to redress the “feeling among American progressives as well as members of the Labour Party that with Tony Blair, that move of the Labour Party to the right went too far, and that one needs to realign that.”
As to Labour’s current leadership race? “I don’t take a formal position, but as… as an outsider, what you’re seeing is, the young people are a little bit like the young people in America… Sanders, he’s a socialist—for older people, that has connotations of the cold war”; not so “for younger people, they’ve grown up in a generation after communism, after the fall of the Iron Curtain. If by socialist you mean higher education accessible to all without huge student debt, we’re in favour—if you mean, a better safety net, social protection, better protection of the environment, they don’t care what you call it. I think it’s the same thing in the UK, and they see too much of the parliamentary party linked to the old.” If Stiglitz wrote a book called Whither Socialism? today, I doubt it would simply assume that the answer was “buried,” and concern itself—as the 1994 book did—only with the cause of death.
Overall he is strikingly kind to Corbyn. While he is careful to register he doesn’t know where Corbyn stands on many subjects, “from my conversations, he is a progressive” on economics. “I want a progressive to win, and I want Labour to win.” While Stiglitz concedes, “I don’t know enough about the workings of the UK political system to know what is the best way of achieving those goals,” his words sound decidedly serene, given Labour’s immediate plight.
This is also an awfully long way for an economics professor to allow himself to get drawn into the strife within a foreign political party. Some fellow intellectuals caution that such embroilment could retard serious analytical work. Skidelsky, for example, makes an unflattering contrast with Keynes who “while notionally a Liberal, never regarded himself as being of any political party at all.” He kept clear of all that so that he could focus on the big picture theory, which politicians of “any party might later pick up.” By contrast, he says, the “likes of Stiglitz and Krugman have got their Nobel prizes, then given up on developing the economic ideas, and drifted into radical political commentary instead.”
For my own taste, this is too harsh. I might not agree with everything that Stiglitz says, but intellectual life would surely be more interesting, and probably healthier, if people were more straightforward about whether they are coming from. Stiglitz started out picking holes in desiccated economic theories, gradually realising how these served to keep the powerful in their place. He went on to see those theories applied in global institutions, at disastrous cost to the deprived. He has warned with increasing alarm that there must be something wrong with the distribution of spoils in a US economy, in which, on some calculations, the minimum wage buys no more than it did in 1956, which means the poorest Americans have been cheated out of the proceeds of the last 60 years of growth. And he has lived to see the high priests of the free market faith, which he challenged so politely and so delicately for long, concede that the world does not quite work as they had thought—as when Alan Greenspan confessed to a “mistake” three weeks after Lehman Brothers came crashing down.
So Stiglitz has a great deal to be ideological about, and also a sense that the intellectual tide is finally running his way. Perhaps he senses politics and history will eventually catch up with the ideas, which may help him to brush off things like Labour’s civil war as passing vicissitudes. At the very least, it leaves him unembarrassed about declaring where he stands: on the left. In the case of the man, then—if not the new tome—we can now judge the book by its cover.
