Joseph E. Stiglitz's Blog, page 12

Globalisation isn't just about profits. It's about taxes too | Joseph Stiglitz

Big corporates are gaming one nation's taxpayers against another's: we need a global deal to make them pay their way

The world looked on agog as Tim Cook, the head of Apple, said his company had paid all the taxes owed – seeming to say that it paid all the taxes it should have paid. There is, of course, a big difference between the two. It's no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the supreme court, in its Citizens United case seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction didn't endow corporations with a sense of moral responsibility; and they have the Plastic Man capacity to be everywhere and nowhere at the same time – to be everywhere when it comes to selling their products, and nowhere when it comes to reporting the profits derived from those sales.

Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organisational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society.

It is not even true that higher corporate tax rates would necessarily significantly decrease investment. As Apple has shown, it can finance anything it wants to with debt – including paying dividends, another ploy to avoid paying their fair share of taxes. But interest payments are tax deductible – which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment. And with the low rate of taxation on capital gains, returns on equity are treated even more favorably. Still more benefits accrue from other details of the tax code, such as accelerated depreciation and the tax treatment of research and development expenditures.

It is time the international community faced the reality: we have an unmanageable, unfair, distortionary global tax regime. It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today – with America standing out in the forefront and the UK not far behind. It is the starving of the public sector which has been pivotal in America no longer being the land of opportunity – with a child's life prospects more dependent on the income and education of its parents than in other advanced countries.

Globalisation has made us increasingly interdependent. These international corporations are the big beneficiaries of globalisation – it is not, for instance, the average American worker and those in many other countries, who, partly under the pressure from globalisation, has seen his income fully adjusted for inflation, including the lowering of prices that globalisation has brought about, fall year after year, to the point where a fulltime male worker in the US has an income lower than four decades ago. Our multinationals have learned how to exploit globalisation in every sense of the term – including exploiting the tax loopholes that allow them to evade their global social responsibilities.

The US could not have a functioning corporate income tax system if we had elected to have a transfer price system (where firms "make up" the prices of goods and services that one part buys from another, allowing profits to be booked to one state or another). As it is, Apple is evidently able to move profits around to avoid Californian state taxes. The US has developed a formulaic system, where global profits are allocated on the basis of employment, sales and capital goods. But there is plenty of room to further fine-tune the system in response to the easier ability to shift profits around when a major source of the real "value-added" is intellectual property.

Some have suggested that while the sources of production (value added) are difficult to identify, the destination is less so (though with reshipping, this may not be so clear); they suggest a destination-based system. But such a system would not necessarily be fair – providing no revenues to the countries that have borne the costs of production. But a destination system would clearly be better than the current one.

Even if the US were not rewarded for its global publicly supported scientific contributions and the intellectual property built on them, at least the country would be rewarded for its unbridled consumerism, which provides incentives for such innovation. It would be good if there could be an international agreement on the taxation of corporate profits. In the absence of such an agreement, any country that threatened to impose fair corporate taxes would be punished – production (and jobs) would be taken elsewhere. In some cases, countries can call their bluff. Others may feel the risk is too high. But what cannot be escaped are customers.

The US by itself could go a long way to moving reform along: any firm selling goods there could be obliged to pay a tax on its global profits, at say a rate of 30%, based on a consolidated balance sheet, but with a deduction for corporate profits taxes paid in other jurisdictions (up to some limit). In other words, the US would set itself up as enforcing a global minimum tax regime. Some might opt out of selling in the US, but I doubt that many would.

The problem of multinational corporate tax avoidance is deeper, and requires more profound reform, including dealing with tax havens that shelter money for tax-evaders and facilitate money-laundering. Google and Apple hire the most talented lawyers, who know how to avoid taxes staying within the law. But there should be no room in our system for countries that are complicitous in tax avoidance. Why should taxpayers in Germany help bail out citizens in a country whose business model was based on tax avoidance and a race to the bottom – and why should citizens in any country allow their companies to take advantage of these predatory countries?

To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalisation, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Tax and spendingUS economyEconomicsEconomic policyTax avoidanceCorporate governanceJoseph Stiglitz
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Globalisation isn't just about profits. It's about taxes too | Joseph Stiglitz

Big corporates are gaming one nation's taxpayers against another's: we need a global deal to make them pay their way

The world looked on agog as Tim Cook, the head of Apple, said his company had paid all the taxes owed – seeming to say that it paid all the taxes it should have paid. There is, of course, a big difference between the two. It's no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the supreme court, in its Citizens United case seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction didn't endow corporations with a sense of moral responsibility; and they have the Plastic Man capacity to be everywhere and nowhere at the same time – to be everywhere when it comes to selling their products, and nowhere when it comes to reporting the profits derived from those sales.

Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organisational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society.

It is not even true that higher corporate tax rates would necessarily significantly decrease investment. As Apple has shown, it can finance anything it wants to with debt – including paying dividends, another ploy to avoid paying their fair share of taxes. But interest payments are tax deductible – which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment. And with the low rate of taxation on capital gains, returns on equity are treated even more favorably. Still more benefits accrue from other details of the tax code, such as accelerated depreciation and the tax treatment of research and development expenditures.

It is time the international community faced the reality: we have an unmanageable, unfair, distortionary global tax regime. It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today – with America standing out in the forefront and the UK not far behind. It is the starving of the public sector which has been pivotal in America no longer being the land of opportunity – with a child's life prospects more dependent on the income and education of its parents than in other advanced countries.

Globalisation has made us increasingly interdependent. These international corporations are the big beneficiaries of globalisation – it is not, for instance, the average American worker and those in many other countries, who, partly under the pressure from globalisation, has seen his income fully adjusted for inflation, including the lowering of prices that globalisation has brought about, fall year after year, to the point where a fulltime male worker in the US has an income lower than four decades ago. Our multinationals have learned how to exploit globalisation in every sense of the term – including exploiting the tax loopholes that allow them to evade their global social responsibilities.

The US could not have a functioning corporate income tax system if we had elected to have a transfer price system (where firms "make up" the prices of goods and services that one part buys from another, allowing profits to be booked to one state or another). As it is, Apple is evidently able to move profits around to avoid Californian state taxes. The US has developed a formulaic system, where global profits are allocated on the basis of employment, sales and capital goods. But there is plenty of room to further fine-tune the system in response to the easier ability to shift profits around when a major source of the real "value-added" is intellectual property.

Some have suggested that while the sources of production (value added) are difficult to identify, the destination is less so (though with reshipping, this may not be so clear); they suggest a destination-based system. But such a system would not necessarily be fair – providing no revenues to the countries that have borne the costs of production. But a destination system would clearly be better than the current one.

Even if the US were not rewarded for its global publicly supported scientific contributions and the intellectual property built on them, at least the country would be rewarded for its unbridled consumerism, which provides incentives for such innovation. It would be good if there could be an international agreement on the taxation of corporate profits. In the absence of such an agreement, any country that threatened to impose fair corporate taxes would be punished – production (and jobs) would be taken elsewhere. In some cases, countries can call their bluff. Others may feel the risk is too high. But what cannot be escaped are customers.

The US by itself could go a long way to moving reform along: any firm selling goods there could be obliged to pay a tax on its global profits, at say a rate of 30%, based on a consolidated balance sheet, but with a deduction for corporate profits taxes paid in other jurisdictions (up to some limit). In other words, the US would set itself up as enforcing a global minimum tax regime. Some might opt out of selling in the US, but I doubt that many would.

The problem of multinational corporate tax avoidance is deeper, and requires more profound reform, including dealing with tax havens that shelter money for tax-evaders and facilitate money-laundering. Google and Apple hire the most talented lawyers, who know how to avoid taxes staying within the law. But there should be no room in our system for countries that are complicitous in tax avoidance. Why should taxpayers in Germany help bail out citizens in a country whose business model was based on tax avoidance and a race to the bottom – and why should citizens in any country allow their companies to take advantage of these predatory countries?

To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalisation, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Tax and spendingUS economyEconomicsEconomic policyTax avoidanceCorporate governanceJoseph Stiglitz
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Japan banks on success of Abenomics | Joseph Sitglitz

Shinzo Abe is doing what many economists have been calling for in the US and Europe: a comprehensive programme entailing monetary, fiscal, and structural policies

The Japanese prime minister Shinzo Abe's programme for his country's economic recovery has led to a surge in domestic confidence. But to what extent can "Abenomics" claim credit?

Interestingly, a closer look at Japan's performance over the past decade suggests little reason for persistent bearish sentiment. Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century. With a shrinking labour force, the standard estimate for Japan in 2012 – that is, before Abenomics – had output per employed worker growing by 3.08% year on year. That is considerably more robust than in the United States, where output per worker grew by just 0.37% last year, and much stronger than in Germany, where it shrank by 0.25%.

Nonetheless, as many Japanese rightly sense, Abenomics can only help the country's recovery. Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive programme entailing monetary, fiscal, and structural policies. Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can.

The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as president of the Asian Development Bank. During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US treasury and the International Monetary Fund. Not wedded to central bankers' obsolete doctrines, he has made a commitment to reverse Japan's chronic deflation, setting an inflation target of 2%.

Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.

Kuroda's stance has already weakened the yen's exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary policy interdependence: if the US Federal Reserve's policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Some day, we might achieve closer global monetary-policy co-ordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.

Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners' refinancing problems, even at lower interest rates, or small and medium-size enterprises' lack of access to financing. Japan's monetary policy, one hopes, will focus on such critical issues.

But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: how would Japan's economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. Second, anyone visiting Japan recognises the benefits of its infrastructure investments (America could learn a valuable lesson here).

The real challenge will be in designing the third arrow, what Abe refers to as "growth". This includes policies aimed at restructuring the economy, improving productivity, and increasing labour-force participation, especially by women.

Some talk about "deregulation" – a word that has rightly fallen into disrepute following the global financial crisis. In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.

What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition. But many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations. Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers' wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March.

Government efforts to increase productivity in the service sector probably will be particularly important. For example, Japan is in a good position to exploit synergies between an improved healthcare sector and its world-class manufacturing capabilities, in the development of medical instrumentation.

Family policies, together with changes in corporate labour practices, can reinforce changing mores, leading to greater (and more effective) female workforce participation. While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.

There is every reason to believe that Japan's strategy for rejuvenating its economy will succeed: the country benefits from strong institutions, has a well-educated labour force with superb technical skills and design sensibilities, and is located in the world's most (only?) dynamic region. It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.

If the comprehensive agenda that Abe has laid out is executed well, today's growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.

EconomicsYenJapanCurrenciesJoseph Stiglitz
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Citizens in Europe are rejecting austerity policies as deeply misguided | Joseph Stiglitz

The eurozone needs reform, but devaluation, lower output and rising debt across the continent are nothing but a toxic brew

The outcome of the Italian elections should send a clear message to Europe's leaders: the austerity policies that they have pursued are being rejected by voters.

The European project, as idealistic as it was, was always a top-down endeavour. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery.

While Europe's leaders shy away from the word, the reality is that much of the EU is in depression.

The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930s. The youth unemployment rate in Greece now exceeds 60%, and the figure for Spain is above 50%.

With the destruction of human capital, Europe's social fabric is tearing, and its future is being thrown into jeopardy.

The economy's doctors say that the patient must stay the course. Political leaders who suggest otherwise are labelled populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.

It will take 10 years or more to recover the losses incurred in this austerity process.

It is neither populism nor shortsightedness that has led citizens to reject the policies imposed upon them. Rather, it is an understanding that these policies are deeply misguided.

Europe's talents and resources – its physical, human, and natural capital – are the same today as they were before the crisis began. The problem is that the prescriptions imposed are leading to massive under-utilisation of these resources. Whatever Europe's problem, a response that entails waste on this scale cannot be the solution.

The simplistic diagnosis of Europe's woes – that the crisis countries were living beyond their means – is, at least partly, wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.

An alternative set of well-discussed policies could work. Europe needs greater fiscal federalism, not just centralised oversight of national budgets.

Europe might not need the two-to-one ratio of federal to state spending found in the US; but it clearly needs far more European-level expenditure, unlike the miniscule EU budget (whittled down further by austerity advocates).

A banking union, too, is needed. But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision. There will also have to be eurobonds, or an equivalent instrument.

European leaders recognise that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy.

Yet years have gone by and no growth strategy is on the table – though its components are well known, being policies that address Europe's internal imbalances and Germany's huge external surplus, which now is on par with China's (and more than twice as high relative to GDP).

That means wage increases in Germany, and industrial policies that promote exports and productivity in Europe's peripheral economies.

What will not work, at least for most eurozone countries, is internal devaluation – that is, forcing down wages and prices – as this would increase the debt burden for households, firms, and governments (which overwhelmingly hold euro-denominated debts).

And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy.

If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. Internal devaluation, combined with austerity and the single-market principle (which facilitates capital flight and the haemorrhaging of banking systems), is a toxic combination.

The European project was, and is, a great political idea. It has the potential to promote prosperity and peace. But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries.

Europe's leaders repeatedly vow to do everything necessary to save the euro. The promise of Mario Draghi, president of the European Central Bank, to do "whatever it takes" has succeeded in creating temporary calm.

But Germany has consistently rejected every policy that would provide a long-term solution.

Of course, the Germans have reluctantly come to accept the necessity of a banking union that includes common deposit insurance. But the pace with which the country accedes to such reforms is out of kilter with the markets. Banking systems in several countries are already on life support. How many more will be in intensive care before a banking union becomes a reality?

Europe needs structural reform, as austerity advocates insist. But it is structural reform of the eurozone's institutional arrangements, not reforms within individual countries, that will have the greatest impact. Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.

The EU's economic and monetary union was a means to an end, not an end in itself. The European electorate seems to have recognised that, under current arrangements, the euro is undermining the very purposes for which it was supposedly created. That is the simple truth that Europe's leaders have yet to grasp.

Copyright: Project Syndicate, 2013

EuropeEurozone crisisEuropean monetary unionEuroMarket turmoilGermanyItalyEuropean Central BankEuropean UnionEuroEconomicsProject SyndicateJoseph Stiglitz
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Climate change and poverty have not gone away | Joseph Stiglitz

An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run

In the shadow of the euro crisis and America's fiscal cliff, it is easy to ignore the global economy's long-term problems. But, while we focus on immediate concerns, they continue to fester, and we overlook them at our peril.

The most serious is global warming. While the global economy's weak performance has led to a corresponding slowdown in the increase in carbon emissions, it amounts to only a short respite. And we are far behind the curve: because we have been so slow to respond to climate change achieving the targeted limit of a 2C rise in global temperature will require sharp reductions in emissions in the future.

Some suggest that, given the economic slowdown, we should put global warming on the backburner. On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth.

At the same time, the pace of technological progress and globalisation necessitates rapid structural changes in both developed and developing countries alike. Such changes can be traumatic, and markets often do not handle them well.

Just as the Great Depression arose in part from the difficulties in moving from a rural, agrarian economy to an urban, manufacturing one, so today's problems arise partly from the need to move from manufacturing to services. New firms must be created, and modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises, especially small- and medium-size companies.

Moreover, making the transition requires investments in human capital that individuals often cannot afford. Among the services that people want are health and education, two sectors in which government naturally plays an important role (owing to inherent market imperfections in these sectors and concerns about equity).

Before the 2008 crisis there was much talk of global imbalances, and the need for the trade-surplus countries, such as Germany and China, to increase their consumption. That issue has not gone away; indeed, Germany's failure to address its chronic external surplus is part and parcel of the euro crisis. China's surplus, as a percentage of GDP, has fallen, but the long-term implications have yet to play out.

America's overall trade deficit will not disappear without an increase in domestic savings and a more fundamental change in global monetary arrangements. The former would exacerbate the country's slowdown, and neither change is on the cards. As China increases its consumption it will not necessarily buy more goods from the United States. In fact, it is more likely to increase consumption of non-traded goods – such as health care and education – resulting in profound disturbances to the global supply chain, especially in countries that had been supplying the inputs to China's manufacturing exporters.

Finally, there is a worldwide crisis in inequality. The problem is not only that the top income groups are getting a larger share of the economic pie, but also that those in the middle are not sharing in economic growth, while in many countries poverty is increasing. In the US equality of opportunity has been exposed as a myth.

While the Great Recession has exacerbated these trends, they were apparent long before its onset. Indeed, I (and others) have argued that growing inequality is one of the reasons for the economic slowdown, and is partly a consequence of the global economy's deep, ongoing structural changes.

An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run. Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions and arrangements will be called into question.

The good news is that the gap between the emerging and advanced countries has narrowed greatly in the last three decades. Nonetheless, hundreds of millions of people remain in poverty, and there has been only a little progress in reducing the gap between the least developed countries and the rest.

Here, unfair trade agreements – including the persistence of unjustifiable agricultural subsidies, which depress the prices upon which the income of many of the poorest depend – have played a role. The developed countries have not lived up to their promise in Doha in November 2001 to create a pro-development trade regime, or to their pledge at the G8 summit in Gleneagles in 2005 to provide significantly more assistance to the poorest countries.

The market will not, on its own, solve any of these problems. Global warming is a quintessential "public goods" problem. To make the structural transitions that the world needs we need governments to take a more active role – at a time when demands for cutbacks are increasing in Europe and the US.

As we struggle with today's crises, we should be asking whether we are responding in ways that exacerbate our long-term problems. The path marked out by the deficit hawks and austerity advocates both weakens the economy today and undermines future prospects. The irony is that, with insufficient aggregate demand the major source of global weakness today, there is an alternative: invest in our future, in ways that help us to address simultaneously the problems of global warming, global inequality and poverty, and the necessity of structural change.

Copyright: Project Syndicate, 2013

EconomicsGlobal economyClimate changeFinancial crisisUS economyChinaFiscal cliffJoseph Stiglitz
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US needs a financial system that tackles inequality | Joseph Stiglitz

The system's focus must shift from speculative and proprietary trading to lending and job creation

After a hard-fought election campaign, costing well in excess of $2bn, it seems to many observers that not much has changed in American politics: Barack Obama is still president, the Republicans still control the House of Representatives, and the Democrats still have a majority in the Senate.

With America facing a "fiscal cliff" – automatic tax increases and spending cuts at the start of 2013 that will most likely drive the economy into recession unless bipartisan agreement on an alternative fiscal path is reached – could there be anything worse than continued political gridlock?

In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes in the US may doom Republican extremism. The Republicans' explicit campaign of disenfranchisement in some states – such as Pennsylvania, where they tried to make it more difficult for African-Americans and Latinos to register to vote – backfired: those whose rights were threatened were motivated to turn out and exercise them. In Massachusetts, Elizabeth Warren, a Harvard law professor and tireless warrior for reforms to protect ordinary citizens from banks' abusive practices, won a seat in the Senate.

Some of Mitt Romney's advisers seemed taken aback by Obama's victory: wasn't the election supposed to be about economics? They were confident that Americans would forget how the Republicans' deregulatory zeal had brought the economy to the brink of ruin, and that voters had not noticed how their intransigence in Congress had prevented more effective policies from being pursued in the wake of the 2008 crisis. Voters, they assumed, would focus only on the current economic malaise.

The Republicans should not have been caught off-guard by Americans' interest in issues such as disenfranchisement and gender equality. While these issues strike at the core of a country's values – of what we mean by democracy and limits on government intrusion into individuals' lives – they are also economic issues. As I explain in my book The Price of Inequality, much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence – and use that influence to entrench themselves. Obviously, issues such as reproductive rights and gay marriage have large economic consequences as well.

In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to healthcare for millions of Americans.

Beyond that, here is what Americans should hope for: a strong "jobs" bill – based on investments in education, health care, technology, and infrastructure – that would stimulate the economy, restore growth, reduce unemployment, and generate tax revenues far in excess of its costs, thus improving the country's fiscal position. They might also hope for a housing programme that finally addresses America's foreclosure crisis.

A comprehensive programme to increase economic opportunity and reduce inequality is also needed – its goal being to remove, within the next decade, America's distinction as the advanced country with the highest inequality and the least social mobility. This implies, among other things, a fair tax system that is more progressive and eliminates the distortions and loopholes that allow speculators to pay taxes at a lower effective rate than those who work for a living, and that enable the rich to use the Cayman Islands to avoid paying their fair share.

America – and the world – would also benefit from a US energy policy that reduces reliance on imports not just by increasing domestic production, but also by cutting consumption, and that recognises the risks posed by global warming. Moreover, America's science and technology policy must reflect an understanding that long-term increases in living standards depend upon productivity growth, which reflects technological progress that assumes a solid foundation of basic research.

Finally, the US needs a financial system that serves all of society, rather than operating as if it were an end in itself. That means that the system's focus must shift from speculative and proprietary trading to lending and job creation, which implies reforms of financial-sector regulation, and of anti-trust and corporate-governance laws, together with adequate enforcement to ensure that markets do not become rigged casinos.

Globalisation has made all countries more interdependent, in turn requiring greater global co-operation. We might hope that America will show more leadership in reforming the global financial system by advocating for stronger international regulation, a global reserve system, and better ways to restructure sovereign debt; in addressing global warming; in democratising the international economic institutions; and in providing assistance to poorer countries.

Americans should hope for all of this, though I am not sanguine that they will get much of it. More likely, America will muddle through – here another little programme for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming.

With the euro crisis likely to continue unabated, America's continuing malaise does not bode well for global growth. Even worse, in the absence of strong American leadership, longstanding global problems – from climate change to urgently needed reforms of the international monetary system – will continue to fester. Nonetheless, we should be grateful: it is better to be standing still than it is to be heading in the wrong direction.

Copyright: Project Syndicate, 2012

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World wants Obama to win US election | Joseph Stiglitz

The rest of the world has a lot riding on the US election – but, unfortunately, no influence on the outcome

Most people around the world will not be able to vote in the upcoming United States presidential election, even though they have a great deal at stake in the result. Overwhelmingly, non-US citizens favour Barack Obama's re-election over a victory for his challenger, Mitt Romney. There are good reasons for this.

In terms of the economy, the effects of Romney's policies in creating a more unequal and divided society would not be directly felt abroad. But, in the past, for better and for worse, others have often followed America's example. Many governments quickly subscribed to Ronald Reagan's mantra of deregulated markets – policies that eventually brought about the worst global recession since the 1930s. Other countries that followed America's lead have experienced growing inequality – more money at the top, more poverty at the bottom, and a weaker middle class.

Romney's proposed contractionary policies – the attempt to reduce deficits prematurely, while the US economy is still frail – will almost surely weaken America's already anaemic growth, and, if the euro crisis worsens, it could bring on another recession. At that point, with US demand shrinking, the rest of the world would indeed feel the economic effects of a Romney presidency quite directly.

That raises the question of globalisation, which entails concerted action on many fronts by the international community. But what is required with regard to trade, finance, climate change and a host other areas is not being done. Many people attribute these failures partly to an absence of American leadership. But, while Romney may summon bravado and strong rhetoric, other world leaders would be unlikely to follow him, owing to the belief (correct in my judgment) that he would take the US – and them – in the wrong direction.

American "exceptionalism" may sell well at home, but it does poorly abroad. President George W Bush's Iraq war – arguably a violation of international law – showed that though America spends almost as much on defence as the rest of the world combined, it could not pacify a country with less than 10% of its population and less than 1% of its GDP.

Moreover, it turned out that US-style capitalism was neither efficient nor stable. With most Americans' incomes stagnating for a decade and a half, it was clear that the US economic model was not delivering for most citizens, whatever official GDP data said. Indeed, the model blew up even before Bush left office. Together with the abuses of human rights under his administration, the Great Recession – the predictable (and predicted) consequence of his economic policies – did as much to weaken America's soft power as the wars in Iraq and Afghanistan did to weaken the credibility of its military power.

In terms of values – namely, the values of Romney and his running mate, Paul Ryan – things are not much better. For example, every other advanced country recognises the right to accessible health care, and Obama's Affordable Care Act represents a significant step toward that goal. But Romney has criticised this effort, and has offered nothing in its place.

America now has the distinction of being among the advanced countries that afford the least equality of opportunity to their citizens. And Romney's drastic budget cutbacks, targeted at the poor and middle class, would further impede social mobility. At the same time, he would expand the military, spending more money on weapons that do not work against enemies that do not exist, enriching defence contractors like Halliburton at the expense of desperately needed public investment in infrastructure and education.

While Bush is not on the ballot, Romney has not really distanced himself from the Bush administration's policies. On the contrary, his campaign has featured the same advisers, the same devotion to higher military spending, the same belief that tax cuts for the rich are the solution to every economic problem, and the same fuzzy budget maths.

Consider, for example, the three issues that are at the centre of the global agenda mentioned earlier: climate change, financial regulation, and trade. Romney has been silent on the first, and many in his party are "climate deniers". The world cannot expect genuine leadership from Romney there.

As for financial regulation, while the recent crisis has highlighted the need for stricter rules, agreement on many issues has proven to be elusive, partly because the Obama administration is too close to the financial sector. With Romney, though, there would be no distance at all: metaphorically speaking, he is the financial sector.

One financial issue on which there is global agreement is the need to close down offshore bank havens, which exist mainly for purposes of tax evasion and avoidance, money laundering and corruption. Money does not go to the Cayman Islands because sunshine makes it grow faster; this money thrives on the absence of sunshine. But, with Romney unapologetic about his own use of Cayman banks, we are unlikely to see progress even in this area.

On trade, Romney promises to launch a trade war with China, and to declare it a currency manipulator on Day One – a promise that gives him little wiggle room. He refuses to note the yuan's large real appreciation in recent years, or to acknowledge that, while changes in China's exchange rate may affect the bilateral trade deficit, what matters is America's multilateral trade deficit. A stronger yuan would simply mean a switch in the US from China to lower-cost producers of textiles, apparel and other goods.

The irony – again lost on Romney – is that other countries are accusing the US of currency manipulation. After all, one of the main benefits of the Federal Reserve's policy of "quantitative easing" – perhaps the only channel with a significant effect on the real economy – derives from the depreciation of the US dollar.

The world has a lot riding on America's election. Unfortunately, most people who will be affected by it – almost the entire world – will have no influence on the outcome.

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Adding liquidity is not enough | Joseph Stiglitz

The Fed and the ECB have taken extraordinary measures to combat the recession but what we really need are growth measures: financial-sector reforms that boost lending

Central banks on both sides of the Atlantic took extraordinary monetary policy measures in September: the long awaited "QE3" (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank's announcement that it will purchase unlimited volumes of troubled eurozone members' government bonds. Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs.

Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending.

In fact, both the critics' fears and the optimists' euphoria are unwarranted. With so much underutilised productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal.

Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited.

Second, the Fed's announcement that it will keep interest rates at extraordinarily low levels through to mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America's.

Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite: further austerity.

But the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth.

In traditional economic models, increased liquidity results in more lending, mostly to investors and sometimes to consumers, thereby increasing demand and employment. But consider a case like Spain, where so much money has fled the banking system – and continues to flee as Europe fiddles over the implementation of a common banking system. Just adding liquidity, while continuing current austerity policies, will not reignite the Spanish economy.

So, too, in the US, the smaller banks that largely finance small- and medium-sized enterprises have been all but neglected. The federal government – under both President George W Bush and Barack Obama – allocated hundreds of billions of dollars to prop up the mega-banks, while allowing hundreds of these crucially important smaller lenders to fail.

But lending would be inhibited even if the banks were healthier. After all, small enterprises rely on collateral-based lending, and the value of real estate – the main form of collateral – is still down one third from its pre-crisis level. Moreover, given the magnitude of excess capacity in real estate, lower interest rates will do little to revive real-estate prices, much less inflate another consumption bubble.

Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well.

But most of the wealthy know that temporary measures result only in a fleeting blip in stock prices – hardly enough to support a consumption splurge. Moreover, reports suggest that few of the benefits of lower long-term interest rates are filtering through to homeowners: the major beneficiaries, it seems, are the banks. Many who want to refinance their mortgages still cannot, because they are "underwater" (owing more on their mortgages than the underlying property is worth).

In other circumstances, the US would benefit from the exchange-rate weakening that follows from lower interest rates – a kind of beggar-thy-neighbour competitive devaluation that would come at the expense of America's trading partners. But, given lower interest rates in Europe and the global slowdown, the gains are likely to be small even here.

Some worry that the fresh liquidity will lead to worse outcomes: a commodity boom, for example, which would act much like a tax on American and European consumers. Older people, who were prudent and held their money in government bonds, will see lower returns, further curtailing their consumption. And low interest rates will encourage firms that do invest to spend on fixed capital like highly automated machines, thereby ensuring that, when recovery comes, it will be relatively jobless. In short, the benefits are at best small.

In Europe, monetary intervention has greater potential to help – but with a similar risk of making matters worse. To allay anxiety about government profligacy, the ECB built conditionality into its bond-purchase programme. But if the conditions operate like austerity measures – imposed without significant accompanying growth measures – they will be more akin to bloodletting: the patient must risk death before receiving genuine medicine. Fear of losing economic sovereignty will make governments reluctant to ask for ECB help, and only if they ask will there be any real effect.

There is a further risk for Europe: if the ECB focuses too much on inflation, while the Fed tries to stimulate the US economy, interest-rate differentials will lead to a stronger euro (at least relative to what it otherwise would be), undermining Europe's competitiveness and growth prospects.

For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending.

The current downturn, already a half-decade long, will not end anytime soon. That, in a nutshell, is what the Fed and the ECB are saying. The sooner our leaders acknowledge it, the better.

© Project Syndicate, 2012.

EconomicsBankingGlobal economyUS economyEuropean Central BankFederal ReserveFinancial crisisJoseph Stiglitz
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Mitt Romney's tax avoidance weakens bonds of American society

If politicians and those around them do not pay their fair share of taxes, how can we expect that anyone else will?

Mitt Romney's income taxes have become a major issue in the American presidential campaign. Is this just petty politics, or does it really matter? In fact, it does matter – and not just for Americans.

A major theme of the underlying political debate in the United States is the role of the state and the need for collective action. The private sector, while central in a modern economy, cannot ensure its success alone. For example, the financial crisis that began in 2008 demonstrated the need for adequate regulation.

Moreover, beyond effective regulation (including ensuring a level playing field for competition), modern economies are founded on technological innovation, which in turn presupposes basic research funded by government. This is an example of a public good – things from which we all benefit, but that would be under-supplied (or not supplied at all) were we to rely on the private sector.

Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure. Economies in which government provides these public goods perform far better than those in which it does not.

But public goods must be paid for, and it is imperative that everyone pays their fair share. While there may be disagreement about what that entails, those at the top of the income distribution who pay 15% of their reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reported to US authorities) clearly are not paying their fair share.

There is an old adage that a fish rots from the head. And if no one does, how can we expect to finance the public goods that we need?

Democracies rely on a spirit of trust and co-operation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.

More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and co-operation can survive only if there is a belief that the system is fair. Recent research has shown that a belief that the economic system is unfair undermines both co-operation and effort. Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice.

The billionaire investor Warren Buffett argues that he should pay only the taxes that he must, but that there is something fundamentally wrong with a system that taxes his income at a lower rate than his secretary is required to pay. He is right. Romney might be forgiven were he to take a similar position. Indeed, it might be a Nixon-in-China moment: a wealthy politician at the pinnacle of power advocating higher taxes for the rich could change the course of history.

But Romney has not chosen to do so. He evidently does not recognise that a system that taxes speculation at a lower rate than hard work distorts the economy. Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie.

Those at the top include a disproportionate number of monopolists who increase their income by restricting production and engaging in anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.

Today, a deficiency of aggregate demand afflicts almost all advanced countries, leading to high unemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption. There is now a growing recognition of the link between inequality and economic instability and weakness.

There is another vicious circle: economic inequality translates into political inequality, which in turn reinforces the former, including through a tax system that allows people like Romney – who insists that he has been subject to an income-tax rate of "at least 13%" for the last 10 years – not to pay their fair share. The resulting economic inequality – a result of politics as much as market forces – contributes to today's overall economic weakness.

Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish.

But, even more important, tax avoidance on Romney's scale undermines belief in the system's fundamental fairness, and thus weakens the bonds that hold a society together.

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Dear George Osborne, it's time for Plan B, say top economists

Seven leading economists on what chancellor George Osborne should do to revive the ailing UK ecomomy

It all seems so long ago. Barack Obama was a senator from Illinois running for the White House. Sven-Göran Eriksson was the manager of mid-table Manchester City. Harry Potter And The Deathly Hallows, the seventh and last in the series, was published. That was the world in the summer of 2007 as the UK entered a financial and economic crisis from which it has yet to recover.

Famine has followed feast. In the years leading up to the crash, the banks took bigger and bigger bets and consumers borrowed against the rising value of their homes. Growth averaged 3% a year between 2001 and 2007 – a time of leveraged buyouts, of private equity deals, and of an anything-goes culture in the City.

The years since have seen the biggest fall in output since the second world war, a short-lived and modest recovery, and a relapse. The double-dip recession Britain has been enduring since last autumn is only the second since modern records began and, unless things improve, it will take until 2014 or 2015 for the economy to get back to where it was before the recession started in early 2008.

There is little expectation that they will. Britain's economic weaknesses – too much reliance on debt-driven growth, too big a financial sector, too narrow an industrial base – were papered over during the good years but have subsequently been exposed as banks have turned off the credit tap and consumers have been either unwilling or unable to borrow.

The worst of the crisis came in the 19-month period between the run on Northern Rock in September 2007 and the G20 summit held in London in April 2009. Gordon Brown's Labour government part-nationalised Royal Bank of Scotland and Lloyds, and allowed public borrowing to rise in the hope that tax cuts and spending on the infrastructure would put a floor under the economy. The Bank of England cut interest rates to 0.5%, the lowest in its history, and cranked up the electronic printing presses.

To little real effect. In 2009, the economy contracted and by the time the coalition government came to power in May 2010, the budget deficit had risen to the highest it had ever been in peacetime. George Osborne, the new chancellor, said it was time for the government to do what businesses and consumers had been doing: tighten its belt.

Osborne's plan was that the economy would become less dependent on consumer spending and the state for its growth. Instead, low interest rates, a weak pound and action to tackle the deficit would encourage companies to invest and export. Things have not gone according to plan. Consumers, hurt by high inflation, have been reluctant to spend and Whitehall cutbacks have started to bite. But the debt crisis in the eurozone, coupled with a sluggish global economy, have made exporting difficult, while businesses have mothballed investment projects until growth starts to recover. All four of the elements that make up growth – consumer spending, government spending, investment and exports – are struggling, which is why the economy is going nowhere fast. George Osborne has been insistent that there is no plan B. But should there be? And if so, what should it look like? Here, seven leading economists give him their ideas. Larry Elliott

Joseph Stiglitz

Dear George
The good news is, you're not part of the euro. So my first piece of advice would be, don't join! And second, call off the mad austerity. No large economy has ever recovered from a downturn as a result of austerity. It is a certain recipe for exacerbating the recession and inflicting unnecessary pain on the economy.

Any additional spending should address the longer term problems – inequality and industrial restructuring – and target the most needy in society who, because of the downturn, are suffering the most. A more progressive tax structure – higher taxes at the top, lower taxes at the bottom – would stimulate the economy. Taxing the excessive speculation that goes on in the financial sector would also be a good thing.

There's a basic economic principle called the balance budget multiplier. If the government simultaneously raises taxes and raises spending, by the same amount, it stimulates the economy and creates jobs. Instead, both the US and the UK have embarked on a policy of austerity, but at least Obama realised he needed a larger stimulus and has been pushing for it. The Conservatives have taken the other stance, and it hasn't worked out.

Joseph Stiglitz is Professor of Economics at Columbia University and author of The Price Of Inequality (Allen Lane).

Paul Krugman

Dear George
The answer is: start over. The UK is basically the same as the US. You've got a private sector that got too far into debt, everyone's trying to pay it down at the same time, and the government needs to be going in the other direction, not adding to that. Undo that austerity. You can currently borrow at real rates that are essentially zero, so this is a good time to be increasing public investment.

The UK is fairly unique, it having gratuitously chosen to pursue austerity. The eurozone countries have little alternative, but Cameron really didn't have to do this. So my message to you is: do the opposite of what you've been doing for the last two years. The credit ratings don't matter at all, so this argument about austerity keeping Britain's triple A rating doesn't make sense. This is a time for the UK government to be borrowing and spending. Boost the economy and give the private sector time to de-leverage. By all means lock in austerity for the medium to long run, but not now. If everyone tries to slash spending at the same time, that's a recipe for what you've got: a depressed economy.

Paul Krugman is Professor of Economics at Princeton University and author of End This Depression Now! (WW Norton).

Vicky Pryce

Dear George
The government needs to appreciate its own position of strength – long-term borrowing rates are very low, the markets have accepted with hardly a murmur the delaying of plans to eliminate the government budget deficit by a couple of years already. In the meantime, there is a golden opportunity to borrow and spend on housing; on roads and rail upgrades, not HS2; to signal a willingness to allow airport capacity expansion (at Heathrow and Gatwick), which will be paid for by the private sector; and during all this remain resolutely pro-business but not pro-excessive rewards that create perverse incentives and inequality. Tax and spending incentives must be aligned with a constant eye to the long-term competitiveness of the British economy, but also what might work in the short term – for example, capital allowances, some temporary tax cuts, extra help to small- and medium-sized firms. In other words, develop an industrial strategy for the UK and start implementing it immediately.

Vicky Pryce is a City economist and former joint head of the Government Economic Service .

Kenneth Rogoff

Dear George
There is no miracle cure. Instead of taking a year to recover, as after a typical recession, full recovery after a financial crisis can easily take another decade or more. There is no shortage of polemicists who argue that the UK should run even larger deficits in view of today's extraordinarily low short-term interest rates. This is classic short-term thinking.

All the advanced countries, including the UK, could probably benefit from having higher inflation for a few years. This would help facilitate downward adjustment in the real (inflation adjusted) value of wages and houses, and also achieve a modest deleveraging of public- and private-sector debt. But the best way to deal with a long-term problem is through long-term growth-enhancing structural reforms. For example, revitalising Britain's infrastructure. Along with improving primary and secondary education, the UK would do well to ask what bottlenecks might be preventing faster growth in technology and biotech firms surrounding the UK's world-class university systems. Most British banks are currently forced to pay a premium for funds, which is in turn affecting lending rates to businesses, so more aggressive recapitalisation of the banking system to promote greater competition might help ease lending conditions, and promote investment.

There is no quick Keynesian fix. A short-term strategy that neglects the long-term fundamentals is not what Britain needs right now.

Kenneth Rogoff is Professor of Economics at Harvard University.

Robert Skidelsky

Dear George
Cutting public spending when there is no other source of growth in the economy is a sure-fire strategy for recession. As if the lack of recovery wasn't bad enough, the lack of growth also scuppers your deficit-reduction goals – the very reason for austerity in the first place. Like throwing away the engine to trim a car, you have offset the lack of revenue recovery by slashing capital spending. The results are already being seen in the forecasts: there will be no spurt of growth to regain the losses of the recession. The best we can hope for is a slow crawl along the bottom.

Is there a way out? Initiatives such as the National Infrastructure Plan and the Green Investment Bank aim to mobilise private money behind growth-boosting capital projects, but they lack the financial backing to have a real impact. The government has promised less than £10bn, a fraction of the size of the cuts to public investment. Why not more? Since well-chosen infrastructure and energy-saving projects will be revenue-generating, increasing capital spending does not even have to come at the expense of a higher deficit.

With a chancellor who believes that budgets can be balanced by cutting expenditure without simultaneously boosting demand, we are stuck in a vicious cycle. Unless there is an immediate change of course, your legacy will stare at us in the form of downward-sloping graphs for a long time to come.

Robert Skidelsky is Professor of Political Economy at the University of Warwick and author of How Much Is Enough? (Allen Lane).

Jayati Ghosh

Dear George
Even the International Monetary Fund thinks the government should loosen its belt! The focus has to be on restoring economic activity through increasing public spending. In the medium term, the focus has to shift from obsessing about GDP growth to improving the quality of life of all citizens, which may create quite different economic goals: generating good-quality employment; ensuring universal access to freely available and good-quality social services; reducing economic disparities and material vulnerabilities to get greater social cohesion; and providing ways of living that are less destructive of nature.

The good news is that this can be done – but it requires a different economic approach and possibly therefore different politics as well.

Jayati Ghosh is Professor of Economics, Jawaharlal Nehru University, New Delhi, India.

Steve Keen

Dear George
Debt created by private banks has been the force behind both the apparent prosperity of Britain during the Labour years, and the crisis you are now saddled with. This is because, just as an individual can finance his spending either from his income or via his credit card, a nation spends from either its income or the increase in its debt level. Rising debt reduces unemployment, while falling debt increases it – but of course this is a fool's path to prosperity, because debt can't forever rise faster than income.

You have inherited an economy that has followed that fool's path, and is now deleveraging – and may do so for decades. In this environment, reducing public debt by running a government surplus accelerates the downturn. But the contrary policy – of simply running government deficits – isn't ideal either. You also need to reduce the private debt directly, by what is best described as "Quantitative Easing for the Public". This would give money to the public via their bank accounts, on the condition that those in debt must pay it down, while those without debt would get a cash injection. Debt would be directly reduced, benefiting everyone – except the banks, whose incomes would fall. That surely sounds like radical advice, but without a direct reduction in private debt, Britain faces as many lost decades as Japan has already endured – and without its export surplus to cushion the blow.

Steve Keen is Professor of Economics and Finance at the University of Western Sydney, and author of  Debunking Economics (Zed Books).

• Inset images: Murdo Macleod; David Levene; Linda Nylind; Getty Images (2); James Croucher

George OsborneEconomic policyEconomicsRecessionTax and spendingInflationLarry ElliottJoseph StiglitzVicky PryceKenneth RogoffRobert SkidelskyJayati Ghosh
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