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17/03/2020 12:25 PM IST

Coronavirus May Cause Worse Economic Crisis Than 2008: Joseph Stiglitz

The pandemic will deliver a shock to both supply and demand, says Joseph Stiglitz, who won the Nobel Prize for economics in 2001.

Nobel Prize-winning economist Joseph E. Stiglitz has a chilling warning for world leaders as they scramble to respond to the novel coronavirus. COVID-19, he says, could lead to a worse economic crisis than that of 2008. 

“The current crisis is more complicated. It is not a financial crisis, but a real crisis affecting the supply and demand system. Monetary policy alone will not be enough because interest rates in Europe are already low, close to zero. It’s the same thing in the United States. The question then is: will fiscal policy work instead?” he told HuffPost Italy in a phone interview from New York.

The pandemic, said the Columbia University professor, will deliver a shock to both supply and demand, pointing out that an increase in demand can’t be the answer if the supply chain is broken.

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The economist, who has written several books including last year’s People, Power, and Profits: Progressive Capitalism for an Age of Discontent, thinks, however, that the coronavirus is an emergency that could also give us positive lessons, if we know how to learn them. This includes the importance of countries staying connected in the age of globalization, collective action and science. 

Above all, he argues, it is an emergency that is not good for the far right, “which has a basic philosophy not suited to respond to a challenge like this”, and could also stop Donald Trump in the next US presidential elections.

Edited excerpts:

Professor Stiglitz, let’s start with your new book ‘People, Power and Profits’. You argue that there is a way to build a form of progressive capitalism: do you still think the same in light of the new coronavirus emergency?

Yes, even more so. The rules of the market economy must be changed. We should have rules that break the monopolies, that prevent imbalances between workers and market giants, we should build collective action, starting with that of governments, and social protection. All this has a lot to do with the COVID-19 emergency. In the face of such a crisis, we all look to national governments and not to the market. We want the government to act, we are concerned about the spread of the virus, we want the government to guarantee us scientific research to get out of this emergency. One of the most disarming things that has happened in the United States with the Trump Administration is the way in which the President has deprived the Center for Disease Control of funds, particularly the section dealing with research into diseases that are transmitted from animals to humans. Trump deliberately deprived them research funds that could be useful for the coronavirus. Furthermore, in these emergencies, we are asking governments to take collective action to treat us in hospitals and to deal with the consequences for the economy: think of the people who will lose their jobs or earn less. We need a progressive capitalist system in order to tackle the crisis we are going through today. Capitalism as we know it today has made us incapable of responding to such a challenge.

What would the consequences of coronavirus be for the 2020 US presidential elections?

Trump has always said that the economic crisis was Obama’s or even Bush’s fault and he claims he won because of it. But now he’s going to have to take responsibility for the stock market crash. The United States is not prepared to respond and he responded so poorly when he should have acted. In the United States, they are testing fewer people than in South Korea and the tests are unreliable because he has taken the funds away from the Center for Disease Control. Trump has made America more vulnerable. Now, the United States is a strange country, there are social groups that would vote for Trump regardless. But I think the vast majority of Americans will realise the responsibilities of a president and administration, denying the role of global cooperation, as incompetent.

ASSOCIATED PRESS
A file photo of Stiglitz. The Columbia University professor, who won the Nobel Prize in 2001, says that an increase in demand can’t be the answer if the supply chain is broken.

Are we facing an economic crisis like the one in 2008 or worse?

I think it’s worse in several ways. In 2008, we had a financial crisis: at the beginning, we did not really understand its nature but many economists diagnosed it, warned about what had to be done. In short, we at least understood what to do, even those who contributed to creating the crisis understood it, even if we did not learn the lesson of the crisis. The current crisis is more complicated. It is not a financial crisis, but a real crisis affecting the supply and demand system. Monetary policy alone will not be enough because interest rates in Europe are already low, close to zero. It’s the same thing in the United States. The question then is: will fiscal policy work instead? We will face a shock to both supply and demand. If the supply chain is broken, an increase in demand will not solve the problem. There are many things that we will have to do, but they have to be tailored. For example, we need to increase the availability of swabs, we need to financially support the workers who are forced to not go to work, small businesses that are at risk of bankruptcy, taxi drivers who will see their earnings collapse, we need to support employees who will lose their jobs. We need a more targeted fiscal policy, than what is needed to deal with a normal economic crisis. In addition, in the United States, we need to make sure that people can go to hospitals: today they do not go because they are afraid of having to pay heavy fees, the Latinos aren’t going because they are afraid of being deported from the United States, which means that we need to change our immigration policy. We need a social policy and not a conventional fiscal policy, especially in the US.

Trump has always said that the economic crisis was Obama’s or even Bush’s fault and he claims he won because of it. But now he’s going to have to take responsibility for the stock market crash. The United States is not prepared to respond and he responded so poorly when he should have acted.

And how do you judge the European Union’s response? Brussels seems willing to grant Italy additional budgetary flexibility to cope with the new emergency. Yet even the coronavirus does not seem to unblock the discussion on the review of the Stability and Growth Pact, which timidly began a month ago. What do you think?

I think that The Stability and Growth Pact should be suspended. You can’t tell Italy, with the emergency it’s going through, ‘No, you can’t build hospitals because it’s not in the budget’. This is a matter of life and death for many Italians. You can’t put Italians at risk just to defend rules that, among other things, have never had economic justification. 3% of the deficit-to-GDP ratio, 60% of the debt-to-GDP ratio have always been arbitrary numbers that have forced Italy’s growth, a country that already before this crisis had budget problems. That someone even has to die to respect these numbers seems to be really excessive to me. The European Union has already proved inconsistent, announcing the ‘Green deal’ and asking national governments to invest in the green economy, while maintaining the same rules. Instead, we must get rid of the criteria of the Stability and Growth Pact, remove the 3% rule, and replace it with a rule that simply encourages investment in the green economy. All the more reason, now that we are facing this coronavirus emergency: it is obvious that we need to suspend and reformulate the rules.

The coronavirus is a far more insidious challenge for the EU than immigration, which has already disfigured the Union by fragmenting it according to national interests. Are there antibodies somewhere for the EU to survive COVID-19?

I think so. Eventually they’ll get together and cooperate. I throw it out there as a provocation: immigration required a European response in terms of hospitality. In this case, the answer is the exact opposite: we need to contain people, to keep them within our borders. So Europe’s natural nationalistic inclination could help to contain the virus (laughs). But cooperation is needed. One of the first answers from the EU was: we cannot suspend Schengen. I was very impressed because that is the wrong answer. The principle of free movement in the Schengen system is important but the principle of epidemic containment is even more important. So I would say that the initial response not to want to suspend Schengen frames things in the wrong way. We are faced with something unique; it does not mean that we must become nationalists, but it means protecting the population.

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What effect does it foresee in European policy? Can the coronavirus help Eurosceptic and nationalist movements, such as Salvini’s Lega and the like?

The coronavirus will have a disruptive effect on policy. In general, however, the far right, which has always been against science and collective action, is not living a lucky time. This is the time when there is a need for science, there is a need for collective action, cooperation. The basic philosophy of the far right is not suitable to respond to a challenge like this. And then, the far right has always exploited people’s fears. This is a moment of great fear but people are also looking for rational answers, or at least I hope so.

But it’s true that the coronavirus puts liberal democracies at risk. In Italy, many people invoke the Chinese model: all locked in their homes by imposition from above. Who wins: the virus or democracy?

Liberal democracies are characterised by two principles: the need for collective action and then the principle that one person’s freedom can harm another person’s freedom, as I write in my book. A liberal democracy must have rules that guarantee the freedom for all. So, if we do not do something about climate change, we undermine the freedom of others. In Italy, for example, you also had the ‘No vax’ movement, those who did not want to vaccinate their children. Your state responded well: if you don’t vaccinate your child, you could put another child’s life at risk. In China, they forced people to stay at home. But they also did it in South Korea and they managed to contain the virus: yet in South Korea there is democracy. This gives us hope that a liberal democracy can succeed.

This is the time when there is a need for science, there is a need for collective action, cooperation. The basic philosophy of the far right is not suitable to respond to a challenge like this.

What kind of world will the coronavirus leave us?

There are three things we could learn from the Coronavirus. One, we’ll realize how interconnected we are globally, much more than we thought. Let me take the example of climate change: when the United States pollutes, the rest of the world suffers. Or, if China does not have a good public health system, the virus can destroy the rest of the world. We must work together on global health, global environment, global knowledge and global research. We live on a small planet, so what happens in one region affects the others. That is why I say that the coronavirus imposes that international cooperation that Trump has been trying to destroy for the last four years. Secondly, we could learn that science is very important. A president of the United States who denies science is really dangerous. Think about how important science is to improve everyone’s life! The third thing is collective action. We will realize that we have to act together, we cannot each move on our own, otherwise we will have the Black Plague again. The ideology of the liberal right to ‘leave it to the market’ will prove inadequate for the challenge.

Now, the coronavirus also has possible benefits...

About the crisis of 2008, it was said: ‘let’s not waste it.’ But then we wasted it: we haven’t learned our lesson. That’s why there are many companies in the United States that have gone into debt and the system hasn’t gone back to pre-crisis times. So with COVID-19, there are lessons we could learn, but it’s not at all certain that we will.

In addition to Covid-19, Europe is facing another immigration emergency on the Turkish-Greek border. In the language of the institutions, the words ‘reception’ or ‘redistribution’ no longer stand out, even in theory. Does this mean that it has in fact won the sovereign recipe?

I don’t think so. I want to hope that Europe is not abandoning its commitment to human rights. But it is understandable that at the moment, it is difficult to manage two crises together. Erdogan somehow caused the crisis by attacking Syria. And Trump gave him the green light. When two authoritarian figures like Erdogan and Trump do not think about the consequences of their actions and impose costs on others with their lack of humanity, others feel empowered to respond that they do not want to bear these costs. This is what happens when two authoritarian figures try to impose themselves by not caring about the rules of democracy.