 Hello and welcome to the Institute of International and European Affairs here in Dublin. My name is Dan O'Brien, Chief Economist at the Institute, and it's a great pleasure to welcome one of the leading economists of his generation and certainly one of the highest profile economists globally, Professor Joe Stiglitz. We'll discuss the future of fiscal policy and I'm sure one or two other issues over the course of the next hour. With such interest in this event, let me get through the formalities quickly so that Joe's as much time as possible to share his thoughts with us, with us, although he needs little introduction, I list just some of his current roles and past roles by way of introduction. Joseph E. Stiglitz is a professor of economics at New York's Columbia University co-chair of the high level expert group on the measurement of economic performance and social progress at the OECD and the Chief Economist of the Roosevelt Institute. A recipient of the Nobel Memorial Prize in economic science in 2001 and the John Bates Clark Medal in 1979. He's held a range of roles, including Senior Vice President and Chief of Commons to the World Bank and chair of the US President's Council of Economic Advisers. If you have questions, please submit them via the zoom Q&A function at the bottom of your screens and identify yourself. I'm your affiliation, please. If you wish to tweet, please use the handle at IIA. And with that, Professor, it's a real pleasure. I'm looking forward so much to hearing hearing your thoughts over to you. Well, thank you. It's a real pleasure to be here. I wish I could be there in person. The subject of my talk today is has to do with the macroeconomic policy, fiscal policy in the aftermath of the pandemic. The pandemic forced governments across the world to borrow at record levels to fund the economic response to the pandemic. I think those responses were appropriate. They were effective. The economic downturn that many worried about was greatly diminished from what otherwise would have been. The vulnerable were protected the countries like the United States that had the strongest even if it's not the best design responses had the weakest economic downturns the strongest recoveries. But now, the world faces an important debate regarding the future of economic policy. The question is, what do we do with the high levels of debt. And this is a particularly important in Europe. The EU now faces an important debate regarding the future of its fiscal rules. The rules would say that deficits should not exceed 3% or deaths 60% of GDP. And by emphasizing that those fiscal rules part of the growth and stability pact. We're never based on economic science. They never made any economic sense. They were drawn out of thin air. They were in many ways counterproductive. I sometimes refer to the the growth and stability backed as the non growth and the instability back. And what I wanted to do in the next few minutes is to describe some of the fundamental flaws with those rules and some alternative ways forward in how to reformulate for Europe to reformulate those rules. The most obvious example of the flaw in the rules is that they didn't distinguish between investment and consumption. The country is borrowing for a vacation for consumption. That's one thing. But if it's borrowing for investments to enhance its economic growth to deal with the challenges of climate change to prevent environmental degradation. That's quite another. But the Europe's fiscal rules didn't make that kind of distinction. There have been efforts in many countries to develop what are called capital budgets to clarify what kinds of spending improve a country's future economic potential. And what kinds of expenditures simply represent consumption that benefit the current generation, often at the expense of future generations. So this flaw, this fundamental failure to make this distinction between consumption and investment has hampered has hampered Europe's economic growth and has a number of adverse effects that I'll describe shortly. So the impact is likely to get even greater in the aftermath of the pandemic, and especially so, if interest rates start to rise, because then servicing previous debt will occupy more and more of the fiscal space, forcing a contraction of investment, and thereby forcing a reading to lower economic growth. From a short run macroeconomic point of view, these flawed rules had another adverse effect. De facto, they were pro cyclical. When an economy went into downturn, tax revenues go down almost inevitably. But if a country was already near at the limits, if it already had a 3% deficit, then the country was forced to contract expending. But of course, contracting spending meant that the economy got even weaker. You know, contractionary policies are, by their very nature, contractionary. And we saw that so clearly in the euro crisis, where the Troika, the IMF, the ECB and European Commission, forced the countries in crisis to cut back on their spending, that deepened the economic downturn, didn't improve the fiscal balance, and it took years for some of the countries to recover. Greece still is not back to where it was before the financial, before the euro crisis. In other things, we've understood that the central tenant of good macroeconomics is counter-cyclical policies. But Europe's fiscal rules forced pro-cyclical policies upon country after country within Europe. Within the context of the eurozone, these effects were particularly adverse. When the eurozone, when the euro was founded, celebrating now the 20th anniversary, when the eurozone was founded, it was recognized that Europe was not what my colleague at Columbia, my colleague Robert Mandel called an optimal currency area. An optimal currency area requires there to be a high level of similarity among countries so that one could share a common monetary and exchange rate policy. The hope was that various European countries would converge together. But unfortunately, the fiscal rules led to divergence rather than convergence. The countries that were afflicted in the euro crisis by economic downturns had no choice but to cut back on their expenditures, on investment, on healthcare, on education, on infrastructure, on technology. These were growth expenditures. And so while the countries that were not afflicted by the crisis, countries like Germany, could continue to grow, the fiscal rules, the austerity imposed on the crisis countries, meant that by and large, their growth was greatly reduced. And that meant that rather than convergence, there was divergence, the weakest countries grew much more slowly than the stronger countries. And that made, of course, the future of euro less prosperous, less stable. So the growth instability back was poorly designed from the start, not based on economic principles. And it had adverse effects in the short run by being counter cyclical, pro cyclical rather than counter cyclical, it had adverse effects on the long term by not distinguishing between consumption and investment. And it led to the divergence of the various countries within Europe. In the context of the pandemic, Europe overrode those rules. It paid no attention. One could only imagine the disaster that would have resulted if Europe had stuck by those rules. In the context of the United States. We spent in our various programs to deal with the pandemic, some something upwards of 25% of GDP, the deficit increased enormously, but it was money that was well spent. It protected the most vulnerable. It even succeeded in reducing child poverty by almost 50%. If we have, we're are able to continue our spending in programs that President Biden has called build back better. It will lay the foundation for even stronger growth. In fact, with a new infrastructure bill and other spending. The United States is on target for exceeding where we would have been had the pandemic, not occurred. There's more fundamental point that the pandemic has brought out. We face constant shocks. We can't predict the big events that affect the economy. We couldn't predict 9 11, we couldn't predict 2008, we couldn't predict the pandemic. We couldn't predict President Trump. So there are all these kinds of big events which affect the macro economy that are not predictable. The lack of predictability, the deep uncertainty. I've made it clear that the top down anchors, like the 3% fiscal fiscal deficits of this 60% limit on debt. Make absolutely no sense. They, even in a more stable world. Before they were put out of thin air, but in the highly unstable world that we live. They particularly make no sense. They are rules that are meant to be broken and rules that are meant to be broken are not much help in the aftermath of the pandemic. I wrote a paper with two of my former colleagues in the Clinton administration, Bob Rubin and Peter Orzack. Bob Rubin had been secretary of treasure, I've been the chairman of council economic visor and Peter Orzack was the head of the office of management budget under President Obama. And while we've been on opposite sides of many issue economic issues over the years, we came to a broad consensus that the kind of rules that Europe uses that some Americans have advocated, make no sense that in a way that it belongs to the, these deep uncertainties one has to have an alternative framework. And we paper issued by the Peterson Institute, try to articulate what that framework was. But out that one can't even predict simple things like with the interest rates are going to be and we documented the enormous errors prediction that the leading forecasters have made even something as simple as interest rates. So, while we live in a world of deep uncertainty. There are reasons that are consistent across economic disturbances. For instance, it is very clear that automatic stabilizers help stabilize the economy. Recognizing this, we ought to be strengthening these automatic stabilizers. Unfortunately, policy is often weakened those automatic stabilizers those are programs that like enhanced unemployment insurance that goes automatically goes into place. When the economy goes into a downturn and the unemployment rate goes up. And that's where there are no jobs, the worry about discouraging search makes absolutely no sense so it, it not only protects individuals at a time when that protection become particularly valuable. It also means that at those particular moments, the distortionary effects that might be there. And some alleged are there become much attenuated. By having strong automatic stabilizers and adjusting other programs within the government to reflect those factors that systematic factors that we can predict means that policymakers have greater scope for focusing on the democratic aspects of any disturbance any perturbation that the economy faces. Example, again, is provided by the pandemic. The pandemic was very different from other shocks the economy has experienced. Not like a financial crisis that began with the misdeeds or misallocation of finance. It was not like 911. It had its own distinctive aspects, for instance, it was, in many respects the first service sector, economic downturn. But by employing automatic stabilizers for those things that we normally would want to do in any case, we free policymakers for focusing on the distinctive aspects of each particular disturbance. So, one of the distinct aspects of the pandemic was, as I said, it focused on the service sector is focused on health. Our policymakers should not have had to debate whether we extended unemployment insurance, which occupies so much of their time, but rather, how do we respond to the special circumstances presented by the pandemic. Well, we are not this kind of broad approach, I think, is a far better approach than the rigid rules that have undermined that have underlaid the growth and stability packed. In the last few minutes, I want to talk more particularly about the way forward for Europe. As I said, the failure to distinguish between investment and consumption is an impediment to Europe's growth, but it's become particularly dangerous as the world faces climate risk and existential risk that we have to retrofit our economy for large investments will be needed. The cost of not making these investments is enormous. But if Europe's hands are tied by the growth and stability act. It will be very difficult for them to make those investments by the cost of making those investments will be to sacrifice education or health or other basic social benefits. It will force unnecessary trade offs. So, as we face the challenge of climate change. And as we think stability packed in the aftermath of the pandemic becomes particularly onerous, and it's a particular imperative for change. In the short run. What would be of enormous health is a move towards what sometimes called the golden rule, identifying the separating out consumption and investment expenditures and deducting from the fiscal constraints, investment expenditures. At the very least, Europe needs to adopt what is sometimes called the green rule, which deducts climate change expenditures. But over the long run. I think there is a need to rethink these basic rules to go more towards the kind of fiscal resilience framework that I've advocated my work with the Orzag and Reuben. It seems to me that, as I said in the beginning, it's time to recognize that those fiscal rules were drawn out of thin air, not based on economic science. It made no sense when they were first adopted the Maastricht agreements and subsequent agreements. And today, 30 years on, they are not helping Europe address the key problems, which it faces today.