Joseph Stiglitz on Recession

Posted on Jun 3, 2008

commons.wikimedia.org

By James Harris

Click here to listen to this interview.

James Harris: This is Truthdig. James Harris here with Nobel Prize winner and author of the new book, “The Three Trillion Dollar War,” Joseph Stiglitz. Some of you may recall that we did talk to his co-author, Linda Bilmes, about a month ago, and she shared with us some of the horrible economic realities around the Iraq war, around spending with this war. And we didn’t get on any particular administration too much, but we talked about some ways perhaps to recover, and we will do so again today with Mr. Stiglitz. But first I want to take a turn. All the papers—the Wall Street Journal has forecast, pretty much, the seventh [interest] rate cut [by the Fed]. People are losing homes at alarming rates. The economy is—to put it lightly—in shambles. What’s it going to take, and how long is it going to take, for us to rebound?

Joseph Stiglitz: I think it’s going to take a while. The IMF is actually talking about 2010. I think I’m basically on that side, you know, the pessimists that think, that ... it’s not going to be quick. Obviously, the answer depends in part on what actions government takes. The Fed is basically only in the mode of trying to prevent a meltdown, very little in fact in keeping the economy going, resuscitating the economy. They’ve admitted it’s going to take fiscal policy and, unfortunately, the administration is doing too little too late, and most of what they’re doing is not very well designed. So, unfortunately, it looks as if we will probably have to wait until January 2009 to begin to see any effective medicine. And since economic policies take six months, nine months, a year, 18 months, to have their full effect, we’re looking towards the end of 2009/beginning of 2010 before we start seeing the benefits.

Harris: You were a Clinton Cabinet member early on in the administration, and certainly recognized and remembered for your work there. So imagine—and I’m not trying to put you in a seat that you don’t want to be in—but if you were a member of a cabinet right now, what type of policies would you put in place to begin to show positive effects in 12 months or less?

Stiglitz: That’s a good question. I think first you begin with a very big stimulus package. I mean, let’s face it: the U.S. economy was being—you could almost say it was, like, on drugs: our savings rate went down to zero, we were taking out $900 billion a year in mortgage equity withdrawals, there was a housing bubble, and people were living off of that effect. That game is over and we’re going to need something else.

Now, when you think about what to do, there are two basic criteria. One is, what has the biggest bang for the buck? Especially important right now because we have a big deficit and we can’t afford to squander any more money. This war has been very, very costly and it’s been totally financed by deficit spending, and it’s drained the economy. And so this year we’re looking to a record level of deficits—close to half a trillion dollars or more—so we have to make sure we have the biggest bang for the buck. The biggest bang for the buck is increasing unemployment insurance. We have one of the worst unemployment compensation systems in the advanced industrial countries. 

A second example of big bang for the buck is—most states and localities have what they call balanced-budget frameworks: they can only spend their income. Their income is going down. Property-tax revenues are going down; income-tax revenues are going down. That means they’re going to have to cut back expenditures, and that’s going to have another, depressing effect on the economy that’s just beginning to work its way through the system. Again, aid to states and localities to help make up the shortfall. Not their own fault but because of mismanagement on the part of the federal government.  They ought to get some assistance to help that shortfall.

Those are the kinds of things that would stimulate the economy a lot, give us the biggest bang for the buck.

The second problem is, you want to have an eye on the long-run problems. The long-run problem in the United States is not too little consumption; it’s too much consumption.  Savings rate is zero. Not sustainable. And yet, what is the administration banking on at the center of its stimulus package? A tax cut encouraging people to consume even more.  Well, the fact is that many of them are not going to take those checks and say, “Boy, I’d better take that and put it in my savings account.” You know, credit card interest rates—credit cards are going to be tightening up. ... American households are very badly in debt. 

So that was just badly designed from the perspective of either maximizing the bang for the buck or addressing America’s long-run needs. Our real long-run needs right now are lack of infrastructure, underinvestment in R&D, underinvestment in education.

So that’s where I would begin.

Harris: Let’s pause there, because that’s a lot. Giving someone $600 to right the wrongful economic policies of your country seems to be a problematic approach to fixing the economy.

Stiglitz: It’s laughable. You’re telling me that we’re seeing a meltdown in our financial markets, we’re seeing 2.2 million Americans are going to be losing their homes, and with that their life savings, and you’re telling me that you’re going to send a $600 check? That won’t even make up for the loss in their income since the last recession. The median American household has a lower income today—adjusted for inflation—than in 1999. There’s been growth in GDP, yes, but it’s all gone to the people at the top. And anybody looking at the reality of the American economy .... it’s not a success story as viewed by the vast majority of Americans. You have to say, what does it mean to be a successful economy? Does it mean to make one person richer and richer, or does it mean an economic system that delivers, year after year, increases in income to the majority of Americans? And—like it or not—our system hasn’t been doing that.

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