23/11/2013 Talking Business with Linda Yueh

grasp. The Kiwis won by 20`18 at Wembley. Now on BBC News, it's time

for Talking Business. They are two of the most prominent

economists in the world, Nobel laureates Paul Krugman and Joseph

Stiglitz may agree on some things, but not everything. We are here in

Hong Kong to find out where they think the world economy is headed.

Five years on from the greatest financial crash in a century, we are

still debating what can help the recovery. Welcome to talking

business, with me, Linda Yueh. Does this territory work? When will the

economy get back to normal? I sat down with Joseph Stiglitz to find

the answers. It is five years since the greatest crash in a century, and

yet economies are still not fully recovered. When do you think the US

will get back on track? It is not going to happen any time soon. We

can learn some important lessons from that. Obviously in 2008 we

focused on the financial sector. The financial sector had not done a good

job of what it was going to do, managing risk, calculating capital.

A mistake was made. It was thought that all you had to do was bring the

financial sector back to health and the economy would we find. We have

not brought it perfectly back to help, but we have saved the big

banks. The overall health of the financial sector is not bad. But the

economy is not healthy. Part of the thing is that we did not focus on

the roles of the financial sector, what it is supposed to do. For

example, providing for small and medium`sized enterprises. Provision

is 20% below with it was before the crisis. There are underlying

problems. We have to restructure the economy, moving out of manufacturing

towards a service sector economy, adapting to changing competitive

advantage. The second is growing inequality. These problems were

there before the crisis. They continue to get worse, much worse.

But we have taken our eye off the ball. We are not focusing on them.

To me, it is not a surprise that we have not recovered. Do you think

that the US, within the end of the decade, will recover to fill

employment, and what will that depend on? I am not that optimistic.

If you look at the numbers, this month we're supposed to have created

200,000 jobs. Assume that is the case, despite the uncertainty, there

are more than 20 million Americans who would like a full`time job who

cannot get it. At that pace of job creation, we will be well into the

next decade before we get back to full employment. Moving across the

Atlantic to the other country that had the worst banking crisis,

Britain, do you think that country has the balance right and growth?

They are doing much worse. They had a double dip recession. To my mind,

it is not a surprise that their performance has not been that good.

Austerity has essentially not worked. The few cases with it seems

to have worked is where there were government cut backs and exports

fill the gap. But in a world where there is an insufficiency of demand

globally, not everyone can export. I jokingly say, export to March still

remains very limited. `` export to Mars. The strategy if every country

to export. You cannot do that as the base of global recovery. The UK has

an advantage, it is relatively small. The exchange rate can go down

and give it a competitive advantage. But the big disadvantage, Europe,

the EU next door, is also going through a double dip recession.

Looking at Britain, do they think it will get back to full employment,

what do you think the timespan for that will be, and is there a chance

it could never go back to its full potential? I hope it will eventually

go back. Never would be a statement of a real failed economic policy.

But many of the problems that United States face problems that the UK

faces. Not necessarily quite as bad, but to the extent that they have

imitated the United States, there are elements that are similar, for

instance, some of the policies that led to problems in the United States

where policy is that the UK followed. It used to be that the UK

was in the middle of the pack, not the best, but not the worst. Now

they are second to the United States, basically, in terms of

inequality. The education system that used to provide equality of

opportunity has been underfunded. Access to university education has

been diminished. Some of the things that are really important for

long`term economic growth and equality, they have gone in the

wrong direction. Whenever people in Europe think about hysterically,

half the country say that they have to do it, or the bond markets will

punish them? What would you to that? If policymakers said to you,

the bond markets will punish me if I do not embrace this territory? This

is an example where a reform of the Eurozone would make a big Air

France. The debt `GDP ratio for Europe is not that different from

the United States. If Europe were borrowing as a whole, it would help.

The US is borrowing at negative interest rates. Are indexed bonds

were actually paying negative interest rates. The factors, if

Europe were more united, they would have access to funds that would make

the budgets more manageable. Finally, you have touched on

inequality. One of the challenges to how important equality is to the

recovery, is that era is not evidence to support that if you

reduce inequality you would be spending of the poor and therefore

growth? What would you say to that? When Paul wrote that article and one

of his blogs, there was an enormous outpouring. Support of the fact that

there was a huge body of evidence, that might not have been true when

he was a graduate student a few years ago, but the evidence that has

come out in the last 15 years, it is overwhelming. Those at the top do

not need to spend, in fact, they do not spend a significant fraction of

their income. Those at the bottom are spending everything, they have

no choice. In fact, in the years before the great recession, they

were borrowing and borrowing and borrowing, so the bottom 80% were

spending on average 110% of their income. That clearly wasn't

sustainable. One of the reasons they were spending so much was they were

trying to keep up, they were trying to adapt to the fact that the

incomes were stagnating, going down. One of the reasons why there has

been this confusion on this issue, the reason is that a lot of people

say, there was a lot of inequality before 2008. Why did we not see the

lack of demand? The answer is simple. There was a lack of demand.

The Fed compensated. How did it compensate? Creating a bubble with

low interest rates and likes regulation. `` and lax regulation.

It solved the problem in the short run but created a bigger problem in

the long run. Short of creating a bubble, short of a credit of all,

short of that, when you have this high level of inequality, demand

will be low, and without people buying, it is very hard to have a

robust economy on a sustainable basis. That was Joseph Stiglitz of

Columbia University on the challenges we still face on the

recovery. He sees the main obstacle, though, as the high levels of income

inequality. His colleague disagrees. I sat down with him to find out why

he does not see eye to eye with Joseph Stiglitz.

You disagreed on `` the disagreed with Joe Stiglitz on how big an

obstacle income recovery is in America. Surely if you give money to

the poor, there would be growth? In a way, we are having technical

dispute that has nothing to do with policy. More aid to the unemployed,

more food stamps would stimulate the economy. But you think that

ultimately, because that is not a lot of evidence, that inequality is

what is holding back the recovery? Yes. Partly I think I am bending

over backwards not to let my political preferences, my

microeconomic judgement. It is to need to think that something which I

think is a very bad thing, inequality, is also the main thing

behind our economic problems, which I think has more to do with the

regulation and inequality. There is also an evidence issue? Yes, there

is nothing really clear. Apart from very crudely, we were a very unequal

society before the great depression. We were in unequal society before

this one. I'd been in mind that European countries are also mess, so

it is not as if, if we take whatever your measure is, European nations,

although they have had an increase, they are nowhere close to US levels

of inequality. It has not as though the great recession spirit has gone.

The result has been trying to do more to shore up the economy. Given

what they have done, do you think there is still a significant chance

of Europe breaking up? The trouble with the Euro is that on the one

hand, it is hard to see how it breaks up but on the other to see

how it goes on. It is a rolling crisis. Year after year, every time

you think they have made progress, something else goes wrong. Now they

are talking about deflation risk. Last year there were talking about

the banks. All it was put on that. Now we are talking about deflation.

If things continue to be this bad year after year, one after another,

the thing will crack. The risk of it falling apart in six months is small

but the odds that it won't be around ten years from now is still quite

substantial. In terms of the recovery, five years on from the

worst crash in the century and yet it looks like the recovery is still

quite fragile. If you looked at the United States, Wendy you think the

US will get back to full employment? Everyone always says five years

because projections always assume five years. I think the US is trying

any a way that the private sector is trying to recover. Household debt

ratios are down. Business investment is up. Structures are starting to

come back. There is a lot of underlying factors. It is what

Keynes said. Debts had either been paid down our default advance so in

a lot of ways the underlying dry cows gone away but we have had this

combination of fiscal austerity plus wild uncertainty created by local

dysfunction, which is held is back. I think maybe the worst of that is

behind us. State and local governments are trying to hire

again. Maybe the recovery will not push us to the brink for another

year or two. If that is the case, we should start to see substantially

better growth next year. Do you think it will take a few more years

before the US goes back to normal in stressed rates `` interest rates.

There is a question of whether we can get back to unemployment in a

5`6 range. We don't know how many of the long`term unemployed have

effectively become very hard to employ. Even if they actually have

the skills, will employers believe that? So, partly for that reason, we

don't know how big the cap is. We don't know how much recovery... I

think we are still operating far below potential. In terms of

interest rates, if we can take any kind of rule of thumb about

inflation and unemployment and then take any sort of those will

rejection, it is `` plausible projection, it is easy to see

interest rates at the same level. People expect to see interest rates

rising next year but I don't see it. The person who will be in charge as

the view that there is still a lot of expansion. Moving across the

pond, it is also five years on for Britain. Do you think the British

government has got the balance between austerity and growth

correct? No. Britain has an away been insulated from seeing the full

consequences of their policy mistakes. But there is an odd thing

in the labour market, where employment has remained fairly

strong even though GDP has been terrible. But productivity has

collapsed. Something funny is going on. Cameron and Osborne said their

policy is a success because we have had some growth. But they have been

destroying the economy and now they have let up and the economy has

recovered and they are saying that is because of them. It is like

letting myself in the head with a baseball bat and then when I saw my

feel better so I can say that it was a good policy. There is a lot of

reason to believe that it is not just the short run, that they will

have damaged the productive capacity of Britain for a long time. When do

you think Britain will go back to full employment? Will it ever?

Britain has made a lot less progress than the US in bringing down

household debt. It is not clear... British investment is not doing that

well either. I think Britain is less ready for a full`blown recovery. The

US is closer to the point of spontaneous ignition. Spontaneous

combustion? Escape velocity. Yes, I think the US is closer to that

point. The US has not used... What Steve think Britain needs to do?

Mostly, public investment. There is plenty of obvious need for public

investment in Britain. Borrowing costs are low. It is odd because the

Conservative government seems to accept that need but they are trying

to do it anyway except through direct public spending. They want

tax incentives and public`private partnerships. Just told the bridges

and fix the hospitals and schools. A pretty easy thing to do. What is the

best and worst thing these governments could be doing in terms

of recovery? The most exciting thing is Japan, of all countries will stop

the last `` of all countries. They have actually already... I am

worried because I think they really have the three arrows. Policy,

structural reform. I am not so worried about them. I am worried

that fiscal policy is partly part, `` partly pointing in the wrong

direction. On the monetary side, they have a pretty remarkable shift

in expectations. This is an away `` in a way, they took our advice 15

years later. That is great. It shows that even a country which has spent

many years stuck in a rut in terms of policy thinking, has cross debt`

GDP over 200%, can still make a big difference if it shifts policy in

the right direction. The worst thing? The austerities in Britain,

which was unnecessary. The scary thing is the`year`old Doctor `` is

the Euro... The Europeans, particularly the Germans, have not

yet accepted that there are rules of the game that apply to everybody.

Back when Germany was depressed and Spain was booming, you had to have

higher inflation in Spain than Germany. Now the roles are reversed.

The Germans don't seem willing to accept that. That is scary. That

means that the euro is still suffering from a failure of key

players to comprehend what it will take to make it work. Are there any

data points that you look at on a delayed basis to see where the

economy is headed? That is crazy to me. There are people who try to do

short`term forecasting truly. It is a black art. People overreact to the

short`term data anyway. The markets got less volatile during the US

government shutdown because some of the data weren't coming in. I think

that actually didn't do any harm. Probably better not to have... If we

did have the numbers every three months then every month we might be

better off. I watched the usual things. The unemployment claims,

which tends to be a leading indicator. I spend a lot of time

looking at Bonn steals. `` bond deals. It gives you a red on the

psychology. We have from two of the world 's most cited economists. Slow

recovery and disagreement over what is causing it means a lot of

unanswered questions. Now we will watch which of their predictions

come true. Tune in next week for another edition.

The temperatures are already going down on the west of the UK. That

means a frost is taking hold. We will see some fog patches, too.

They're that in mind if you're going to drive on Sunday. In Wales and

West of England we will see the lowest temperatures. Some mist and

fog may also pop up in Scotland's central