By Joseph E. Stiglitz
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The world survived 2006 without a major economic catastrophe, despite sky-high oil prices and a Middle East spiraling out of control. But the year produced abundant lessons for the global economy, as well as warning signs concerning its future performance.
Unsurprisingly, 2006 brought another resounding rejection of fundamentalist neo-liberal policies, this time by voters in
Perhaps most importantly for the world, voters in the
When Bush assumed the presidency in 2001, many hoped that he would govern competently from the center. More pessimistic critics consoled themselves by questioning how much harm a president can do in a few years. We now know the answer: a great deal.
Never has
In fact, we should be careful not to read too much into the 2006 vote: Americans do not like being on the losing side of any war. It was this failure, and the quagmire into which America had once again so confidently stepped, that led voters to reject Bush. But the Middle East chaos wrought by the Bush years also represents a central risk to the global economy. Since the Iraq war began in the 2003, oil output from the Middle East, the world’s lowest-cost producer, has not grown as expected to meet rising world demand. Although most forecasts suggest that oil prices will remain at or slightly below their current level, this is largely due to a perceived moderation of growth in demand, led by a slowing
Of course, a slowing
This economic strategy was not sustainable. Household savings became negative for the first time since the Great Depression, with the country borrowing $3 billion a day from foreigners. But households could continue to take money out of their houses only as long as prices continued to rise and interest rates remained low. Thus, higher interest rates and falling house prices does not bode well for the American economy. Indeed, according to some estimates, roughly 80% of the increase in employment and almost two-thirds of the increase in GDP in recent years stemmed directly or indirectly from real estate.
Making matters worse, unrestrained government spending further buoyed the economy during the Bush years, with fiscal deficits reaching new heights, making it difficult for the government to step in now to shore up economic growth as households curtail consumption. Indeed, many Democrats, having campaigned on a promise to return to fiscal sanity, are likely to demand a reduction in the deficit, which would further dampen growth.
Meanwhile, persistent global imbalances will continue to produce anxiety, especially for those whose lives depend on exchange rates. Though Bush has long sought to blame others, it is clear that America’s unbridled consumption and inability to live within its means is the major cause of these imbalances. Unless that changes, global imbalances will continue to be a source of global instability, regardless of what
In light of all of these uncertainties, the mystery is how risk premiums can remain as low as they are. Especially with the dramatic reduction in the growth of global liquidity as central banks have successively raised interest rates, the prospect of risk premiums returning to more normal levels is itself one of the major risks the world faces today.
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– Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at Columbia University and was Chairman of the Council of Economic Advisers to President Clinton and Chief Economist and Senior Vice President at the World Bank. His latest book is Making Globalization Work.
Copyright: Project Syndicate, 2006.
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