OWS ‘put inequality on US agenda’
RT: The global economy is still not fully recovered from the recent financial crisis, and now we have many economists saying that we are going into another recession or that we're going to have another wave of crisis hit us. What's your take on that?
Kenneth Arrow: I think the answer is "we don't know". The American economy seems to be recovering on a fairly solid basis: slow, but I don't see any particularly obvious instability in it. The European debt crisis has not been resolved, but at the moment immediate fires have been dampened. I am disturbed about the tendency – which is partly true in the US, but much more true in some parts of Europe – of too much austerity. When we have a condition of deficient demand – massive unemployment – I think the idea that you have to stimulate the economy through government spending or some other good way – tax decreases – is pretty clear. We could be recovering faster from our problems in the US, but we don't have the extremes of Great Britain or France. So I'm a little worried that this recovery will be slower than it needs to be.
RT: You're absolutely right – the recession fears are actually higher among the EU countries. What future do you see for Greece? It defaulted a few weeks ago. Is it really that bad?
KA: It obviously creates problems for Greece: that lenders may say "well, they defaulted once – they'll default again." Although the interesting thing is that there's not much evidence of this: countries default and then they go ahead to quite a nice recovery. It will be difficult for Greece to borrow money, but maybe that's a good thing – they will maintain discipline. I think they made a mistake by not defaulting a year earlier. I said that then. They overspent during times of prosperity: for example, they probably should never have undertaken the 2004 Olympic Games as this was too costly.
There are also fundamental long-run problems with Greece as there are with a couple of other economies there. But these are real problems, not financial problems. They have rigid labor laws. For example, Greece has what seems to be an extraordinarily generous social security system – a far more generous one than in the US, which could afford it a lot better. They have people retiring very early, and of course they have the problem of taxes. If a country isn't collecting taxes, it's going to be in for a big problem.
RT: But you don't think Greece will leave the EU?
KA: I don't think so. But maybe they should, by the way. The problem with the euro is that it's very difficult to break away from it. It can be done but there will be a big price to pay and it needs to be paid immediately. The problem is that if Greece had not been in the euro, they probably would have been unable to borrow the money they did.
RT: But the euro is still under question because of countries like Italy, Spain, Portugal, Greece. Where do you see the euro in a year’s time?
KA: There's an argument that the euro is a big mistake, to begin with. I think it was premature. Having a currency without being a single state has got lot of problems.
RT: You said earlier that the US is getting itself out of the mess, slowly but securely. US debt now stands at $16 trillion, exceeding its GDP. Will that continue to create instability for the global financial system? And how will the US cope with all that exactly?
KA: We have apparently a big debt problem but at the moment it is easily bearable. It's not a great strain but of course we assume that the strain will at some point rise. The basic problem is medical costs. Our medical care system is extremely inefficient and very expensive: 70-80 per cent of national income goes for medical care.
The things that are not health and not social security, – they are being cut in a very unfortunate way, because many of them are important factors. For example, our education system is under attack financially. Look at California, where we're cutting down educational spending and that's a recipe for disaster.
RT: I know that you were in your teens when the Great Depression happened. But you don't feel like anything like that is happening in America?
KA: No, there is no comparison. This is the worst thing since the Great Depression, no question.
RT: People feel like the government has preferred the banks to them at this point. They're asking “where is my bailout?” Do you think they have a point?
KA: We've an economic system, a financial system to be more precise, which has directly led to a very large negative value with the American people. The incomes of these people are now getting back to pre-recession levels. It's not a question that the inequality of income has got a lot worse but it has nothing to do with recession: that was going on long before the recession.
RT: Will the inequality of income grow in the US?
KA: I don't know, partly it is a problem of taxation, but it's not the only reason. There's also a problem of foreign trade – our manufacturing jobs have gone overseas, to China. Now we are still strong in many industries, our manufacturing exports are rising today. But manufacturing was the way by which you had relatively high-income jobs, middle income jobs for people who were not very successful educationally. And this has gone down greatly.
RT: What do you think of OWS, what do you think it feeds off?
KA: At first I thought it was ridiculous as they have no proposals, but it has changed the national attitude. The issue of income inequality has been put on the political agenda. I think very well of that.