CNBC: Here's why the economy could get worse
Source: CNBC
Author: Joseph Stiglitz
Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise — slow growth and near-stagnant incomes for years to come — could set in. While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.
The basic point that I raised a half-decade ago was that, in a fundamental sense, the U.S. economy was sick even before the crisis: It was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust.Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns.
Policy makers' response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones — and not just in the U.S. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues.
Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23 percent. Germany, the top-performing European country, has recorded miserly 0.7-percent average annual growth over the last six years. The U.S. economy is still roughly 15 percent smaller than it would have been had growth continued even on the moderate pre-crisis trajectory.
But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.
Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists' miserable record — reflected in the run-up to the crisis — for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: Unless government policies change, we are in for a long period of disappointment.
The neoliberal policies that have prevailed for the past three decades have much to do with our current predicament.
Our current difficulties are the result of flawed policies. Some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.
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