Transcription of Finance News Network with former World Bank Chief Economist and Nobel Prize Winner, Professor Joseph Stiglitz
John Treadgold: Hello I’m John Treadgold for the Finance News Network and joining me at Sydney’s Town Hall today is former World Bank Chief Economist and Nobel Prize Winner, Professor Joseph Stiglitz. Professor, welcome to Sydney.
Joseph Stiglitz: Nice to be here.
John Treadgold: A lot of your work has focused on understanding growing inequality in developed markets. Is there a threat that inequality could reverse some of the strong economic growth that Australia has experienced over the past decade?
Joseph Stiglitz: Very much so, studies done by the IMF and others, have shown that counties with greater inequality are likely to experience lower economic growth and more instability. So if Australia follows the common pattern, and there are good reasons for this pattern, then the growing inequality in Australia will be followed by weaker economic performance and more instability.
John Treadgold: What policy settings could you suggest that would help to lessen inequality, in order to maintain prosperity?
Joseph Stiglitz: First you want to begin with making sure it doesn’t get worse and your education system, your health system, your support for families through your welfare system, are all important ingredients in the current Australian model. It’s important to have progressive taxation, important to make sure that those at the top pay their fair share of taxes, and because they’re more able to pay than those at the bottom the percentage of their income that they pay in taxes should be higher than those at the bottom.
It’s particularly important to close the kind of loopholes that allow large amounts of high income money to escape taxation. There are loopholes caused by capital gains, caused by superannuation schemes that allow very wealthy people to put aside large amounts of money tax free which costs the treasury enormous amounts of money, money that could be spent on investments in people, in technology infrastructure. All which would raise standards of living.
There are a whole set of other policies that are important for fighting inequality. Fighting monopolies, fighting discrimination, making sure you have good corporate governance laws to make sure that CEOs can’t grab for themselves a large fraction of the revenues of corporations. Good financial laws to make sure that the banks don’t engage in predatory lending, abusive credit card practices; the kind of things that banks in other countries have engaged in, in massive amounts.
John Treadgold: Regulation of financial markets is a hot topic both here and in the US. Do you think enough has been done since the global financial crisis to manage risk and avoid another crisis?
Joseph Stiglitz: We clearly haven’t done enough. In the US for instance we have banks that are too big to fail, too inter-connected, too correlated to fail. They’re actually too big to jail. They’re too big to be managed, and they’ve caused all kinds of problems to our economic system.
But it’s interesting, all the focus has been on trying to prevent them from doing harm to the rest of the economy, there’s not enough talk about how do we make sure that the financial sector does what it’s supposed to do. Allocate capital, manage risk, run a payments mechanism, all at low cost. These are things that good financial systems do and in some countries, particularly in the US, they’ve not been doing these basic functions well. So while they expose the economies to enormous risk they’ve engaged in a whole variety of abusive practices they actually haven’t been providing the kind of services they should be providing.
John Treadgold: Much of your academic work has looked at the assumptions of perfect markets, and you’ve indicated that you still believe in an overall market-based system. How do these views reconcile in your approach to investment and capital growth?
Joseph Stiglitz: I actually think that part of the agenda here is to try to make markets work like markets. The real problem is that we’ve developed what I sometimes call an ersatz version of capitalism. Where we socialise losses but privatise gains. Where we have massive bailouts for the banks but we leave homeowners on their own. Where we allow monopoly powers, abuses of corporate governance; all these things are things that are not part of text book economics of competitive markets, these are really undermining the workings of a market economy.
I think we have to understand that what we have in most of the advanced countries is not a traditional text-book market economy, competitive market. We have a mixture of monopolies and managerial capitalism and political influence, exploitation and unfortunately that mix has not been serving most citizens; certainly not in the US but in many of the other advanced economies.
John Treadgold: Australia is currently in negotiations as part of the Trans-Pacific Partnership free-trade agreement. You’ve recently raised some concerns about the intentions of the agreement, do you think it’s a good deal for Australia?
Joseph Stiglitz: I think all countries that are a part of this agreement ought to worry. They ought to worry first because there’s a certain lack of transparency. Even people in the US government have had trouble figuring out what the USTR negotiating position is, what they’re asking for.
Part of the trade agreement is a provision called an investment agreement and the investment agreement is designed to protect special interests, not to have better property rights. For instance these kinds of provisions are being used all over the world to undermine health standards, environmental standards, safety standards, undermine the basic structure that has enabled market economies to function.
In fact the USTR doesn’t seem to understand that we had a crisis in 2008 and that the response to the crisis was, in many countries, to adopt stronger financial sector regulations to make sure that the financial sector serves the rest of the economy, doesn’t undertake excessive risk, and there are provisions (in the agreement) that might restrict the ability of governments to undertake these kind of regulations.
Another provision, that’s really adverse, are those that are associated with intellectual property. Most people believe in intellectual property, this is not just about ordinary protection, this is extending the market power of American pharmaceutical companies to go well beyond the provisions that, for instance, apply in the US.
Make it more difficult to get access to generic medicines, raising costs of providing health care to Australian citizens. So yes I think you ought to really think twice before you sign this agreement.
And at the very least negotiate. Remember this is not a free-trade agreement, this is not a partnership. At least not a partnership among equals, this is a managed trade agreement mostly managed for special interests in the US.
John Treadgold: Professor Stiglitz thank you for your time.
Joseph Stiglitz: Thank you.