February 25, 2014

Joseph Stiglitz's Crystal Ball

Nobel laureate Joseph E. Stiglitz, University Professor at Columbia University, holds forth on what economists can predict — and when they should keep their mouths shut.


The list of credentials Joseph E. Stiglitz holds is about a mile long and includes two Nobel prizes. So when Stiglitz speaks, business leaders listen. Here’s what he had to say at a recent forum, “Predicting the Future of the World Economy,” sponsored by the Jerome A. Institute of International Business.

On economists’ ability to predict: Let me begin by distinguishing between different kinds of predictions. Economists may not be very good at predicting precisely what time and date a certain event will occur, such as the breaking of the housing bubble. But that doesn’t mean they cannot “forecast” the future. One set of predictions is broad-stroke, where we may not be exactly sure of the timing. Consider the 2008 global financial crisis. Well before the crisis, it was clear we had a bubble — clear to everybody except for those in the financial markets, that is. It was clear to anyone who took a moment to think about it that Americans couldn’t continue to spend so much of their income on housing. They were all counting on the continuation of high levels of capital gains. I and others knew and said this bubble couldn’t continue. But we couldn’t predict when it would break.

Another kind of prediction we can make: For this kind of prediction, we know with a very high degree of confidence what will happen, and even when. An example of that is climate change. It’s a process that’s actively unfolding, though we won’t experience its full effects in, say, the next year. Rather, the full effects are going to be happening over the next 20, 50, or 100 years, or more. The magnitude of those effects will depend on whether our policies change. Unless we significantly reduce our emissions, the consequences will be dire. But there is a chance we will wake up and adjust. Even if we knew how we would respond — how quickly we would reduce our greenhouse gas emissions — the severity of climate change is something we can’t predict with perfect accuracy. How many feet will the sea level rise, for instance? What part of Manhattan will be under water?

A third prediction we can make: If we don’t do a better job of regulating our too-big-to-fail banks, and our over-the-counter markets are not transparent, we risk a significant probability of another financial crisis. There were underlying problems before the crisis in 2007 and 2008. They were disguised by a bubble, and that was the bubble that kept our economy going. If we don’t fix those underlying problems — structural transformation, growing inequality, global imbalances — in a fundamental way, we will likely enter into a period of malaise. That would mean a situation like Japan has had for many years — not disaster, but not robust growth.

Why GDP is a poor measure of economic performance: Economists’ predictions of future growth typically center around GDP. But more and more economists are recognizing that GDP is not a good measure. Why? GDP tells only about a narrow part of economic performance, and it is a particularly inadequate measure of the well-being of citizens. It is striking that American GDP has been going up almost continuously for decades (2009 was the most recent exception). But median income today in the United States is lower than it was in 1989, almost a quarter century ago. I hope it’s temporary. I hope there’s mean reversion. But there is no evidence at this point. Unless we do something, this dynamic is likely to continue, with GDP increasing, while the incomes of large parts of the country continue to decline.

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