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The Big Picture: Joseph Stiglitz on the Economy

Tuesday, October 26, 2010

WNYC

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from political conversations on WNYC. On the Leonard Lopate Show, Nobel Prize winner Joseph Stiglitz weighed in on the Obama administration's economic policies.

For a topic that's become the central issue of the campaign season, the economy has gotten precious little serious analysis from candidates and pundits. Nobel Laureate Joseph Stiglitz offered his take as part of The Leonard Lopate Show's election series The Big Picture. Stiglitz is professor of economics at Columbia University and chair of the university’s Committee of Global Thought.

Stiglitz says the recession has been worse than he expected and the initial concensus on how best to manage it has splintered.

In the aftermath of the collapse of Lehman, there was a broad consensus that we needed to stimulate the economy. We were all Keynesians all over the world for a moment. That global consensus has frayed. And we’ve now turned to a situation where several countries have faced debt crises—Greece, Ireland is potentially on the verge. And several countries, the UK, are talking about austerity.

During this election season, critics of the Obama administration have called its economic policies ineffective. Voters are angry that unemployment is high, the number of home foreclosures this year is higher than it was in 2009. Many are critical of the American Recovery and Reinvestment Act, the stimulus package, saying it cost too much and hasn’t produced results. Stiglitz says the problem with the stimulus is actually the reverse of most people's complaint.

The problem with the stimulus was that it was too small and not well enough designed. It did work. Let’s be clear: it did work. If it hadn’t been for the stimulus unemployment, rather than peaking at 10 percent, would have peaked at 12 to 13 percent. 

Stiglitz says candidates like Republican Rick Scott, who is running for governor of Florida, and says the stimulus hasn’t created jobs is misinformed:

They were very clear, it wasn’t a question of new jobs. It was preserving jobs that otherwise would have been destroyed. This statement that it didn’t help with jobs is just wrong. I think every serious economist realizes that if it had not been for the stimulus, our unemployment rate would be 2 to 3 percentage points higher than it is today. And we have enough suffering as it is—one out of 6 Americans that would like a full-time job can’t get one. Without the stimulus, things would have been that much worse.

A great deal of the discussion about the recession is about political ideology rather than economics, Stiglitz says.

What’s sad about this is that the particular battle we’re going through is a battle that the world has gone through over and over again. Back in 1929 after the stock market crash that led to the Great Depression, there was a debate: what is the best way to get the U.S. out of the problem? There was one school of thought argued for Andrew Mellon, Secretary of the Treasury at the time, which was big deficits are the result of when the economy goes into a recession, revenue goes down, expenditures go up, deficits go up. What they said is, you have to cut back expenditures to get the deficit down and if you do that, confidence will be restored and the economy will start growing. Well, we know what happened. That policy led the stock market crash into the Great Depression. This is an experiment that’s been done over and over and over again. And almost every time, it leads to downturns turning into recessions, recessions turning into depressions. The other way, the only way you’re going get a restoration of confidence is to stimulate the economy and get growth.

Housing foreclosures have continued, and the housing market has remained in a slump. President Obama rejected a moratorium on foreclosures. Stiglitz says the banking industry engaged in terribly risky behavior and is now getting caught on minor technicalities associated with rushing foreclosures.

I think what we have to recognize is that the mortgage market has been fraught with fraud and deceptive practices, predatory lending, and what were seeing now is the consequences of those bad mistakes. Now, what the banks are claiming is ‘Oh, we only made a little mistake, we didn’t dot some I’s and cross some T’s.’ What this reminds me of a little bit is Al Capone. You remember Al Capone was finally convicted of income tax evasion when his real crime was murder, gangster, everything else, right? But he avoided that because he was very careful. He got caught you might say in a technicality. That’s the state of our banking system, our mortgage market. They’ve really been engaged in fraudulent behavior, things that should be illegal if they’re not illegal. And now they’re being caught up in a massive wave of resentment. Deservedly so.  

He pointed out that more than just the mortgage market is at stake. Trust, a basic tenet of capitalism, is being eroded. Recent news about banks not filing paperwork for foreclosures correctly means that the public worries that it can’t trust the banks. Conservatives have gained a lot of momentum in the midterm election campaigns by feeding voter anger about the economy, government spending, bank bonuses and high unemployment. The battle over whether to repeal the Bush-era tax cuts has been heated, with many arguing that raising taxes during a recession would be a mistake. But Stiglitz disagrees.

We couldn’t afford those tax cuts back in 2001 and 2003. Disproportionately, most of the money went to people at the very top. And it’s the people at the very top who’ve been doing so well over the last 20 or 30 years. I mentioned before that the median income in the United States—the people in the middle—has actually gone down. Today it’s lower than it was in 1997. So you would have thought that given that, you would have given all the tax cuts to people whose income is going down and none of it to the people at the top. But we did just the opposite. In the current conjuncture things are even worse, because we need to stimulate the economy, and these upper income people, when they get these tax benefits, they put it back in their bank account, or at least a very large share of it. One of the things about a stimulus is, you have to spend the money to stimulate the economy.

Tax cuts for those with the highest incomes costs an enormous amount, don't stimulate the economy and add to the growing gap between the rich and the poor, Stiglitz says.

Listen to the entire discussion on The Leonard Lopate Show.

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Comments [2]

Melvin Goldstein from Dallas tx

The economy is non-linear. Non-linear equates to chaos theory. Chaos is one of Physics Foibles - non-predictable. Butterflies may cause tornadoes!!!

Dec. 14 2010 08:45 PM
Michael Hammond from Tampa Fl

When you move money from the private sector to the government you grow the government and you shrink the private sector.
Is that too simple to understand?

Oct. 26 2010 07:20 PM

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