[Update: I edited some portions of this entry to make it sound better and to recount Prof Stiglitz’s address more accurately, particularly at the second bullet point.]
I am typing this nursing some coffee (3-in-1 comfort coffee from Singapore – my mum’s great idea!) and listening to Stef Sun’s plaintive and demonstrative 我不难过 in my hotel room, which has just been chilled by the March Geneva night. All is well in my part of the world.*
As I mentioned, I had the good fortune to hear Joseph Stiglitz speak about the global financial crisis a few days back. About half an hour before he was due to speak, the assembly hall started to fill up, and the anticipation and noise built like a jet preparing for takeoff. When the chair called the meeting to order with a bang of his gavel, no one could hear him. He had to almost break the thing before anyone noticed. I think this crisis is going to make economics a fad as a course of study and many economists rock stars.
- made it clear that, far from being “decoupled”, the world’s economies were more integrated than ever. This aspect of globalisation contributed to the pervasiveness of the crisis – for example, although catalysts of the economic crisis such as toxic mortgages and a philosophy of deregulation were centred in the US, this did not prevent countries with good monetary policies from suffering. In addition, the interconnectedness and interdependence of the world’s economies meant that stimulus packages at the national level would leak i.e. flow outside national borders and that it would be more efficient to have a global stimulus package, coordinated by global decision making. I suppose there is a sort of inevitability about this reasoning: if national economies cannot escape their impact on one another, then it follows that all the affected players have to sit together to work something out. However, national and political interests being what they are, I can only see this happening at the pace of particularly clumsy swans.**
- described how he thought the crisis came about. I’ll try to summarise it: As a result of the 1997 Asian financial crisis, during which the IMF lent money to many countries but only if they fulfilled onerous conditions based on sufficient reserves, many countries in this “class of 1997” resolved to never again be in that position and therefore to build up their reserves. This led to income not spent in these countries and resulted in a lack of aggregate global demand. To Stiglitz, the unsustainability of the many bubbles and the lax regulations that abetted them were not a surprise – the lack of aggregate global demand meant that regulations had to be lax for economies, particularly the US economy, to continue growing. (Here I must admit I would love to find out how one determines that aggregate global demand is lacking. What would be considered adequate demand? What indicator would one look at?) To paraphrase Prof Stiglitz, if the global economy was based on American consumers, who made up the richest nation in the world, spending beyond their means, it was certainly flawed. He continued to say that unless fundamental reform occurred, the world cannot return to sustainable economic growth. To me, this is a little scary, because something like a country’s savings rate – the proportion of income that is saved by its consumers – is fostered over generations and would be difficult to change, i.e. it would be very difficult for the world to return to sustainable economic growth. Or perhaps some sort of reform may mitigate the negative impact of over-high national savings rates? Then a thought struck me (this was a surprise: it is not often I encounter violent thoughts – ok ok that’s a bad joke :p) – how are we defining sustainable economic growth? Is not the natural state cyclical, with peaks and troughs? Prof Stiglitz also noted that we have been measuring economic growth with GDP growth. To assess economic growth, he said, we should look at how it benefited the individuals of the system. In this regard, median income in the US – I suppose adjusted for inflation etc. – has not increased over the past 7 or 8 years. So ideally, I take it, sustainable economic growth would involve growth in the common man’s median income. (Wonder whether that metric has increased over the years for Singapore.) And what does “sustainable” mean i.e. how long does the growth have to occur over?
- pointed out that the US’s brand of “capitalism” essentially meant socialising losses and privatising profits, the continuation of a system of perverse incentives that afforded no penalties for excessive risk taking. If banks are too big to fail i.e. they will unfailingly get bailed out, as seems to be the case in the US, they are not going to worry about taking risks and failing, are they?
- mentioned the concept of automatic economic stabilisers such as insurance and social protection – when the economy was weak, spending in these two areas traditionally went up and shored up the economy – and how the US had weakened theirs and therefore exacerbated the crisis.
- noted that well-managed bankruptcies that entailed essentially financial reorganisation should be allowed to occur.
- demonstrated some quite appropriate gallows humour. At the end of his address, when he clearly had more to say but had to cut himself short in view of the time, he remarked that the good news was that the crisis was going to go on for a while, so he’d have many opportunities to come back and talk to us all again :p
I’ve only started to try to understand economics, so most of the above was new to me, and it is no exaggeration to say that I was quite captivated by the speech. Because of my newness to this, I may well have miscommunicated some of the good professor’s remarks, so… well, just a little disclaimer :)
*Not least because my beloved Reds just whipped their hated rivals in the football match of the season.
**Yesterday was a particularly fine day – spring is certainly coming – and the three of us got some ice-cream and sat by the rocky shore of Lake Geneva to savour the weather. Soon two swans swam over, and… I can’t describe how birds with as regal a bearing as swans could seem to beg – maybe it had something to do with a certain supplication of their sinuous necks – but these swans seemed to beg. When they realised there were to be no handouts from us, the swans looked mildly baffled, then disappointed, though to be fair they seemed used to the latter and accepted it with good grace. Then a gentlemen came to sit near us, bearing a bag of bread crumbs. The swans noticed him and paddled toward him, not too slowly, and sure enough he started tossing out small handfuls of the stuff. The swans were just starting to settle down for the meal when seagulls began to swarm all over them. They were several times smaller than the swans and so agile that they seemed always to be first to the crumbs. They would pick the crumbs off the water right next to the much bigger swans, which looked anything but graceful – sometimes the swans didn’t notice the food right next to them, sometimes they took so long to turn or to manoeuvre their necks that the crumbs were long gone by the time they did. One unfortunate swan had a bread crumb land on its broad back, and I worried for what seemed like many minutes that its back would soon be the target of seagull divebomb attacks before it finally twisted its neck behind to snatch up the morsel. The speed of these swans, I fear, is the pace at which global decision making on the economic crisis can realistically take place. (Boy that was a long and winding road to explicate that metaphor eh? :p)