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Joseph Stiglitz, who is described by
the Sunday Telegraph as “one of the world’s leading
economists” has updated his book, Freefall. Stiglitz provides last
Sunday’s Telegraph with an exclusive extract, headed, The euro may not survive. For those who don’t know
Stiglitz, he is a card-carrying Keynesian and a Nobel Prize winner; for those
of us that do he is nearly as misguided as Paul Krugman, another Nobel Prize
winner.
Early
in his extract, he regrets that when the G20 brought the developed countries
together, “there was a moment when the whole world was Keynesian, and
the misguided idea that the unfettered and unregulated markets were stable
and efficient had been discredited”. This sets the scene for us, being
a firm statement that he does not believe in a free market. Furthermore this
extract is so full of common Keynesian fallacies that he provides a useful
text for criticism of daft Keynesian ideas without going to the needless
expense of buying his book. And it is so muddled that I shall restrict my
critique to just a few of his key misconceptions.
1.
He states that “Critics
claim that Keynesian economics only put off the day of reckoning”,
and he argues that to the contrary, unless we go back to basic principles of
Keynesian economics, the world is doomed to a protracted downturn. Mr
Stiglitz is confusing cause and effect. A primary cause of all our troubles
is the expansion of credit, firstly fuelling the dot-com bubble and secondly
the residential property bubble. Mr Greenspan rescued us from the former by
pitch-forking us into the latter. A further cause is the growth of
non-productive government at the expense of the productive private sector; a
result of past interventions that are never unwound. The crisis has
been created by the very policies he believes in, and he somehow thinks that
even greater doses of credit-creation and budget deficits will get us out of
it. The world is doomed to a downturn because attempts by governments
to undermine free markets eventually fail, not because of insufficient
stimulus. The problem with basic Keynesian theories is that they rely on
tricking the market with unsound money, and successive waves of intervention
have left us with a legacy of debt and devalued savings, or put more simply,
we are bust.
2.
He states that “The
low interest rates on long-term bonds and inflation-indexed bonds suggest
that the ‘market’ itself is not too worried about inflation, even
over a longer period”. This is incorrect. Bond yields
reflect the fact that the Fed and the Bank of England are pricing bond
markets through QE purchases, wrongly persuading fund managers that
government bonds are a safe-haven. You cannot draw conclusions from a rigged
market.
3.
He believes
that governments can still do more to help the private sector grow –
“if the old banks won’t lend, create some new banks that
will”. He fails to understand that banks are operating in an
economic environment that is totally different from before the credit-crunch.
The private sector is burdened with an insupportable debt mountain and it is
a bad bet. Banks’ primary duty is to their shareholders, and they will
seek the best returns available, commensurate with risk. And guess what
– their best returns come from lending money to governments and to
dynamic businesses in developing economies. If governments were to
create new banks with a different approach, bankers would have to be
retrained to have the sense knocked out of them.
4.
“Had
Greece and Spain been allowed to decrease the value of their currency, their
economies would have been strengthened by increasing exports”. This is a common
assumption that goes all the way back to Keynes’ Tract on Monetary
Reform, and is wholly fallacious. If it was true, Germany’s and
Japan’s trade surpluses would have diminished as their currencies rose,
and the continual devaluations of sterling and the US dollar would have
diminished their trade deficits as well. Experience shows that devaluation
does not reduce trade deficits, as Stiglitz wrongly states. Trade imbalances
are simply the result of government interventions: debtor nations run
unbalanced budgets, intervene in the currency markets, inflate the money
supply and permit banks to create excessive levels of credit. Without these
inputs, the private sector always balances its trade and capital flows; with
them it does not have to.
5.
Our final
example addresses the future for the euro: “There is one solution:
the exit of Germany from the eurozone or the division of the eurozone into
two sub-regions.” This recommendation overlooks the fact that there
is no exit mechanism and for the treatment of affected debt. What creditor is
going to agree to redenominate his loans in drachmas, pesetas or lira? It
also overlooks the fact that members of Stiglitz’s new sub-region would
be simply unable to raise money in the capital markets without paying
considerably higher interest rates than they do today. Leaving the euro
would accelerate their bankruptcy and create the economic and banking crisis
Stiglitz says he is trying to avoid.
These
misconceptions in Stiglitz’s book extract are but a small sample of his
Keynesian errors. Unfortunately, they have been repeated so often that they
are now unquestioned. People like Stiglitz have become an integral part of
the establishment and their insistence on interventions and regulation to
counter perceptions of private sector short-comings is finally wearing the
private sector down. That is why the global economy risks collapse, and not
as he supposes, from insufficient Keynesian stimulus.
Like
Paul Krugman, Stiglitz has achieved the highest honours the establishment can
bestow in the form of a Nobel Prize. Yet the wise man reads his writings in
the knowledge that they are infallibly wrong and therefore excellent guidance
for what is right.
Alasdair McLeod
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