Joseph Stiglitz on Recession
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.Harris: And they’re not doing it, I imagine, because, aside from long-run consumption, getting that down, there was another component you were going to speak about that, in the future, doesn’t look good for the U.S.
Stiglitz: We have also been encumbering ourselves with huge debts, some of them apparent, some of them not so apparent. You know, this war has cost us $3 trillion, we estimate. That’s conservative. A more reasonable estimate is somewhere closer to $4 trillion or $5 trillion. Among those costs are $600 billion in unfunded entitlements to pay for the health care costs and disability benefits of our injured/disabled returning veterans. About 40% of the 1.65 million people who’ve already been deployed are coming back with disabilities. Some of them very, very serious disabilities. That’s an obligation that we’ve taken on and we will be paying this for decades to come. Because we borrowed every dime of this war, Americans are going to have to pay those bills. There’s no such thing as a war for free. Just like the economists say, there’s no such thing as a free lunch. And yet the administration was trying to pretend that you could have a war and not pay any sacrifice, not encumber your lifestyle. But the fact is that somebody is going to have to pay that price.
Harris: I just saw the report — I believe on “20/20” — that 300,000 soldiers have reported post-traumatic stress disorder. So these are people that fall into the category that you’re talking about, that will call upon the U.S. to pay for their health care. Am I getting that wrong, or is that right on?
Stiglitz: You’ve got it. I mean, one of the things is, right now, one of the — you might call it duplicitous — one of the shocking things that we uncovered as we were doing research on our book, on “The Three Trillion Dollar War,” is that so many of the veterans, when they come back from the battle in Iraq, fight a new battle: a battle with the bureaucracy to get the benefits to which they thought they were entitled. One of the reasons is that the Bush administration has underfunded the Veterans Administration. You know, they say that we’ll give our troops everything they need, they’ll give our veterans everything they need, but the reality is that they have vastly underfunded it. As late as 2005/2006, they were basing their budget on … data from 2002, before the war, as if there had been no casualties, as if there had been no injuries in the war. The result of this is, the backlog of 400,000 has built up in the VA, the Veterans Administration. And so even when they go to the VA hospitals, they may not be able to get the care, particularly for psychological problems, for PTSD, that they need. We know from Vietnam what happens when you don’t deal with these problems quickly. You wind up with problems of homelessness, people who have a hard time putting their life together. And it looks like we’re on the road to another disaster like that, unless we resolve to do something about it very quickly.
Harris: I have a question for you about that, but I — you’ve just reminded me of this article that I read on you in Rolling Stone, of all places. You talked about human capital. I had never heard human life evaluated that way. But you talked about people’s inability, when they return from this war and other wars, to contribute to the economy and the economic well-being of the U.S. And I found that to be one of the most profound things, because that seems to be — to me — the problem with myopic policies, whether they be in the Federal Reserve or whether they be in the administration. I don’t care which administration it is. But that seems to be the most callous negligence that I’ve seen in quite some time.
Stiglitz: I agree. And one of the scandals, again, that we discovered as we were doing this — discovered in the public sense — that people in the armed forces have known about this. You know, after World War II, we had the GI Bill of Rights that guaranteed every GI a right to an education and really had a very big effect on transforming our country. People got to go to college. They changed the face of America. Well, you know, the returning veterans in this war aren’t getting the same benefits. They have to sign up at the beginning of their service to get those education benefits. They have to pay, upfront, a couple of thousand dollars. If they don’t do that upfront — and that takes away a large fraction of their salary for the first period of their enlistment — they can’t get them. They can’t say in three years, “Oh, by the way, I’d like to get a GI bill. I’d like to get these education benefits.” They say, “Too bad; you didn’t sign up for this when you first signed up.”
You know, an 18-year-old is very different from a 22-year-old. An 18-year-old may not be able to think about what he wants. A 21-year-old is beginning to think more seriously. So rather than facilitating their ability to become active contributors, well-educated contributors to our economy, to our society, we put roadblocks. And I think it’s all based on an attempt to save money. To say, “Well, if we make them pay upfront, maybe they’ll forget about it, maybe they won’t … and then maybe we can make money out of our education program!” Harris: Dammit, I agree with you. I mean, does it all boil down to making money? In some ways, I think we’ve become that type of nation. Has our need to be globalist, to put our factories in other countries, to allow other people to do work that we used to do — has that come home to roost? Are we starting to see, in addition to the war, just a diminished country? A country that cannot produce anymore? A country that cannot do anything but consume, as you said earlier? Where does the psychology come down on all of this?
Stiglitz: In a way, the problem lies not so much with engaging in the world but from thinking that we can engage the world totally on our terms and that we could win no matter what we did. So, for instance, China realizes that it’s a poor country. They’ve said, “Look, our aspiration is to be a moderately prosperous country.” Not even to be prosperous: moderately prosperous. Because they know they have so far to go. But they know, to get from where they are to where they want to be, they have to invest in education, in technology, in infrastructure. They know they can’t squander huge amounts of money on the military. And what we spend in a few months in Iraq is their total defense budget. Because they know that every dollar they’re spending on defense is not available to increase their standard of living. In the long run, the strength of China will depend on the strength of their economy.
So we took the opposite view. We said, “Well, we can squander $3 trillion on a war in Iraq.” We cut back on research. We haven’t provided the educational benefits, the health benefits that other advanced industrial countries have done. Let alone when you go to Europe and there’s all the excitement about new infrastructure to try to deal with the problem of global warming. Fast trains. Anybody who travels on American trains, visits our airports, feels the gap between where we are and where much of the rest of the world is.
Harris: Well, what do we do? George Washington told us that party politics was a bad idea, but here we are, fascinated by both races in front of us. John McCain’s endorsement of this war, the idea that he’s OK with being there for, as he said, “a hundred years.” Isn’t that but evidence that we will continue down this road as globalists, as people who always feel like they can make it work just as long as they work it hard enough? Does it seem like there’s a real change, economically speaking, on the horizon for you, given what we just talked about?
Stiglitz: Well, you know, I still have a lot of faith in American democracy and, in a way, that was one of the reasons I wrote the book. Because I felt that if Americans could only understand what this war was costing them, the connection between the weakness of our economy and the waste of money in Iraq, that actually it’s undermined our security, not enhanced our security. That, you know, as an economist, we begin with the premise: resources are scarce, no matter the richest country in the world. Resources are scarce and we have to use our resources carefully. We haven’t been doing that. There are lots of examples in the world of countries that didn’t learn that lesson and suffered the consequences.
So, I have a lot of faith in America and I believe, as we start to point this out to them, they’re trying to understand why it is that they feel poor, why they aren’t doing well. And as they ask that question, hopefully they’ll come to realize that the recipes that were sold in the past, particularly by people like McCain and Bush, are not the recipes that work. You know, tax cuts are not the solution to all problems. In fact, our current economic downturn is — besides the war — the other major factor, I think, is the tax cut, which was not designed to stimulate the economy and didn’t do it very much and forced a greater burden on monetary policy beyond its ability to deliver in a way that was sustainable. So my view is that the more we can discuss these issues, the more we can try to come to understand them, the more likely the American people will say, “We’ve had enough of that strategy. Let’s try another strategy.”
Harris: Where do poor people fit into all of this? I’m getting more phone calls and having more conversations with people that are at their wits’ end. They can’t pay the bills. They’re either losing their homes or are about to lose their homes, or they’re losing so much value that their loan doesn’t make sense. Where do the poor people fit into all of this? We talked early on in this interview about a turn-around coming perhaps in 2009. Does the poor class get larger over the next year? What happens there?
Stiglitz: Unfortunately, that is the prospect. Unless we do something. And what’s so frustrating to so many of these people is, it’s not because they’re not working hard. They are working hard. They’re working as hard as they can. When you look at the data, the amount of work that they’re working has gone up; the time they have to spend with their families is going down. They’re struggling — they’re struggling to make their ends meet. And so this is where the role of the government comes in. These are forces beyond the ability of any single individual. What we obviously need to do is to have a more dynamic economy that helps drive up wages. The focus has been on driving down wages to increase profits. And we need to really say, “Look, enough of that.” We need to have higher real wages. We have to figure out how to deliver higher real wages, increasing productivity. We need to have more social protections, not less social protections; the world has become more volatile. And people — these risks are beyond their ability, to many people, to meet.
The irony is — talk about the financial market — the financial market has prided itself on its ability to manage risk, design products to help people manage risk. What we now see is, the financial market has created more risk and has created risk beyond their ability, even, to manage. But, meanwhile, it didn’t create the products that the world needed, that Americans needed to help manage the risk to own their own homes. Now, that’s the risk that should’ve been managed. And they totally failed. And this is a clear argument — you know, we know the answers of how to do that. There are products out there. But clearly, the private sector is not interested in delivering on those, probably because there’s not profit. You know, one of the problems of being poor is, there’s not much money in servicing you. And that’s where the government needs to come in, a government that focuses not on helping the Halliburtons, the Enrons, the oil companies, the Exxons, but somebody to come in and try and help the average American. And … it’s not just the poor we’re talking about. The median American — that’s the person in the middle — is today worse off than he was in 1999. So we’re talking about helping the majority of Americans, and that’s what democracy is about.
Harris: Mr. Joseph Stiglitz, the author of the new book, “The Three Trillion Dollar War.” And if you don’t have a copy of this book, you need to have it on your person. Not at all times, but it needs to be in the house, because it’s about the war. But beyond that, it is about the underlying philosophy that we need to take on as Americans, as policymakers, as people, in order to fix these problems. I always say to my son, “When we spill milk, there’s no need to cry.” He literally thinks you have to cry when you spill milk, because he thinks he’s in trouble. I always say, “There’s enough paper towels to fix it.” And he said to me the other day, he said, “They keep talking about this economy. They’re going to need a lot of paper towels.”
But I agree. I don’t want to end on a sad note, but I want to end reflecting on what you said earlier. You know, as long as we start the conversation and keep the conversation going about this issue, it’s something we can work through.
Stiglitz: I agree.
Harris: Well, thanks for joining us today on Truthdig.
Stiglitz: Nice to be here.
Harris: For Joseph Stiglitz, this is James Harris, and this is Truthdig.