When Joseph Stiglitz was named to the president's Council of Economic
Advisers in 1993, one pundit named the group "the dream team
of economics," and another writer later dubbed him the council's
Wherever Stiglitz has gone he has made important contributions,
beginning with his work in academia, which included professorships
at Oxford, Princeton and Stanford. His efforts in economic research
earned him the John Bates Clark Medal of
the American Economic Association in 1979, an award given to the most distinguished economist under 40.
After serving the administration through 1996, Stiglitz joined the World
Bank as its senior vice president and chief economist. At the World
Bank, Stiglitz has focused his efforts on how countries can grow, especially
those that have been mired in poverty or that are trying to establish
market economies after years of state-run systems. "We can make a
difference," Stiglitz told officials from around the world at a recent
World Bank conference. "The challenge is to understand what are the
appropriate policies and how to target our assistance to promote growth
and poverty alleviation most effectively."
In the following interview with Arthur Rolnick, Minneapolis
Fed senior vice president and director of research, Stiglitz
discusses the question of appropriate policies for economic
growth, as well as questions relating to trade, banking, inflation
and other issues.
ROLNICK: In our 1996 annual
report essay we suggested that one of the keys to understanding
the differences in economic growth in developing countries is openness
to new technology. We argue that countries that are more open to
new ideas tend to develop faster. What advice is the World Bank
giving to developing countries? What do you see as a government's
role in promoting growth?
STIGLITZ: Well, I looked at it in two parts. One is the
perspective that you raised, that one of the major sources of
economic growth is the transfer of knowledge. We used to think
of the gap between developed and less-developed countries to be
an object gapthe lack of capital. And we now realize that
is one of the factors, but there's another factor that's very,
very important, which is the gap in knowledge. And closing that
gap is one of the most important strategies for development. It
is being reflected even in the way the World Bank conceives of
itself. It talks about itself as being a knowledge bank, as one
of its main roles in promoting development.
The next question is: How do you close that knowledge gap? What
are the strategies that can facilitate the closing of the knowledge
gap? One of the ingredients of that is human capital, something
that the bank and the developing countries have been discussing
for a long time. In order to close the knowledge gap you have
to have the skills to absorb that knowledge. That actually requires
a two-pronged approach. It's important to make sure that all the
populations reach the level of primary education in order to achieve
the basic level of literacy that is essential for a modern society.
You also need to have technical skills. You have to have engineers.
Korea is successful, in part, because they promote those skills,
they have enough engineers to facilitate the transfer of technology.
So clearly that's one aspect of the strategyhuman capital
and very broad, essential skills.
The second part of the approach is openness, being part of the
world community. And again, I think one of the lessons is that
if you look at the enormous success of East Asia, it has really
given a lot of inspiration that says that development is possible.
A country like Korea closing the gap in the space of four decades
shows that with the right policies you can do it.
ROLNICK: How would you explain the success of the South
Korean economy relative to India's? Was openness a key factor?
STIGLITZ: Historically, one of the interesting things
is that 40 years ago per capita income in these two countries
was comparable, and now the gap is enormous. Openness is one of
the factors, yes. India has a well-educated population at the
high end, so that ingredient they had in some sense. And, clearly,
an essential aspect of Korea was not only openness but actual
aggressive attempts to acquire knowledge. So it was more than
a passive openness. It was a government saying that we need to
do everything we can to transfer that technology. And so at various
periods they made big efforts to make sure that a lot of their
students went abroad. They had an active policy of encouraging
exports. And the interesting thing about encouraging exports was
it did two things. One, it ensured that their firms were competitive
and met international standards. And it made them focus on competition,
which I view as one of the real ingredients here. Even though
they were large firms, they were entering into an environment
where they were competing with other firms all over the world.
So competition was one of the ingredients. And the second one
is that by entering into the international market and meeting
international standards they came into contact with knowledge
that inevitably, given their abilities, facilitated importing
knowledge. I view that as a key ingredient.
There is some research that suggests that entering into exports
is more effective in transferring technology than openness to
imports. But I think both of them are important. One of the reasons
why openness on imports is important is that a lot of modern technology
requires specialized intermediate goods. And if you're going to
have a technology that's similar enough to other countries' technologies,
you have to have the input. To give you an example, modern technology
is based on computers, fairly sophisticated computers. A country
that tried to keep out computers just couldn't play in the game
of modern advanced technology.
ROLNICK: So while there may be different impacts between
export policies and import policies, you're essentially arguing
for open trade and it's not just in physical capital, it's in
ideas as well?
STIGLITZ: That's right. But, it's a very different argument
from the traditional arguments for trade. There is a little bit
of evidence that the gains from trade do not come from inter-sectoral
reallocation of resourcesthe traditional economist's view.
The idea being that the gains from trade really come from these
ROLNICK: This is the new literature that suggests there
are gains to trade that we in the profession haven't quantified
STIGLITZ: And this enters very much into thinking about
regional trade arrangements, what the gains and the costs and
benefits that go beyond the traditional debate of trade diversion
vs. trade creation. They address issues like: What will be the
impact of this particular regional trade agreement on technology
ROLNICK: What about NAFTA [North American Free Trade
Agreement]? NAFTA is one of the more recent regional trade agreements.
There are still many critics of NAFTA. Where do you stand?
STIGLITZ: My general stand on regional trade agreements
is that they need to be viewed as a step toward a more open international
set of arrangements. They are intermediate steps. And as intermediate
steps, they need to be evaluated not where they are but where
they lead. So if an intermediate step blocks off the link to the
final step, then it's a step backwards. But if it's really intermediate
. . .
ROLNICK: Some have argued NAFTA was just that, an intermediate
step that was going to lead to a full-blown North American free
trade agreement and then eventually open up to the rest of the
world. Is that a fair view?
STIGLITZ: That, I think, is a fair interpretation of
what those of us who are optimistic about NAFTA believe. There
have been some setbacks over the last couple of years. A lot of
us hoped for fast track authority in Congress that would have
facilitated Chile being brought into the free trade area. And,
in a way, I wish the debate were on the issue of whether the best
way of reaching the free trade area, embracing all of the Americas,
was through fast track accession or a big bang agreement that
would embrace everybody at the same time. That kind of debate
would have made clear what the goal was and the best way of obtaining
it. With some of the protectionist sentiment in Congress, one
worries about whether we've lost sight of what the goal is. And
the fact that there's still much resistance to even a fast track
for Chile suggests that the goal may not be in sight.
ROLNICK: One reason for this resistance is that when
governments make new trade agreements there are going to be winners
and losers. NAFTA attempted to take care of those that would lose.
Has this attempt been successful?
STIGLITZ: Any change has winners and losers. New innovations
have winners and losers. Our attitude toward opening up trade,
which is like an innovation, should be like our attitude toward
somebody discovering a super laser that makes the economy more
ROLNICK: Well, that's easy for an economist to say, but
U.S. politicians have to worry about firms that have to compete
with Mexican firms.
STIGLITZ: I agree. However, once you begin by bringing
the issue of lost opportunities in our society, you can phrase
a question like: How are we going to react to the automobile that
threw the blacksmith out of work? Are we going to say we're not
going to allow the automobile? And from a historical perspective,
do we think it was a mistake to allow the automobile? I think
most of us probably think, aside from maybe being worried about
pollution, that our society is much better off. Now the same argument
goes for opening up trade. We're going to be better off. But,
just like the blacksmiths were hurt, opening up trade leads to
some people being hurt. It really is basically the same principle.
Innovations that make our society more productive have mostly
winners but some losers. And as a society it is incumbent upon
us to ease the transition of those who are hurt. And that principle
was encompassed in NAFTA, and it's one of the things that we need
to continue to focus on.
ROLNICK: Some argue that we should only negotiate free
trade agreements when we're at full employment. Do you agree?
STIGLITZ: No. My view is that good macro-economic policy
overall is the most important part of a jobs program. You've got
good macro-economic policy. You've got the unemployment rate under
5 percent without inflationary pressure. Whatever the cause of
unemployment, whether it's new technology or new trade, people
have to move from one job to another. And so, some of this issue
I think is a red herring. I think we ought to have job transition
programs, period. And the cost of the programs, if we have our
economy running at full employment, is not going to be that great.
People don't want to spend a lot of time in a training program
when they could be out in the labor force. So, I'm not worried
about the overall cost. When the economy has ups and downs, the
cost will go up a little bit, but that's again not bad. People
are training for where the economy goes.
ROLNICK: Let me switch to another controversial issue,
excessive risk-taking by the banks and the role of government
in protecting bank deposits and being a lender of last resort.
Of course, the Federal Reserve was established to be the lender
of last resort in the United States, to prevent systemic problems.
One thing we have found in country after country, whether developed
or underdeveloped, when the government starts to get involved
in the banking sector it tends to overinsure and create moral
hazard in the extreme. The S&L debate in this country is often
cited as a classic example of moral hazard. Last year The
Economist did an article listing five or six major countries
that were having serious banking problems and suggested that over-insurance
was part of the problem. My question here is: In advising governments,
how do you suggest they balance safety for small depositors against
the need for market discipline?
STIGLITZ: Let me challenge your underlying hypothesis.
If you look around the world, there have been banking crises in
countries in which there's no insurance.
ROLNICK: I'm not just talking about explicit insurance,
I'm also talking about the implicit kind, where depositors assume
the government's going to rescue a bank if it gets into trouble.
STIGLITZ: I remember conversations in one country, I
won't mention the name, where they were very proud that they didn't
have deposit insurance. And they said that's what provides the
discipline. And I said, "Well, you know, it's always been a theory
that depositors are good monitors of the behavior of the bank."
In general, the evidence is that the individuals don't have the
requisite information. Furthermore, the financial state of the
bank is a public good, monitoring of that kind is a public good,
and there is therefore a strong rationale for governments to have
The general perspective that I would have is that the problem
comes from a disjunction between providing insurance and providing
the monitoring by the insurance companies. And the government
in most of these cases is an implicit insurer, whether it provides
a formal insurance or not, of the insured. Now, any company that
provides fire insurance to a commercial building puts a stipulation
that there are sprinklers and inspects to make sure the sprinklers
are there. An essential part of all insurance is monitoring. Now,
what has happened in many of these countries is a disjunction
between the implicit or explicit insurance and the monitoring.
And my interpretation of the problems of the '80s in the United
States was exactly that kind of disjunction. It was an ideologically
based regulatory lapse, without an understanding of the fundamental
incentive issues that underlie bank behavior. Of course, there's
a political problem. But ex-post in most of these economies, there
are relatively few banks and the principle of too-big-to-fail
is an inherent part of the problem. So you're not going to walk
away from the issue.
One of the things that we are getting to understand is how best
to undertake regulation, that is, we have a better understanding
of banks. Some of us understood this before, but I think it's
getting outwhat motivates banks and what kinds of information
regulators can use to help them undertake more effective regulation.
For instance, we know the incentives of a bank to undertake excessive
risk depends, in part, on the net worth of the bank. And if the
net worth is very low you get to these issues like gambling on
resurrection. That was part of the problem with the S&Ls.
ROLNICK: The S&Ls with very low net worth are what some
economists called "Zombie thrifts."
STIGLITZ: Zombie thrifts, exactly. And so you recognize
that if banks are in that kind of financial position, their incentivewhether
or not there is insuranceis to gamble.
ROLNICK: Suppose an insured financial institution has
substantial net worth, but the owners are risk neutral or risk
lovers. You still have a moral hazard problem.
STIGLITZ: That's right. So, going back to the theme I
said before of the government being in a better position to monitor,
it can monitor net worthwhich is a different kind of monitoring
than monitoring individual transactionsand as monitor of
net worth, it can increase the likelihood that banks undertake
ROLNICK: Can't we rely on the large, sophisticated depositors
to monitor banks' behavior toward risk?
STIGLITZ: One of the things that good banking regulation
may do is to establish a layer of uninsured capital, which would
presumably be provided by large depositors, which would, in my
view, complement government monitoring. I don't view these as
either/ors. I think good monitoring requires an array of instrumentslarge,
private monitoring, government monitoring of net worth and some
government monitoring of transactions brings this monitoring of
self-dealing. A rule we've established, the intent of which is
to reduce the likelihood of bad behavior, and in which we complement
what you might call the ordinary civil incentive (the criminal
incentive is when you violate this) is again a rule for government.
Government has the role and tries to discourage fraud and makes
fraud a criminal offense. And here is a similar set of actions
that you don't want any bank to undertake because when they undertake
it, it creates a public bad. People won't have confidence in the
And there are two things that we've learned from our general
research. One is that good financial institutions promote economic
growth, that financial mediation is a valuable asset and aspect
of the organization of society. That is how economies grow. And
the other is banking crises inhibit economic growth and have impacts
that last long after the financial crisis.
ROLNICK: The Congress is now considering expanding banking
powers and allowing nonbanks to own banks. In a world in which
the government is going to be the chief monitor, some are worried
that we have enough trouble in monitoring traditional banking
activities. What's your position on how far Congress should go
in deregulating banking?
STIGLITZ: I think that one should proceed very cautiously
in this area. The argument for breaking down some of the restrictions
I find fairly unpersuasive, if only in terms of the way economists
put it. The argument for putting people together are synergy,
economies of scope, I believe is the technical term. I'm not convinced
that somebody who knows how to manage an automobile company well
has learned something that makes him a better manager of a financial
institution. And so I don't see a lot of economies of scope. I
do see lots of potential for danger. That is to say, an owner
of an automobile company might want to use access to the bank
to get loans that it couldn't otherwise get, or to provide loans
to customers it that may not otherwise be able to take. So, though
I can see some dangers, I don't see a lot of advantages from it.
Why should I, as a shareholder, buy a bank through buying shares
in an automobile company that then buys a bank? If I want to own
a bank I probably would do it directly. Why this indirect route,
unless you can show some big managerial economies or you can take
advantage of getting a better rate for the bank.
ROLNICK: Of course a shareholder of an automobile company
would want its company to own a bank.
STIGLITZ: Those are the very reasons why, from a societal
point of view, it's not efficiency enhancing. It's probably using
your differential assets with a government guarantee as a source
ROLNICK: The nonbanks/financial institutions relationships
are a problem in the United States. Is this a problem in the developing
STIGLITZ: The issue of nonbanks/financial institutions
relationships is an issue of debate in all countries. One of the
driving forces in this debate, though, is that the traditional
lines between industries are breaking down. And what is going
on in our economy forces you to reexamine these issues constantly.
Take General Electric, a major industrial company; G. E. Credit
is one of the largest financial institution employers. There are
lots of the traditional lines, even though we had a division between
ownership of banks. In fact, the division between finance and
industry has already broken down. I think you put your finger
on the right issue, though. Banks are in a special position partly
because of their systemic effect on the economy, and partly because
of that systemic effect we have an explicit or implicit role of
government insurance. And that raises certain sets of dangers.
My own view is, therefore, let's keep that narrow and only expand,
if at all, gradually and in response to necessary changes for
ROLNICK: There is one other economic development issue
that I would like you to discuss. We're seeing sub-governments
(cities, counties and states) competing for private firms. The
most visible competitive battles have come over professional sports
teams, but the competition extends to virtually every type of
business. Is this the appropriate role of government?
STIGLITZ: That's a really interesting question. There
is a well-developed theory in economics about how competition
among communities can lead to an efficient delivery of public
services. That theory, when carried to its extreme, said competition
should be very fierce and when it's very fierce it turns out that
effectively you can't tax capital at all. Because what happens
is if you tax capital that's mobile, the community next to you
says, "Come to me. I will tax you a little bit less." And then
the first community says, "I'll tax you a little bit less." And
you wind up with no tax on mobile capital. In the extreme then,
that says the only taxes that can be imposed by local communities
are on immobile factors, which are typically land and labor that
is grossly immobile, which tends in many cases to be the least
skilled labor because skilled labor is a national market. What
I think worries some of us is that the prediction of that kind
of intense competition among communities is being realized. Communities
are discovering the principles of competition without thinking
through where that's going to lead. It is in the interest of each
of them to do it.
ROLNICK: It's tough to unilaterally withdraw.
STIGLITZ: Yes, it is tough to unilaterally withdraw. But
when they all do it, the consequence will be that the benefit
doesn't go to one city or the other, the equilibrium will be over
taxes on businesses and on, in general, low taxes in the pure
theory. Now there are two ways of responding to this. One of them
is an agreement at a national level that we will not allow this
kind of competition. As a practical matter, that's very difficult
because even if you restrict competition in actual tax rebates,
there is a whole set of amenities that communities can provide
that basically reduce costs. And some of them a city ought to
provide. There's drawing a line between what the community ought
to provide and what is a teaser or gift. It's a very fine line.
I'm going to give you an example. You want good transportation
facilities. But where do you draw the line between transportation
facilities that the town should provide and transportation facilities
that the company should provide? How about making good school
facilities that you then get to use for your training programs.
Good school facilities, we all agree on that, but using them for
training? These programs are pretty good things, you know, night
school and so on. So, the lines are going to be very difficult
to draw and coming up with a meaningful compact would be difficult.
But maybe that's one direction we should go. The other oneand
these are not exclusive strategiesis to recognize that in
fact both the communities that have relatively little scope for
taxing capital and moving at the local level more to broad-based
use of income taxes, or broad sales taxes, and recognizing that
in the modern life we can't use some of the kinds of taxes that
we have. Globalization, and the world has its counterpart in mobility
within the country, and some of the tax structures that we have
used in the past are really not going to be viable.
ROLNICK: How is this problem being addressed internationally?
Are there parts of trade agreements that prohibit subsidies or
other financial inducements to lure companies away from other
STIGLITZ: There areit's part of the World Trade
Organization. In the Uruguay Round there was a whole set of provisions
dealing with this issue, where if one country subsidizes an industry
you're allowed to offset that subsidy. So that is already part
of the trade structure. There is a related issue, however, that
I am concerned about. It is a danger in the way the United States
is proposing implementing the subsidy policy that goes too far
and will impede the transition of some of the nonmarket economies,
like the former Soviet Union, into market economies. The subsidy
policies can be used as protectionist measures. A key issue on
this is in a socialist system you couldn't tell what a subsidy
was because they didn't have prices on everything. Now you have
in these economies nationalized enterprises, socialized enterprises,
and you privatize them by auctioning them off. When you auction
them off, do previous subsidies get carried forward or do they
get wiped out at the private auction? Almost all economists would
say that if you have a competitive auction they get wiped out.
There are some groups in the US government that are trying to
argue that this is not the case. And if they prevail in this debate,
we will have established a real barrier to auctioning off these
enterprises and to these companies entering into market economies.
So, implementing this in a fair and effective way is going to
be very difficult.
ROLNICK: Another current trade-related issue is the proposed
European monetary union. European countries are talking about
a single currency. It looks like they're going to get there, despite
all the economic and political hurdles in their way. Do you think
a single currency is a good idea for the European communities,
or should they stick with floating rates and multiple currencies?
STIGLITZ: There's a large literature that talks about
the issue of what is the appropriate basis of a common currency.
The United States can be viewed as an area in which we use a common
currency. We've had it for so long we take it for granted. But
clearly, each of the 12 districts could have its own currency.
ROLNICK: We do. We have our numbers on them, but we have
a fixed exchange rate.
STIGLITZ: So, it's a common currency. And the question
is: What are the concerns? The real issue is that you have regional
shocks that leave one part of the country in a recession. And
how do you equilibrate? The problem is that right now we can't
use monetary policy. Say Texas has a problem. We can't use monetary
policy very effectively to help Texas recover from a downturn
because it doesn't have a separate interest rate. It's linked
to the national interest rate, which is linked to concerns about
national levels of inflation, not the Texas problem. Texas also
may have a problem because it may have a constitutional amendmentmany
states have a constitutional provision that says they can't have
deficit spending. So you can't use fiscal policies to stimulate
Texas. But in the United States there are two other forces that
help Texas recover. One of them is we have a very nationally integrated
product market. Texas can export to the rest of the country very
easily. And so the rest of the economy is doing well, and that's
the reason why the Fed has a lower interest rate. Markets in the
rest of the economy are strong, so Texas starts doing exports.
This is one thing in their favor that helps their recovery.
Secondly, there's migration. People start leaving and entering,
and they all speak the same language. So we have a variety of
ways that we adjust in response to a shock in one part of the
economy even though we don't have monetary policy and we have
what I call restrictive fiscal policy. Now, if you look at Europe,
they're giving up monetary policy in the same way. Fiscal policy
is restrained, particularly with conversion criteria. However,
they don't have the constitutional provisions that we have and
they don't have an integrated product market yet.
ROLNICK: It's tough to unilaterally withdraw.
ROLNICK: But both could develop.
STIGLITZ: They could develop. But it will take a long
period of time; there's been a lot of mobility but it's not the
magnitude that we have between Texas and California or the rest
of the country. All of that says that the challenges in integrating
are substantial. Then the question is: What are the benefits that
accrue? Interestingly, some of the innovations that have occurred
in modern capital markets have reduced the magnitude of the advantages
of a common currency. Because one of the disadvantages is the
risk of fluctuations in value; one of the disadvantages of having
different exchange rates is that you don't know the value. That
makes trade difficult, right? And because we have improvements
in foreign exchange markets, futures markets, that risk can be
spread out more widely.
ROLNICK: But the risk is still there.
STIGLITZ: Yes, but it gets spread among a large number
of people and so the real question is: If it's spread among enough
people, then it doesn't act as a very effective impediment to
trade. What you're doing is choosing one form of risk for another.
In one case you have the shock to a particular country or region
and you allow for prices to adjust when you have flexible exchange
rates. The other one is if prices are fixed you're more likely
to get quantity adjustments. Price fluctuations aren't real consequences,
aren't real risks. And so you're not getting rid of risk. It's
really how risk gets spread through the economy. Modern financial
measures have allowed financial markets to do a better job of
distributing the risk.
ROLNICK: I agree that we've become more efficient in
dealing with that risk. The literature, though, suggests that
these exchange rate fluctuations are deadweight loss. The empirical
work shows that short-run exchange rate fluctuations look like
a random walk; they do not reflect changes in economic fundamentals.
Going to one currency gets rid of that deadweight loss. That's
STIGLITZ: That's right. And it's really a question of
the role of exchange rates. I view it as an open question, and
an interesting experiment. If you look at the data and how difficult
it was even for the United States to make some adjustments, how
long it took California to move from 10 percent unemployment down
to 7 percent unemployment with a major role adjustment from '92
to '96, a major role adjustment being migration patterns, it makes
ROLNICK: The transition may be a problem. But, if I think
of doing business in Europe, say I have a major company and I
am supplying my product to 10 different countries. From that point
of view, even if the markets are more efficient in handling this
risk, there's still a big cost to me in dealing with the exchange
rate risk. I have to pay for these hedges.
STIGLITZ: And this goes back to what I said earlieroptimum
currency here20 may be too much for Europe. We have, by
the way, fiscal methods within the United States that we use.
The federal government is sensitive to unemployment and tries
to adjust. If Europe starts thinking more about these adjustment
problems, then they have some fundamental reasons why they're
at a disadvantage to the United States.
ROLNICK: A question about research. We have limited resources
for research, whether it's the World Bank or the Federal Reserve.
There's been a debate as to how to allocate that research recently.
Some argue that we should continue trying to put our resources
into better understanding the business cycle. Others say that
the return on making any improvement in the business cycle is
relatively low, that the real benefits are going to come from
studying why some economies grow faster than others. That is,
research on economic growth is where we should be putting our
resources. Your thoughts?
STIGLITZ: I think that business cycles are still very
important. In fact, there's actually some relationship between
cycles and growth. We've done work that shows that when the economy
goes into a downturn, one of the first things that gets cut out
is research; when a firm experiences a shock in its cash flow,
it cuts back research. This is consistent with certain models.
The consequence is that recessions have an adverse effect on long-run
growth. So I actually see the study of both business cycles and
growth as necessary and complementary.
Now, I think it would be shortsighted for us to say that we've
slain the dragon of the business cycle. Europe still has unemployment
over 10 percent. We have a better functioning economyand
I could tell you all the wonderful things the administration has
done over the last four years to facilitate thatbut I want
to know the whole set of things so that when the next administration
comes in, I can tell them what they ought to do so they don't
kill this wonderful economy that we've helped create.
ROLNICK: One of the things the Fed argues that helped
to create this robust economy is low inflation. Has the Fed been
following the right policy?
STIGLITZ: I actually think that the success of our economy,
that low inflation, is a symptom of some more fundamental successes
and not something that I attribute really to Fed policy, as much
as you would like to take credit for it. I think a more competitive
economy is likely to be more disciplined in prices. We've got
a more competitive economy through a number of features. I think
the complete openness of the economy, which is partly a change
in mentalitywe began talking exports, we passed NAFTA, the
Uruguay Round, all the things we've talked aboutsome of
it has actually changed trade barriers; some of it has just changed
the way we look at the world, the way we enter the world and engage
the world. And classification, in that sense, creates a more competitive
environment in which firms realize that this process of globalization
means that you don't have three automobile companies, you have
a world of automobile companies and that means you can't raise
your prices. So, it's something that hopefully we did, but it's
something really that is the evolution of the economy here. Classification
has provided the tool that makes competition more effective. It's
not only that we have made classification more effective, but
classification means that I can find out what the prices are all
over the world.
The work that I did earlier shows the relationship between information
and competition and shows that imperfections in information lead
to imperfections in competition; whereas, more perfect information
leads to more perfect competition. That has been what has led
to a big fall in the NAIRU [nonaccelerating inflation rate of
unemployment]. There's a lot of evidence of this shift in NAIRU,
very little evidence that there is a relationship through the
rate of growth of the economy and the levels of inflation so long
as inflation remains low. So that's why . . .
ROLNICK: So you're not concerned whether we're aiming
at 4 percent or 1 percent inflation?
STIGLITZ: For inflation in that range, the evidence shows
very little effect that is discernible to even a highly trained
eye. Some people argue that if you let it get too low there may
be some adverse effect. I'll leave that as an open question. But
within the range we're talking about, inflation is not a major
source of concern. A lot of the evidence that we produced at the
Council suggests that if you happen to miss the inflation target
you were aiming at, in a low-inflation environment, the cost of
undoing that is very, very low; the cost of undoing it is less
than the benefit you got when you did it. In other words, there's
a steep slope of the Phillip's curve such that wringing out inflation
is relatively low cost. As long as you do these things moderately.
So I've been advocating what I call a policy of cautious activism.
ROLNICK: Related to the pursuit of good monetary policy
is the need for an independent central bank. How important is
STIGLITZ: I think the econometric evidence on that is
somewhat ambiguous. There's not a lot of evidence that it improves
the trade-offs in a significant way. I think there are some deep
philosophical issues on whether, or the extent to which, macro-economic
policies which are a fundamental responsibility of central banks
should be delegated to nonelected officials. Now, there are arguments
against putting macro-economic policy in the heat of the fray.
And so the question is arriving at this balance between independence
and accountability; it seems to be a question a democratic society
has to address. People should be aware of the balance in principle.
We should not, for instance, allow authority to be delegated to
a group of people whose only focus are bankers. Bankers' concern
is inflation. That may have a very disastrous consequence for
working people. That, I think, would be a mistake.
ROLNICK: Actually, I think if you go back to the debate
on the Federal Reserve Act, that's exactly what the issue was.
That's why the district banks are required to have nonbanker directors.
STIGLITZ: We're within the ambit of what I would call
a balance. But, if we started debating, I would argue for more
accountability than we currently have.
ROLNICK: It's healthy to have the discussion about the
importance of independence. The discussion itself promotes accountability.
STIGLITZ: Discussion is part of accountability.
ROLNICK: Thank you, Mr. Stiglitz.
More about Joseph E. Stiglitz
Currently senior vice president and chief economist at
the World Bank, Washington, D.C.
Served on the president's Council of Economic Advisers,
including stint as chairman, from 1993-1996.
After receiving his doctorate from the Massachusetts Institute
of Technology in 1966, he began his teaching career there,
and later served as a professor at Yale, Oxford, Stanford
He received the John Bates Clark Medal of the American
Economic Association in 1979, and has also received international
prizes in economics, including the Union des Assurances
de Paris prize in 1989.
He has been an editor and associate editor of many professional
journals, including the Journal of Public Economics, Review of Economic Studies and American
Stiglitz has written many journal articles, with his most
path-breaking papers summed up in "Information and Competitive
Price Systems," American Economic Review, May
His books include textbooks, such as Lectures in
Public Economics (1980), and others, including The
Theory of Commodity Price Stabilization (1981).
Nobel Prize Winner in Economics, 2001