Krugman v Stiglitz on what’s holding back the recovery

 

BBC Chief Business Correspondent Linda Yueh investigates claims that inequality is hampering growth

Two of the leading economists in the world disagree over whether inequality hampers the economic recovery.

It relates primarily to the US where the top 1% has captured 95% of the income gained since the financial crisis. Since 2009, the top 1% of incomes grew by 31.4% while the bottom 99% saw their incomes rise by only 0.4%, according to a study from the University of California at Berkeley.

The main cause of the slow recovery is certainly worth knowing.

I sat down with two of the most eminent economists in the world, Nobel Laureates Paul Krugman and Joseph Stiglitz, who disagree over the issue.

Stiglitz maintains that those sorts of inequality figures are the main impediments to economic growth. The rich pay less tax, so higher inequality depresses tax receipts. Also, most importantly, the poor consume more of their income than the rich.

This lower "marginal propensity to consume" of the rich was originally pointed out by John Maynard Keynes.

Rich v poor?

In other words, poorer people have less disposable income, and spend more of it on necessities such as food.

Richer people tend to spend proportionately less of their income since they have more money to spend.

It implies that raising incomes for the poor would generate proportionately more consumption.

But, Krugman says that he hasn't seen evidence that the rich "under-consume".

In one sense, of course, the rich spend more absolutely than the poor. If the poor spend 20% of, say, £10,000 of income, then that would add £2,000 to the economy. If the rich spend 3% of £100,000, then that would add £3,000.

Slow recovery

Krugman's point is that this comparison is a static one: if you took two people at a point in time with two different levels of income, then that's what they are doing.

But, if you were raise the income of, say, the poor person, then it's harder to know how their spending would change. Stiglitz maintains that there is a large body of evidence that supports his position.

Stiglitz and Krugman may disagree over how important inequality is to the slow recovery. But they agree that high levels of income inequality are clearly a problem for economic as well as social reasons.

They also agree that most governments have not got it right in terms of the balance of austerity and growth, and don't see the crisis-affected economies of the US, Britain and eurozone getting back to more normal rates of growth anytime soon.

For the rest of us trying to understand why this recovery is so slow five years on from the crisis, it's worth having these debates, since the answer could provide guidance on what needs to be done.

For the full interviews with Paul Krugman and Joseph Stiglitz, tune into Talking Business with Linda Yueh on Friday. Details of when to watch are at: www.bbc.co.uk/talkingbusiness.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    -1

    Comment number 46.

    Both of them are re-arranging deckchairs on the Titanic.

    They refuse to believe that it's govt intervention and liberal printing of money that is causing the ship to sink.

    Inequality is needed for investment: if we all had the same amount of money, who would provide the massive investment that certain projects need?

    And, anyway, its govt money printing that's exacerbating income inequality.

  • rate this
    +1

    Comment number 45.

    debt levels in western society are far too high. we will not return to healthy economic growth until most of the debt is purged from the system. central banks are doing everything they can to prevent a purge. so at this point central banks are part of the problem, not part of the solution.
    when it comes to this simple point, someone like krugman does not even understand the problem.

  • rate this
    +1

    Comment number 44.

    the top 5% have indeed got richer by robbing the other 95% in numerous scams eg all are failed financial products designed essentially to do just that. Its fair to say that the back heeling of all of the toxic debt from banks to governments and then on to consumers/taxpayers will weigh all of the western economies down years to come.
    Its true to say greed killed all of the western economies.

  • rate this
    +1

    Comment number 43.

    We humans consume, and the World provides.
    We are all consumers....some more than others.

    AUSTERITY is the evidence of finite resources...that trough is emptying...no growth...Austerity for some but not others...This will continue and the strong (or wealthiest) will take more and more of the less and less...causing the greater divide between the haves and the have nots.

    Answer....It's obvious.!

  • rate this
    -1

    Comment number 42.

    Money that is not spent is not somehow "wasted" it is normally invested in some way or another and therefore provides for future wealth generation.
    Few people who have money use it to light fires, Krugman is right that the distribution of income makes very little difference to the overall economy.

  • rate this
    +3

    Comment number 41.

    Greed, and the possible realisation that on an overpopulated planet, something's got to give.

  • rate this
    0

    Comment number 40.

    31.Joe
    3 Hours ago
    BTW, China has announced they will stop buying foreign treasury. That alone is potentially much bigger news than what you report.

    When did they say that Joe?
    If they did say it, the rest of what you say is absolutely correct. Better go and buy some gold because the dollar will be finished.

  • rate this
    +1

    Comment number 39.

    Again no comprehension of limits by leading economists. Quality and quantity of energy for consumption is falling and so we must spend more on it to get the same. This affects disposable income and hits the poor hardest. Factor in more climate disruption and over population and you see why real wealth per person is in decline. Compound that with too much debt and you see only long term recession.

  • rate this
    +1

    Comment number 38.

    What Krugman fails to mention in his 'Europe' example is that we are taxed at a far higher rate than the US which I would suggest has a similar effect. i.e. money moved from the productive cycle in to big bank accounts and wasteful vanity projects!

  • rate this
    0

    Comment number 37.

    Looks like it could be a very interesting discussion.
    Sadly, being in the UK I don't seem to be able to see it, as BBC News 24 is what I have, with no BBC World News.
    Anyone help ?

  • rate this
    0

    Comment number 36.

    Trade should not be accounted for using ordered pairs of numbers (debit, credit). Money (pounds, euros, bitcoins, etc) and all economic theories are based on this accounting method! It gives rise to a false belief that "money" is real. It is why no two economists can agree! Trade is a chiral (handed) activity. It needs to be accounted for using four numbers, not two.

  • rate this
    -2

    Comment number 35.

    Does income inequality not produce more savings and therefore investment?
    Alan

  • rate this
    0

    Comment number 34.

    33 Is incorrect. Trying to understand trade in terms of one pair member of credit and debt is like trying to understand the universe in terms of too much yin or too much yang. They function together like two walking legs walk one body. One is not a store of value and the other a store of anti-value. They are mathematical constructs: ordered pairs of numbers that do not work.

  • rate this
    +2

    Comment number 33.

    US recovery is slow because as Janet Yellen testified before Congress 2/3 of $3 tn the Fed pumped into the economy as QE is sitting around gathering dust, not stimulating credit.The US economy is a credit economy where credit is a critical part of the money supply.Samuelson and Friedman don't tell you that.In 2008 these "experts"stood on the tracks with glazed eyes unaware of the oncoming train.

  • rate this
    +3

    Comment number 32.

    The problem that is holding back recovery is debt, debt and more debt.

    Until the debt is resolved any recovery will be small, muted and utterly inadequate to keep us all in the manner to which we have become accustomed, rich and poor alike.

    I think this just proves that economists are quite incapable of providing solutions but excellent in providing distractions.

  • rate this
    +2

    Comment number 31.

    BTW, China has announced they will stop buying foreign treasury. That alone is potentially much bigger news than what you report.

    When China has stopped buying, think again what the Fed can do. They can only print even more. They acted like a headless chicken when the 10Y yield reached 3%. Think again.

    BBC should stop getting in bed with the government avoiding the true global economy picture.

  • rate this
    +1

    Comment number 30.

    In order for two people with no money to start an economy, one needs to be able to buy and the other sell. One needs to be able to buy with credit and the other to sell with debt. Provided they can do this, the people can form an economic community. Right now, many people, especially the young unemployed, cannot start an economy because they have no means of exchange.

  • rate this
    +1

    Comment number 29.

    The monetary system is inherently inequitable. You can buy things with credit from anyone, but you can sell things with debt only to people with credit. If everyone had to exchange credit for debt every time they traded, the inequality would be removed and trade would become fair. Thus, the way to make trade fair is to require that people with money (credit) can only buy from people in debt.

  • rate this
    -1

    Comment number 28.

    It is pointless to discuss a situation which can only change with a

    radical change of direction. This will not happen without a dramatic

    need for industry to be revitalized. War...and only war can achieve this.

  • rate this
    +5

    Comment number 27.

    Linda - 'guidance on what needs to be done'

    Joe is a capitalist who hates the international economic system that has been allowed to develop during the three decades of neoliberal decadence.

    He is particularly critical of the IMF who he says are only interested in the well-being of the corrupt and incompetent 'financial engineers'.

    There is plenty of 'guidance' in his wonderful books.

 

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