We're In A Whole New Territory

The power shift from west to east continues, as developing nations flexed their muscles at the G20 in London recently, and China and Russia called for a new international reserve currency to replace the dollar. Nobel laureate Joseph E. Stiglitz, who pioneered the idea of "global greenbacks" in his book "Making Globalization Work," and is now at the center of many debates over the future of global capitalism, spoke to NEWSWEEK'S Rana Foroohar about Asia's big bucks, America's bad loans and why the European welfare state still works.

FOROOHAR: You've been talking for years about how the dollar reserve system is broken. Why is everyone getting on the bandwagon now?
STIGLITZ: A reserve currency has to be stable to be effective, and for some time now, it's been clear that the dollar is not. The financial crisis has brought this home with a vengeance. The Fed's balance sheet is surreal. They are in uncharted territory, and there are serious concerns about inflation, and its subsequent effects on the dollar. The Chinese are clearly very concerned about this. They see that some of their investments in the U.S. (like Blackstone) have gone badly wrong, and they worry that they will have worked so hard to save their $2 trillion in reserves, only to see it blown away by inflation. At the same time, there's this broader concern about how the current reserve system basically entails poor countries lending to the U.S. at very low interest rates. It's inequitable, and it also reduces consumer demand at a time when it's really needed.

Why can't the euro help fill the currency void?
A two-currency reserve system would be even more unstable than what we have now, because people would move in and out of the dollar and the euro depending on which is up or down, increasing volatility.

You proposed a new reserve system at the U.N. recently. How would it work?
The new system would be supported by an already approved IMF measure to double the Special Drawing Rights [SDRs] available to countries in need. Rather than putting their money into dollar reserves which do nothing to increase consumption, countries could draw from this SDR $42.8 billion fund at need. That way, they spend the income, rather than storing it in the ground.

Do you think China's support of a non–dollar reserve system represents a new and more aggressive economic policy stance in the world?
I think that China's been taking a more active role for some time in a way that's been overlooked. We know about their aid to Africa, and attempt to buy Rio Tinto and things like that, but what's not covered is that they are winning the most World Bank contracts in Africa. They are very competitive. I think they are trying to represent the less developed nations, but have tried mostly to do it in a nonconfrontational way, so as not to upset the U.S., which often sees itself in competition with China in a way that the Chinese themselves do not.

You just came back from China. How is the economy there?
I think they are running things very well. They've got a large and much deeper stimulus package than we do. And they don't have our financial market troubles.

And how about Europe? You've been working with the French government to come up with a new way of measuring economic growth that would account for the benefits of education, staterun health care, etc. How would that work?
GDP is a misguided accounting number. Input figures are almost always more important than output figures. I'll give you two examples. In the U.S., we spend a lot of money on health care, but we have much poorer outcomes in terms of life expectancy, morbidity, etc., than many European nations. Yet that spending has the effect of increasing our GDP, even though much of the health-care spending is actually wasted money. Another example: we have the highest percentage of people in prison of any developed nation. This is a symptom of a dysfunctional society. Yet prison spending increases our GDP; it's a perverse effect. So, we're trying to come up with a method of accounting that would factor in things like this, as well as the benefits of education and health care and many other factors. It's not easy, and it certainly won't happen overnight, but it's meant to start a conversation about how we can achieve real, sustainable growth.

Do you think that the European welfare model is actually better suited to the economic needs of the moment?
Yes, definitely. Europe's social safety net can actually act as a kind of economic stimulus encouraging people to keep spending, or not to save so much, because they feel more secure. What's clear is that the American model of corporate welfare —taking care of companies, but not of people—is broken.

What's your take on the Geithner plan to offload bad bank assets in the U.S.?
It's terrible. Investors don't have to take responsibility—they can still walk away if it all goes bad. It's what I call American socialism—you socialize the losses and privatize the gains.