A Nobel Prize-winning economist says the coronavirus recession is ‘a textbook example of showing that markets don’t work’

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Global health will take a grim toll on markets. John Lamparski/NurPhoto/Getty Images
  • Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the “Pitchfork Economics” podcast with Nick Hanauer and David Goldstein.
  • In the latest episode of Pitchfork Economics, they spoke with Nobel laureate in economics and Roosevelt Institute Chief Economist Joseph Stiglitz about the role of the markets in essential services and recession outlooks.
  • We can’t rely on the markets to fix themselves, he said, because externalities – like global health – hindering the markets will continue to weigh on the economy if not tackled head on.
  • And this points out major market failures, like industry’s inability to produce enough test kits and farmers destroying milk and crops because restaurants are closed, that won’t fix themselves without intervention.
  • Visit Business Insider’s homepage for more stories.

There’s no feeling quite like the stomach-clenching dread that hits when you hear a Nobel laureate in economics label the coronavirus recession as “a textbook example of showing that markets don’t work.”

The concept of markets – defined simply as the system that allows buyers and sellers to interact – is a cornerstone of mainstream American economic thought. Free markets are supposedly the most efficient way to determine everything from your salary to the cost of a loaf of bread to the most efficient way to deliver supplies in the midst of a pandemic. “Let the market decide” has become a rallying cry for Republicans and neoliberal Democrats as a refutation of government’s role in everything from healthcare to package delivery.

In the latest episode of Pitchfork Economics, Joseph Stiglitz – the aforementioned Nobel laureate who also serves as chief economist at the Roosevelt Institute – questions the role of markets in essential services like public health and recovery from a recession. He identifies our unshakable belief in markets as one of the biggest stumbling blocks in America’s lacklustre response to coronavirus.

“One of the problems with markets is they don’t deal with what we call externalities,” Stiglitz said. He defines externalities as situations in which “one person’s action has effects on others that are not reflected in the prices they receive or pay.”

Climate change is an example of an externality: “If I engage in pollution,” Stiglitz explained, “it leads to more carbon dioxide in the atmosphere.” But the polluter doesn’t have to pay for the effects of that increased carbon dioxide, like rising sea levels and more extreme weather. Instead, those costs are transferred to the citizens of New Orleans during Hurricane Katrina or to the island nations that are disappearing as seas rise.

“Global health is another big example of an externality,” Stiglitz said. This can be represented by personal decisions like going out in public and refusing to wear a mask if you’re sick: “If I’m contagious and I walk around, I can contaminate you and you can die.”

But externalities also expand to a macro scale in the United States, which doesn’t require employers to provide paid sick leave: “You have people without paid sick leave with no money in their bank account, living paycheck to paycheck. So they get sick, and if they’re able to work, they will go to work.”

Those sick employees will infect coworkers, customers, commuters, and anyone else they encounter – an externality that is “one example of a major market failure,” Stiglitz said. The pandemic has caused quite a few different market failures, including industry’s inability to produce tests in the quantities that the United States needs to reopen, and farmers destroying milk and crops because restaurants are closed.

That last example is especially galling: “We have, in our society, people who are going hungry every night,” Stiglitz said. “The market should be able to connect the producers [of food] with the people who need it so badly. And yet the market clearly is failing.”

Another recent example is our medical system, which, based on the markets of private health insurance, ruthlessly favours hospitals that have been run so efficiently they didn’t have any spare capacity for additional patients.

“That’s all fine and well and good as long as you don’t have a crisis,” Stiglitz said. “But we have fewer beds per thousand than most other advanced countries. And that means when we have a crisis like this, we are in a much worse position than other countries. A few people do a little bit better as a result, but our society does a lot worse.”

Stiglitz believes that COVID-19 is demonstrating this fundamental flaw in American economic thinking: “Let’s not have this view of the perfect market versus an imperfect government,” he urged. Yes, some government programs produce a lot of waste. And no, government isn’t the answer to every problem. But, he concludes, the markets are far from perfect, too – and to pretend otherwise is to put your society at risk.

“I’ve studied a lot of patterns of growth around the world,” Stiglitz said, “and I can tell you the only countries that have been successful are countries where the government has played a very important role.”

Stiglitz has been very unhappy with how the recovery packages have been distributed by the Trump administration: “We have to do a better job of getting money down to the smaller businesses, the most vulnerable,” as opposed to bailing out giant airlines and other corporations. And he believes the one-time $US1200 checks that went to average Americans were “not enough to live on for very long.”

Unless we put small businesses and average Americans at the centre of our recovery, Stiglitz thinks the economic recovery will be difficult. “If we don’t manage things well,” he warned, “this will be the deepest downturn in living memory.”

It’s a dire warning, but a necessary one. The first step toward a better recovery is to acknowledge that markets don’t contain the answers to all our problems. Once that central illusion of American economics has dispelled, the path forward becomes much clearer.