:00:00. > :00:00.grasp. The Kiwis won by 20`18 at Wembley. Now on BBC News, it's time
:00:00. > :00:11.for Talking Business. They are two of the most prominent
:00:12. > :00:13.economists in the world, Nobel laureates Paul Krugman and Joseph
:00:14. > :00:19.Stiglitz may agree on some things, but not everything. We are here in
:00:20. > :00:40.Hong Kong to find out where they think the world economy is headed.
:00:41. > :00:47.Five years on from the greatest financial crash in a century, we are
:00:48. > :00:52.still debating what can help the recovery. Welcome to talking
:00:53. > :01:00.business, with me, Linda Yueh. Does this territory work? When will the
:01:01. > :01:06.economy get back to normal? I sat down with Joseph Stiglitz to find
:01:07. > :01:11.the answers. It is five years since the greatest crash in a century, and
:01:12. > :01:18.yet economies are still not fully recovered. When do you think the US
:01:19. > :01:22.will get back on track? It is not going to happen any time soon. We
:01:23. > :01:31.can learn some important lessons from that. Obviously in 2008 we
:01:32. > :01:34.focused on the financial sector. The financial sector had not done a good
:01:35. > :01:41.job of what it was going to do, managing risk, calculating capital.
:01:42. > :01:45.A mistake was made. It was thought that all you had to do was bring the
:01:46. > :01:50.financial sector back to health and the economy would we find. We have
:01:51. > :01:57.not brought it perfectly back to help, but we have saved the big
:01:58. > :02:05.banks. The overall health of the financial sector is not bad. But the
:02:06. > :02:09.economy is not healthy. Part of the thing is that we did not focus on
:02:10. > :02:16.the roles of the financial sector, what it is supposed to do. For
:02:17. > :02:21.example, providing for small and medium`sized enterprises. Provision
:02:22. > :02:29.is 20% below with it was before the crisis. There are underlying
:02:30. > :02:34.problems. We have to restructure the economy, moving out of manufacturing
:02:35. > :02:40.towards a service sector economy, adapting to changing competitive
:02:41. > :02:47.advantage. The second is growing inequality. These problems were
:02:48. > :02:54.there before the crisis. They continue to get worse, much worse.
:02:55. > :03:00.But we have taken our eye off the ball. We are not focusing on them.
:03:01. > :03:05.To me, it is not a surprise that we have not recovered. Do you think
:03:06. > :03:09.that the US, within the end of the decade, will recover to fill
:03:10. > :03:21.employment, and what will that depend on? I am not that optimistic.
:03:22. > :03:27.If you look at the numbers, this month we're supposed to have created
:03:28. > :03:33.200,000 jobs. Assume that is the case, despite the uncertainty, there
:03:34. > :03:39.are more than 20 million Americans who would like a full`time job who
:03:40. > :03:42.cannot get it. At that pace of job creation, we will be well into the
:03:43. > :03:48.next decade before we get back to full employment. Moving across the
:03:49. > :03:51.Atlantic to the other country that had the worst banking crisis,
:03:52. > :03:59.Britain, do you think that country has the balance right and growth?
:04:00. > :04:10.They are doing much worse. They had a double dip recession. To my mind,
:04:11. > :04:13.it is not a surprise that their performance has not been that good.
:04:14. > :04:19.Austerity has essentially not worked. The few cases with it seems
:04:20. > :04:28.to have worked is where there were government cut backs and exports
:04:29. > :04:33.fill the gap. But in a world where there is an insufficiency of demand
:04:34. > :04:45.globally, not everyone can export. I jokingly say, export to March still
:04:46. > :04:52.remains very limited. `` export to Mars. The strategy if every country
:04:53. > :05:00.to export. You cannot do that as the base of global recovery. The UK has
:05:01. > :05:04.an advantage, it is relatively small. The exchange rate can go down
:05:05. > :05:10.and give it a competitive advantage. But the big disadvantage, Europe,
:05:11. > :05:16.the EU next door, is also going through a double dip recession.
:05:17. > :05:19.Looking at Britain, do they think it will get back to full employment,
:05:20. > :05:24.what do you think the timespan for that will be, and is there a chance
:05:25. > :05:35.it could never go back to its full potential? I hope it will eventually
:05:36. > :05:41.go back. Never would be a statement of a real failed economic policy.
:05:42. > :05:47.But many of the problems that United States face problems that the UK
:05:48. > :05:51.faces. Not necessarily quite as bad, but to the extent that they have
:05:52. > :05:59.imitated the United States, there are elements that are similar, for
:06:00. > :06:03.instance, some of the policies that led to problems in the United States
:06:04. > :06:10.where policy is that the UK followed. It used to be that the UK
:06:11. > :06:15.was in the middle of the pack, not the best, but not the worst. Now
:06:16. > :06:23.they are second to the United States, basically, in terms of
:06:24. > :06:30.inequality. The education system that used to provide equality of
:06:31. > :06:35.opportunity has been underfunded. Access to university education has
:06:36. > :06:37.been diminished. Some of the things that are really important for
:06:38. > :06:45.long`term economic growth and equality, they have gone in the
:06:46. > :06:49.wrong direction. Whenever people in Europe think about hysterically,
:06:50. > :06:53.half the country say that they have to do it, or the bond markets will
:06:54. > :07:01.punish them? What would you to that? If policymakers said to you,
:07:02. > :07:05.the bond markets will punish me if I do not embrace this territory? This
:07:06. > :07:11.is an example where a reform of the Eurozone would make a big Air
:07:12. > :07:15.France. The debt `GDP ratio for Europe is not that different from
:07:16. > :07:22.the United States. If Europe were borrowing as a whole, it would help.
:07:23. > :07:30.The US is borrowing at negative interest rates. Are indexed bonds
:07:31. > :07:38.were actually paying negative interest rates. The factors, if
:07:39. > :07:47.Europe were more united, they would have access to funds that would make
:07:48. > :07:57.the budgets more manageable. Finally, you have touched on
:07:58. > :08:02.inequality. One of the challenges to how important equality is to the
:08:03. > :08:07.recovery, is that era is not evidence to support that if you
:08:08. > :08:16.reduce inequality you would be spending of the poor and therefore
:08:17. > :08:21.growth? What would you say to that? When Paul wrote that article and one
:08:22. > :08:33.of his blogs, there was an enormous outpouring. Support of the fact that
:08:34. > :08:37.there was a huge body of evidence, that might not have been true when
:08:38. > :08:42.he was a graduate student a few years ago, but the evidence that has
:08:43. > :08:52.come out in the last 15 years, it is overwhelming. Those at the top do
:08:53. > :08:59.not need to spend, in fact, they do not spend a significant fraction of
:09:00. > :09:05.their income. Those at the bottom are spending everything, they have
:09:06. > :09:07.no choice. In fact, in the years before the great recession, they
:09:08. > :09:13.were borrowing and borrowing and borrowing, so the bottom 80% were
:09:14. > :09:19.spending on average 110% of their income. That clearly wasn't
:09:20. > :09:25.sustainable. One of the reasons they were spending so much was they were
:09:26. > :09:33.trying to keep up, they were trying to adapt to the fact that the
:09:34. > :09:36.incomes were stagnating, going down. One of the reasons why there has
:09:37. > :09:42.been this confusion on this issue, the reason is that a lot of people
:09:43. > :09:48.say, there was a lot of inequality before 2008. Why did we not see the
:09:49. > :09:55.lack of demand? The answer is simple. There was a lack of demand.
:09:56. > :09:58.The Fed compensated. How did it compensate? Creating a bubble with
:09:59. > :10:09.low interest rates and likes regulation. `` and lax regulation.
:10:10. > :10:13.It solved the problem in the short run but created a bigger problem in
:10:14. > :10:25.the long run. Short of creating a bubble, short of a credit of all,
:10:26. > :10:28.short of that, when you have this high level of inequality, demand
:10:29. > :10:34.will be low, and without people buying, it is very hard to have a
:10:35. > :10:40.robust economy on a sustainable basis. That was Joseph Stiglitz of
:10:41. > :10:44.Columbia University on the challenges we still face on the
:10:45. > :10:55.recovery. He sees the main obstacle, though, as the high levels of income
:10:56. > :10:58.inequality. His colleague disagrees. I sat down with him to find out why
:10:59. > :11:04.he does not see eye to eye with Joseph Stiglitz.
:11:05. > :11:10.You disagreed on `` the disagreed with Joe Stiglitz on how big an
:11:11. > :11:17.obstacle income recovery is in America. Surely if you give money to
:11:18. > :11:20.the poor, there would be growth? In a way, we are having technical
:11:21. > :11:33.dispute that has nothing to do with policy. More aid to the unemployed,
:11:34. > :11:38.more food stamps would stimulate the economy. But you think that
:11:39. > :11:43.ultimately, because that is not a lot of evidence, that inequality is
:11:44. > :11:53.what is holding back the recovery? Yes. Partly I think I am bending
:11:54. > :11:58.over backwards not to let my political preferences, my
:11:59. > :12:01.microeconomic judgement. It is to need to think that something which I
:12:02. > :12:06.think is a very bad thing, inequality, is also the main thing
:12:07. > :12:11.behind our economic problems, which I think has more to do with the
:12:12. > :12:19.regulation and inequality. There is also an evidence issue? Yes, there
:12:20. > :12:26.is nothing really clear. Apart from very crudely, we were a very unequal
:12:27. > :12:31.society before the great depression. We were in unequal society before
:12:32. > :12:36.this one. I'd been in mind that European countries are also mess, so
:12:37. > :12:42.it is not as if, if we take whatever your measure is, European nations,
:12:43. > :12:50.although they have had an increase, they are nowhere close to US levels
:12:51. > :12:58.of inequality. It has not as though the great recession spirit has gone.
:12:59. > :13:02.The result has been trying to do more to shore up the economy. Given
:13:03. > :13:09.what they have done, do you think there is still a significant chance
:13:10. > :13:17.of Europe breaking up? The trouble with the Euro is that on the one
:13:18. > :13:21.hand, it is hard to see how it breaks up but on the other to see
:13:22. > :13:25.how it goes on. It is a rolling crisis. Year after year, every time
:13:26. > :13:29.you think they have made progress, something else goes wrong. Now they
:13:30. > :13:37.are talking about deflation risk. Last year there were talking about
:13:38. > :13:45.the banks. All it was put on that. Now we are talking about deflation.
:13:46. > :13:52.If things continue to be this bad year after year, one after another,
:13:53. > :14:01.the thing will crack. The risk of it falling apart in six months is small
:14:02. > :14:06.but the odds that it won't be around ten years from now is still quite
:14:07. > :14:13.substantial. In terms of the recovery, five years on from the
:14:14. > :14:18.worst crash in the century and yet it looks like the recovery is still
:14:19. > :14:24.quite fragile. If you looked at the United States, Wendy you think the
:14:25. > :14:26.US will get back to full employment? Everyone always says five years
:14:27. > :14:34.because projections always assume five years. I think the US is trying
:14:35. > :14:41.any a way that the private sector is trying to recover. Household debt
:14:42. > :14:49.ratios are down. Business investment is up. Structures are starting to
:14:50. > :14:59.come back. There is a lot of underlying factors. It is what
:15:00. > :15:03.Keynes said. Debts had either been paid down our default advance so in
:15:04. > :15:12.a lot of ways the underlying dry cows gone away but we have had this
:15:13. > :15:20.combination of fiscal austerity plus wild uncertainty created by local
:15:21. > :15:24.dysfunction, which is held is back. I think maybe the worst of that is
:15:25. > :15:28.behind us. State and local governments are trying to hire
:15:29. > :15:34.again. Maybe the recovery will not push us to the brink for another
:15:35. > :15:38.year or two. If that is the case, we should start to see substantially
:15:39. > :15:42.better growth next year. Do you think it will take a few more years
:15:43. > :15:51.before the US goes back to normal in stressed rates `` interest rates.
:15:52. > :15:57.There is a question of whether we can get back to unemployment in a
:15:58. > :15:59.5`6 range. We don't know how many of the long`term unemployed have
:16:00. > :16:03.effectively become very hard to employ. Even if they actually have
:16:04. > :16:13.the skills, will employers believe that? So, partly for that reason, we
:16:14. > :16:19.don't know how big the cap is. We don't know how much recovery... I
:16:20. > :16:26.think we are still operating far below potential. In terms of
:16:27. > :16:29.interest rates, if we can take any kind of rule of thumb about
:16:30. > :16:38.inflation and unemployment and then take any sort of those will
:16:39. > :16:44.rejection, it is `` plausible projection, it is easy to see
:16:45. > :16:52.interest rates at the same level. People expect to see interest rates
:16:53. > :16:57.rising next year but I don't see it. The person who will be in charge as
:16:58. > :17:04.the view that there is still a lot of expansion. Moving across the
:17:05. > :17:08.pond, it is also five years on for Britain. Do you think the British
:17:09. > :17:16.government has got the balance between austerity and growth
:17:17. > :17:18.correct? No. Britain has an away been insulated from seeing the full
:17:19. > :17:25.consequences of their policy mistakes. But there is an odd thing
:17:26. > :17:28.in the labour market, where employment has remained fairly
:17:29. > :17:34.strong even though GDP has been terrible. But productivity has
:17:35. > :17:42.collapsed. Something funny is going on. Cameron and Osborne said their
:17:43. > :17:49.policy is a success because we have had some growth. But they have been
:17:50. > :17:56.destroying the economy and now they have let up and the economy has
:17:57. > :18:03.recovered and they are saying that is because of them. It is like
:18:04. > :18:07.letting myself in the head with a baseball bat and then when I saw my
:18:08. > :18:13.feel better so I can say that it was a good policy. There is a lot of
:18:14. > :18:16.reason to believe that it is not just the short run, that they will
:18:17. > :18:22.have damaged the productive capacity of Britain for a long time. When do
:18:23. > :18:28.you think Britain will go back to full employment? Will it ever?
:18:29. > :18:38.Britain has made a lot less progress than the US in bringing down
:18:39. > :18:43.household debt. It is not clear... British investment is not doing that
:18:44. > :18:47.well either. I think Britain is less ready for a full`blown recovery. The
:18:48. > :18:58.US is closer to the point of spontaneous ignition. Spontaneous
:18:59. > :19:08.combustion? Escape velocity. Yes, I think the US is closer to that
:19:09. > :19:18.point. The US has not used... What Steve think Britain needs to do?
:19:19. > :19:22.Mostly, public investment. There is plenty of obvious need for public
:19:23. > :19:29.investment in Britain. Borrowing costs are low. It is odd because the
:19:30. > :19:33.Conservative government seems to accept that need but they are trying
:19:34. > :19:38.to do it anyway except through direct public spending. They want
:19:39. > :19:46.tax incentives and public`private partnerships. Just told the bridges
:19:47. > :19:52.and fix the hospitals and schools. A pretty easy thing to do. What is the
:19:53. > :19:57.best and worst thing these governments could be doing in terms
:19:58. > :20:07.of recovery? The most exciting thing is Japan, of all countries will stop
:20:08. > :20:15.the last `` of all countries. They have actually already... I am
:20:16. > :20:24.worried because I think they really have the three arrows. Policy,
:20:25. > :20:33.structural reform. I am not so worried about them. I am worried
:20:34. > :20:38.that fiscal policy is partly part, `` partly pointing in the wrong
:20:39. > :20:46.direction. On the monetary side, they have a pretty remarkable shift
:20:47. > :20:57.in expectations. This is an away `` in a way, they took our advice 15
:20:58. > :21:02.years later. That is great. It shows that even a country which has spent
:21:03. > :21:10.many years stuck in a rut in terms of policy thinking, has cross debt`
:21:11. > :21:14.GDP over 200%, can still make a big difference if it shifts policy in
:21:15. > :21:29.the right direction. The worst thing? The austerities in Britain,
:21:30. > :21:43.which was unnecessary. The scary thing is the`year`old Doctor `` is
:21:44. > :21:48.the Euro... The Europeans, particularly the Germans, have not
:21:49. > :21:52.yet accepted that there are rules of the game that apply to everybody.
:21:53. > :21:57.Back when Germany was depressed and Spain was booming, you had to have
:21:58. > :22:03.higher inflation in Spain than Germany. Now the roles are reversed.
:22:04. > :22:11.The Germans don't seem willing to accept that. That is scary. That
:22:12. > :22:15.means that the euro is still suffering from a failure of key
:22:16. > :22:21.players to comprehend what it will take to make it work. Are there any
:22:22. > :22:26.data points that you look at on a delayed basis to see where the
:22:27. > :22:33.economy is headed? That is crazy to me. There are people who try to do
:22:34. > :22:44.short`term forecasting truly. It is a black art. People overreact to the
:22:45. > :22:49.short`term data anyway. The markets got less volatile during the US
:22:50. > :22:55.government shutdown because some of the data weren't coming in. I think
:22:56. > :23:03.that actually didn't do any harm. Probably better not to have... If we
:23:04. > :23:05.did have the numbers every three months then every month we might be
:23:06. > :23:12.better off. I watched the usual things. The unemployment claims,
:23:13. > :23:20.which tends to be a leading indicator. I spend a lot of time
:23:21. > :23:28.looking at Bonn steals. `` bond deals. It gives you a red on the
:23:29. > :23:36.psychology. We have from two of the world 's most cited economists. Slow
:23:37. > :23:40.recovery and disagreement over what is causing it means a lot of
:23:41. > :23:44.unanswered questions. Now we will watch which of their predictions
:23:45. > :23:58.come true. Tune in next week for another edition.
:23:59. > :24:09.The temperatures are already going down on the west of the UK. That
:24:10. > :24:12.means a frost is taking hold. We will see some fog patches, too.
:24:13. > :24:18.They're that in mind if you're going to drive on Sunday. In Wales and
:24:19. > :24:22.West of England we will see the lowest temperatures. Some mist and
:24:23. > :24:24.fog may also pop up in Scotland's central