« The American Dream is a myth. I tell my students there is one key decision they have to make, and that is choosing the right parents. And if you mess up that decision the game is over. »

« The American Dream is a myth. I tell my students there is one key decision they have to make, and that is choosing the right parents. And if you mess up that decision the game is over. »

« The American Dream is a myth. I tell my students there is one key decision they have to make, and that is choosing the right parents. And if you mess up that decision the game is over. »

Joseph Stiglitz started by pointing out that, while much of the blame for the growing problems in the world economy are being placed on Donald Trump and his particular brand of populism, many would have arisen without him. Anti-globalisation is a reality in many countries. Economics is not the only factor contributing, but it is an important one. We have to understand some of the reasons why economics has not been working well. Trump has hastened the Day of Reckoning, and he has gotten the assent, even the support, of many leaders of his party and the business community.

As happened with the rise of fascism in Germany and Italy it was the short- term thinking of those who went along that trumped the recognition of the long-run dangers. In this case, the short-term thinking centres around the tax cuts for the rich and the corporations, continued Mr. Stiglitz.

« His party and the business community should have bridled at Trump’s misogyny, his racism, his ignorance, his protectionism. But instead, they have been licking their lips at the benefits they get from the tax cut and the hope for deregulation. »

« His party and the business community should have bridled at Trump’s misogyny, his racism, his ignorance, his protectionism. But instead, they have been licking their lips at the benefits they get from the tax cut and the hope for deregulation. »

TRUMP’S TAX CUT AND EXPENDITURE INCREASES ARE SERIOUS DANGERS FOR THE ECONOMY

Most Americans don’t realize how dangerous the tax cut is. Together with expenditure increases it raises the deficit-GDP ratio by about 3%, in an economy already at full employment. If the United States were a developing country the IMF would “come down like a hammer”, he lamented, and not just say “you’re irresponsible”.

Moreover, the tax act was not a reform. Reform is about simplification and closing loopholes, and this actually made the tax code more complex and opened up new loopholes, even eliminating the minimum income tax. It is so complex that many of the guidelines have not yet been written. But, said Mr. Stiglitz, the most egregious aspect is the unfairness, since it will raise taxes on the middle class to finance a tax.

It was short-term thinking that led to the passage of the tax bill, he said. It worsened the key problems facing the country: inequality, health, the deficit, the debt. Its advocates say that growth will offset the costs, but this was already tried under Reagan in 1981 with supply-side economics and did not work. It is even less likely to do so now. It will result in a bigger deficit, a bigger debt, slower growth and more inequality, emphasized Mr. Stiglitz.

In fact, a detailed look suggests that it will decrease economic growth. Because the economy is already at full employment, interest rates will have to decrease, slowing investment from what it otherwise would have been. Because the economy already has a shortfall between national investment and savings, it will force more borrowing and more forward indebtedness. This will reinforce Trump’s protectionist rhetoric. Moreover, the bill taxes many of the more dynamic parts of the economy.

The mind-set of the financial sector, with a focus on quarterly returns and short-term thinking, has had an effect on the entire society and economy. “Longterm sustainable growth has to be based on long term responsible finance. Finance is enormously influential in our political decisions and the stances taken naturally affect the outcomes.”

INCOME INEQUALITIES – THE US VERSUS EUROPE 

Since 1980, the divergence of income inequalities has been very pronounced between Western Europe and the US. They had comparable levels of inequality in 1980, but today they are in radically different situations. In 1980, the share of national income accruing to the poorest 50% of taxpayers was 24% in Western Europe and 21% in the United States. Since then, it has stabilized at 22% in Europe, but has fallen to 12.5% in the US.  In addition, the top 1% of the richest Americans and Europeans held about 10% of income in 1980. This share rose to 12% in Europe in 2016 but doubled to 20% in the US.

This divergence is due to the fall in real incomes of the poorest in the US, growing inequality in education and health, and a less progressive tax system. It also proves that public policies have a strong impact on inequalities. While globalization and the explosion of international trade are often blamed for rising inequality, its role was secondary. Indeed, European countries, which are even more exposed to globalisation than the US, have experienced a much smaller increase in inequalities, because their changes of public policies were much less extreme. 

LONG-TERM EQUITABLE FINANCE IS NEEDED

We cannot have economies that are successful unless growth is politically, socially, economically, and environmentally sustainable, emphasized Mr. Stiglitz, and the current trajectory does none of this.

Starting with inequality, it is not only a moral issue, but also an economic and political issue. Societies with more inequality have slower growth and more volatile growth. We used to think that if you want more equality you have to give up on growth, but now we realise that equality and growth are complementary. This has been proven in IMF research, he underlined.

There are many dimensions of this inequality, but two have not received sufficient attention in the financial community. The first is that race and gender discrimination are rampant in the US and in many other countries, both in employment and in lending. Second, that there is inequality across generations. Young people today are having a hard time entering the job market. In a period where people should be gaining skills, they are sitting at home not working, and this is undermining long-run potential growth.

US data show that the fraction of firms that are new and are headed by young people is on the decline. So the US is not as dynamic as believed and is becoming less so, he pointed out. One of the reasons is the difficulty of gaining access to finance. The financial markets and banks in the US have found it more lucrative to engage in writing CDSs and consumer lending, for example, than their core mission, which should be to provide finance for new enterprises and the expansion of old ones.

The bad mortgage products of the financial crisis are one example, said Mr. Stiglitz. “They were good for the short-sighted financial sector because they generated enormous fees, but they were not good for the people they were supposed to serve.” There are other ways of providing mortgages that provide access to stable finance, but the financial sector failed, with enormous consequences for the macro-economy.

Another major issue is demographics, especially the growing population that is in retirement. We have to do a better job of making our labour market and our macroeconomics more flexible, so that we can absorb and enable people to stay on in the labour force, he insisted. At the same time, an essential part of policy has to be to provide better, not smaller, pension schemes.

« I regret to say that America’s financial sector has played a pivotal role in this short-term thinking. It is not just that they have supported the tax bill, they supported deregulation, stripping away the protections from another crisis. »

« I regret to say that America’s financial sector has played a pivotal role in this short-term thinking. It is not just that they have supported the tax bill, they supported deregulation, stripping away the protections from another crisis. »

WE NEED REGULATIONS AND ETHICS TO MANAGE RISKS

The financial sector, especially in the US, has strongly opposed laws imposing financial standards with no conflicts of interest. More fiduciary standards are needed, but the financial sector opposed even minimal improvements. We also need better products to manage the risk individuals face, since it has been shifted onto them, he suggested. They have neither the resources nor the knowledge to manage this risk well. The financial sector, with the help of government has to do more.

A third issue is climate risk, which is existential for the planet, and is also a financial risk. Asset values have not included the consequences of a potential rise in the price of carbon, and it is certain that it is coming. Several years ago the estimated price was 100 euros a ton to stay within the Paris accord’s limit of 1-2 degrees warming. The good news is that this amount would not undermine the economy; the bad news is that it is a lot higher than where the world is today, explained Mr. Stiglitz. That price will have important consequences, and interdependence means that the full effects will reverberate throughout the economy, not just in hydrocarbon sectors.

The good news is that more firms are beginning to take into account at least direct carbon costs, and some are actually engaging in carbon pricing. There has been a major change in perspective, with a growing consensus that we are moving towards a world with high carbon costs. There are already new green indices that firms and mutual funds can benchmark their performance against. There are also new financial products that enable lending, such as green bonds. And there are new institutions, like the development bank of the BRICs, which are focusing explicitly on carbon lending.

Mr. Stiglitz closed his talk by calling for a reinvention of the financial sector. It should be a long-term sustainable intermediary, working with institutions like development banks to devise financial products suitable for the risk profiles of different categories of investors.

« What we should really be focusing on is how to make sure that the financial sector does what it is supposed to do, what no one else can do. That is to provide finance in a sustainable way, in a responsible way, to ensure long-term stable growth,” he emphasized. This entails ensuring that there is access to funds for young people, and well-designed mortgage and retirement products. “Fortunately the issue of long-term, responsible financial investment has moved to the top of the agenda, including of the 2018 Amundi World Investment Forum. »

« Responsible accounting means acknowledging the magnitude of climate risk. Responsible lending and investing means helping the economy respond, not aiding and abetting the demise of the planet by lending to carbon, but instead supporting green investments. »

« Responsible accounting means acknowledging the magnitude of climate risk. Responsible lending and investing means helping the economy respond, not aiding and abetting the demise of the planet by lending to carbon, but instead supporting green investments. »