Nobel Prize Winner to Obama: You're Mistaken on Quantitative Easing
"Nobel Prize-winning economist Joseph Stiglitz, dismissing the Federal Reserve’s quantitative easing as a “beggar-thy-neighbor” strategy of currency devaluation, called on America to learn the art of stimulus from China.
President Barack Obama has defended the Fed’s controversial program, telling the world that a fast-growing America is good for the world economy. But Mr. Stiglitz, in comments at a conference in Hong Kong on Thursday, charged that quantitative easing, by leading to a weaker U.S. dollar, in fact steals growth from other economies.
“President Obama has rightly said that the whole world will benefit if the U.S. grows, but what he forgot to mention is…that competitive devaluation is a form of growth that comes at the expense of others,” Mr. Stiglitz said at the Mipim Asia real estate conference. “So I think it is likely to present problems for the global economy going forward.”
Emerging-market nations have bristled at the Fed’s move to spur the U.S. economy by increasing the U.S. money supply. They worry it will end up instead as a tidal wave of “hot money” that will overwhelm smaller, developing economies, creating asset bubbles and inflation. To prevent that, many are establishing or strengthening capital controls, banking regulations that restrict the flow of money into and out of economies. Taiwan and Brazil are the latest to act. South Korea is also considering measures.
That patchwork of international capital controls is “fragmenting the global capital market,” Mr. Stiglitz said.
Rather than just looser monetary policy, the Columbia University economist urges more government spending by countries whose low borrowing costs make it affordable—notably the U.S.
“We really should learn the lesson from China,” he said. “If you take money and spend it on investments, then you grow the economy in the short run, but you also grow the economy in the long run.” He says China’s massive infrastructure investments over the past two years have “changed the economic geography” of that country, setting it up for strong growth in the years ahead.
The U.S. should do the same, he said, adding that because it has funded infrastructure so poorly over the past 20 years, projects will likely have strong positive return on investment.
“We have a big list of what we need to do,” he said. “We could begin with high-speed railroads. On the list of infrastructure that was drawn up in 2000, at the top of the priority was New Orleans levees. It was public knowledge that New Orleans needed new levees; $5 billion invested in New Orleans levees would have saved $200 billion. Figure out the rate of return on that.”
He recognizes, however, that this dream of a second fiscal stimulus is unlikely to materialize. Much more likely is an extension of the Bush administration’s tax cuts, whose “bang for the buck is very low,” he said, and which will hurt the federal budget deficit.
On the issue of exchange rates, Mr. Stiglitz falls into the emerging-markets camp, led by China, that thinks the system of free-floating rates advocated for decades by the developed world is too volatile.
“An ordinary business, they just want to sell products,” he said. “With the exchange rate going up and down all over the place…you don’t know what you are going to get in return for the sales of your products.” Financial markets haven’t created hedging tools that are good enough and cheap enough to provide protection, he said.
“There’s a high social cost for the volatility in exchange rates,” he said. “So it’s very reasonable for governments to stabilize what the markets haven’t done a very good job at.”
So if you accept that intervention in currency markets to reduce volatility isn’t damaging to the world economy, where does it cross the line and become “beggar-thy-neighbor” manipulations? That’s the crux of the problem that policymakers at the G-20 are trying to hash out.
For instance, China has accumulated $250 billion in reserves this year while letting its currency appreciate only about 3%. Is that too much?
Mr. Stiglitz says China’s currency policy is understandable. And he echoed Premier Wen Jiabao’s contention that fast currency appreciation would send thousands of Chinese businesses into insolvency.
Given the failure of markets to offer adequate protection to export-dependent firms, he said, “to make sure that the exchange-rate volatility is not such as to force significant number of firms in bankruptcy that have macroeconomic consequences, that is at least the minimal intervention that is appropriate on behalf of government.”0