“An economy that fails to serve a majority of its citizens is a failed economy. In that sense, ours is a failed economy,” Stiglitz argued during a March 9th Flom Auditorium lecture. “The median income of a full-time male worker is lower than it was 40 years ago. We’ve been telling people every generation gets better. It’s not true.”

“Seventy years ago, we could afford four years, eight years at the most expensive schools in our country, for anybody” Stiglitz observed (referring to the benefits of the GI Bill).  But when President Obama proposed two years of college education for our poorest, many people said ‘We can’t afford it.’ “I think the answer is, we can’t afford not to do it now,” (see Patrick Verel for Inside Fordham ).

This was Professor Stiglitz 2nd visit to Fordham’s Rosehill campus as part of the Nobel lecture series.  Like his recent appearance at a January AEA session in San Francisco, Stiglitz focused on why the U.S. recovery has been so week.   If growth had resumed at its 1990 to 2008 rate today’s GDP would be 15% higher Stiglitz pointed out.  Still the U.S. is doing well compared to Europe, Stiglitz conceded.  He argued for more public spending on infrastructure as well as measures to get banks to resume lending to SMEs and greater investment in education.

Professor Stiglitz received the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979.  Stiglitz’s Nobel Lecture follows that of Amartya Sen who focused on the impending election in India (he flew off to vote the next day).   Stiglitz is a University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute.  A former senior vice president and chief economist of the World Bank and chair of the US president’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. He has authored over 300 technical articles and 23 books. His most recent book is Rewriting the Rules of the American Economy.  Stiglitz’s received the Nobel prize for his work on asymmetric information as the key to understanding many observed market phenomena, including how credit markets work. He shared the 2001 Nobel Memorial Prize in Economics “for laying the foundations for the theory of markets with asymmetric information” with George “market for lemons” Akerlof (husband of Janet Yellen) and Michael Spence who focused on how education for example sends a signal to employers.

At the Nobel Lecture Series, Stiglitz addressed the issue of equitable and sustainable economic growth in the United States. He also spoke on the underperformance of the US economy in the January 2nd session of AEA organized and moderated by Fordham Professor Dominick Salvatore.

Stiglitz identifies lack of aggregate demand as the underlying problem of this slow recovery. Some components of the aggregate demand are weak like the huge inflow of money from monetary easing (also QE) has not led to an increase in investment. One of the reasons of the slow recovery is the misdiagnosis of the global recession. There was insufficient attention paid to improving the credit channel; SME lending is very low and the mortgage and financial market is not fixed. This partly explains why monetary easing didn’t work.

Joseph Stiglitz identifies the underlying problems with the US economy that need to be addressed. Foremost is the inequality, which has been rising. Unfortunately, the monetary policy and other factors (QE) have increased rather than reduce inequality.  The government needs to orchestrate a structural transformation as it did after WWI when the U.S. radically reduced employment in Agriculture.  Since the global manufacturing employment is declining and the U.S. share of that employment is declining, the United States needs to transform itself into a services based economy.  The first item on Stiglitz’s list of needed reforms was a carbon tax, then social security reforms and reforms in the education sector. There is an under-investment in technology, government support for basic research is lower and there is a dearth of innovation enhancing ideas, hence the current pause in productivity growth contributing to stagnating wages.

Stiglitz offered a seven point agenda to boost growth and speed recovery. There is a significant need to stimulate investment; one way is to impose environment taxes, another is for government to increase investment in infrastructure and technology. Since public and private investments are complements, this will increase private investment as well. Another way of increasing investment is to end austerity, if government borrows to improve infrastructure then the investment goes up. Also, the balanced budget multiplier means that increasing taxes (along with investment) increases GDP. Lastly, there is a need to fight inequality that will improve, both short term and long term, economic performance. He goes beyond the redistribution of wealth and stresses on the importance of more equitable distribution of market wealth. Instead of measuring economic performance using GDP we should measure the performance based on the living standards (especially of the bottom 50%). There is a need to address the fundamental problems with the economy to achieve a robust growth.

photo: Bruce Gilbert, Inside Fordham March 10th