24th April 2012
Stiglitz's premise is that global exports and imports must balance. Therefore, if a country pursues a policy that leads to persistent net exports, another must have persistent net imports. High imports risk high national debt, surplus countries lower aggregate demand.
Business Insider summarises it: "A few powerhouses like China, Germany, and Japan, plus some commodity based economies, have thrived in a system where they do all the exporting, and a few countries like the US run massive trade deficits.
"But that system is coming to an end, as countries realize that their trade deficits are unsustainable, and seek to become trade surplus countries at the same time. Of course, not everyone can run surpluses, so this becomes a game of hot potato, with everyone pushing the deficit to someone else, via currency devaluation and other aggressive trade moves."
Stiglitz's solution is a global reserve system with disincentives to run surpluses. He also proposes greater global financial market regulation and proper capital account management. He believes exchange rates should be managed.
Much of the subsequent debate has centred on Stiglitz himself and whether he is a credible economist. Certainly, he is a Keynesian, with all that implies and allegiances have therefore split along Keynesian versus monetarist lines. Major, for example, agrees with Stiglitz's analysis, saying: "Stiglitz is (quite logically) correct on a couple of points. First, in that we obviously have some nations who chronically produce more economic value than they consume and, as a result, an economic surplus, a growing standard of living and real savings, capital formation, investment, developing infrastructure with a growing and increasingly prosperous middle class (more producers and more consumers).