We have to stop feeding the crazy.
Nobel laureate Joseph Stiglitz is the ultimate insider-dissenter. The chair of President Clinton’s Council of Economic Advisers and a former senior vice president and chief economist at the World Bank, Stiglitz has become well known for his criticisms of globalization, the Bush Administration’s policies, and, now, the Obama economic team.
Stiglitz first burst into the public consciousness, while still with the World Bank as a “special adviser,” when he wrote an article in The New Republic in April 2000 excoriating the International Monetary Fund.
The piece began: “Next week’s meeting of the International Monetary Fund will bring to Washington, D.C., many of the same demonstrators who trashed the World Trade Organization in Seattle last fall. They’ll say the IMF is arrogant. They’ll say the IMF doesn’t really listen to the developing countries it is supposed to help. They’ll say the IMF is secretive and insulated from democratic accountability. They’ll say the IMF’s economic ‘remedies’ often make things worse—turning slowdowns into recessions and recessions into depressions. And they’ll have a point. I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the U.S. Treasury Department, responded. And I was appalled.”
Then-U.S. Treasury Secretary and President Obama’s chief economic adviser Lawrence Summers reportedly offered World Bank President James Wolfensohn a choice: It’s either Stiglitz’s head or yours. Stiglitz was swiftly ejected.
The following year, Stiglitz received vindication when he was awarded the Nobel Prize in Economics for his work showing how markets operate inefficiently under a variety of circumstances. Ever since then, he has produced a steady stream of articles and books analyzing the world economy (Globalization and Its Discontents and Making Globalization Work), economic policies at home (The Roaring Nineties), and the cost of the Bush wars (The Three Trillion Dollar War). He’s currently at work on a book dissecting the economic crisis and “why the economics profession failed so badly” in predicting it, as he told me.
Here in the United States, his heretical views have earned him the reputation of a gadfly. But “when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle,” writes Newsweek. “Stiglitz’s work is cited by more economists than anyone else’s in the world, according to data compiled by the University of Connecticut.”
I interviewed Stiglitz in August at Columbia University, where he’s a professor and the founder and head of the Initiative for Policy Dialogue, a forum to foster debate on economic policy-making. I’ve met Stiglitz twice now, and have been struck by how jovial and approachable he is. Since a camera crew was busy dismantling equipment in his office, we chatted in a nearby conference room. Our discussion was interrupted by his wife and media handler Anya, who came in with ice cream sandwiches for both of us. Stiglitz spent much of our conversation tackling the ice cream while rocking back and forth in his chair.
Q: In April, you had said that the economy is “going to be bad, very bad.” Now what’s your assessment?
Joseph Stiglitz: It’s still bad. The free fall that we were experiencing in the months after September has been arrested. But it would be wrong to confuse the end of free fall with a robust recovery. Right now, they’re saying, “Well, the rate of decline has declined.” And, quite possibly, the rate may turn from negative to positive. But every downturn comes to an end. The question is the shape of the recovery. It’s already been the longest downturn since the Great Depression. It would be a mistake to think that it is likely to be V-shaped. It is likely to be very protracted.
And the vocabulary that is being used by many people in the media is misleading because they say: “the end of the recession.” What most Americans mean when they say “the end of the recession” is, “When will it be back to normal? When can we get jobs? When will the employment rate be back to 4 percent or 5 percent?”
For that to happen, growth has to be very strong. To get back to normalcy, we will have to have extended growth of more than 3 percent. That’s not in the cards.
Q: Some Obama Administration officials have stated that they didn’t know it was going to be this awful. But many—including you—had predicted this. Why didn’t they listen?
Stiglitz: I actually find it very surprising that they’ve said that. I understand why political leaders in the beginning want to be cheerleaders to generate optimism. But to admit that they didn’t understand the depths of the problem afterwards, I found a little bit surprising. This is, quite frankly, worrisome because if they don’t understand the basic dynamics, then you worry about if they understand what needs to be done. And I think that reflects their mistaken focus: They thought the only problem was the banking system, and if they fixed the banking system, all would be fine. But the banking system and the mortgage problem were symptomatic of some deeper problems, and evidently they still haven’t recognized those deeper problems.
Q: You’ve said about Lawrence Summers and the rest of the Obama economic team that they’re “either in the pocket of the banks or they’re incompetent.”
Stiglitz: Where did I say that?
Q: I have the quote with me.
Stiglitz: Really? Several people have quoted that to me, and I don’t remember saying that quite so bluntly. I may have thought it. [Smiles.] But usually I try to be more temperate than that.
Q: You did say that, sir. [I show him the clip and read back the quote to him.]
Stiglitz: Oh, it was the Bloomberg News article. When I said “the pocket of the banks,” it is not necessarily a mercenary relationship. It is a mindset. They haven’t been asking the questions, such as: “What needs to be done?” Which is, we want more lending at least cost. And there are lots of ways to do it. I’m not sure I said it quite that way, but anyway.
Q: So, what is your assessment of the person who holds the position you did in the Clinton Administration—Larry Summers—and his team?
Stiglitz: I think what they’ve been doing is largely almost in firefighting mode without a good conceptual framework—either at the micro or the macro level. Micro, you would ask: “What kind of financial or banking system do we want?” Macro, you would say: “What are the underlying problems in the structure of our economy?”
You don’t see that at all. The result is that some of the problems have been exacerbated: The size of the deficit is larger. Many of the programs have been very poorly designed, like the PPIP [the Public-Private Investment Program]. The not surprising thing is that they haven’t worked. The recovery of the banks is what happens when you reduce competition, lend money to them at zero interest rates, allow them to gamble. That particular style of restoration actually inhibits the economic recovery.
Wall Street banks have used the same tactic that Bush used in the war on terror—fear—and they’ve basically said that if you don’t do what we tell you, the sky will fall. If you don’t do what we tell you, it will be the end of capitalism as we know it. The failure of Lehman Brothers lent some credence to those fears.
But what were they afraid of? The fact that the government had to put up hundreds of billions of dollars to Citibank in guarantees was a public declaration that Citibank was a mess. Making Citibank go through financial restructuring would not have conveyed any more different information. So it’s very hard to see why it would have had that kind of a panic if it were done well. The Fed and the Treasury didn’t fully understand the financial system, and so that made it easier for them to give in to the blackmail. But even when they gave in to the blackmail, there is absolutely no reason why they didn’t get more in return.
Q: Why isn’t there more visible outrage at the ground level about the bailout?
Stiglitz: There is a lot of outrage, actually. It’s been focused on the bonuses. The guys have been very clever in trying to frame the issues as, “We gave Wall Street all this money not because we loved them but because we needed to save the economy.” But that doesn’t answer the question because we could have given the money and gotten something back. We didn’t have to just give it to them. We could have saved Wall Street without putting our future in jeopardy. I predicted that there would be all-around consequences—in the long run as well as in the short run. People are now saying we can’t afford health care reform because we spent all the money on the banks. So, in effect, we’re saying that it’s better that we give rich bankers a couple of trillion than giving ordinary Americans access to health care. That’s a choice our country made. I don’t think if we had been able to make that choice rationally, we would have said that’s what we want to do. We would have said: “Can’t we save the banks and solve our health care problems?” The answer is yes. You could have.
Q: You are for temporary nationalization of the banks, aren’t you?
Stiglitz: I prefer the word “conservatorship” because “nationalization” has particular overtones, and the basic point is that this is financial restructuring. And that’s not a dirty word. It’s as American as apple pie.
Temporary nationalization of the banks that are in very bad shape would mean basically that the government is the temporary owner. I always believe that the government should focus on its comparative advantages, and banking is not one of them. It should, therefore, if it nationalizes banks, sell them back to the private sector.
There is, however, a more compelling case that can be made: What we’ve seen is that private banks have incentives to prey on poor people, and have incentives not to serve them. So I could certainly see the creation of a government bank that fills in these holes: The private sector doesn’t want to provide banking services to the poor. Well, maybe the government bank would want to do that. It would certainly be better than the current system where the poor have to pay 20 percent for cashing checks and things like that.
Q: Your Nobel-winning work dealt with market imperfections. How does that tie into our current debate on health care?
Stiglitz: Health care is very different from other sectors of the economy in several respects, one of which is the fact that the risk can be very high beyond people’s ability. That leads to insurance.
It has a second problem, in that unlike conventional goods where you know whether you like apples or oranges, your demand here is very much derived on the basis of your judgment of the recommendations given by the doctor. So, it’s a very peculiar demand—it’s a real problem with a lack of information.
The third is that from the societal point of view, different people are in different circumstances, and markets try very hard to differentiate who are the high risk and who are the low risk. From a social point of view, you might argue that it is often desirable for those who are healthy to provide some support to those who are less healthy. Yet the insurance industry will spend large amounts of money to avoid doing that.
The result of all this is that the private health insurance market doesn’t work very well. There is a growing consensus that the European systems have worked better than the American: They have been able to deliver better health care to more people at lower cost. America’s system is very strong in health innovation but that’s probably as much or more to do with the high quality of our medical schools and our research universities, and the large support to research given by the government through the NIH [National Institutes of Health] and other mechanisms. One might actually expect that if you continue that and marry that with a public health insurance system that one could retain the dynamic advantages and have vast increases in efficiency delivery.
Q: Which countries are weathering the global downturn the best and why?
Stiglitz: Probably, China is weathering it the best. The growth decline is significant, but it’s still growing at 6 to 8 percent. This is because it took forceful action and it had the financial resources to do that. But it never engaged in capital market liberalization. Had it done that, it would have probably suffered.
India has done reasonably well. It, too, never bought into financial market deregulation. So the countries that have done best are the ones that never bought into the IMF-Washington Consensus policies.
Q: Which economic model would be the best for the developing world?
Stiglitz: I think that for the developing world there are many versions of capitalism, and countries have to choose one that’s appropriate. What we’ve seen is that the version called unfettered market American-style capitalism doesn’t work. Developing countries can’t afford that kind of luxury. They just can’t afford it. Period. If there’s a mistake, they can’t afford to put out $2 trillion. So that’s clearly a lesson. I think that the countries whose citizens are bearing up to it the best are perhaps some of the Scandinavian-European because they have social protections. So, the European social model in one version or another could be adapted for developing countries.
Q: So, what is the future of U.S.-style capitalism?
Stiglitz: When you say U.S.-style capitalism, you have to be a little more specific: What are the particular characteristics that define American-style capitalism? If you say it’s the belief in deregulation that began with Reagan but was accelerated in the financial markets in the 1990s, I think that there will be a great deal of skepticism about that economic model. It clearly didn’t work. Everybody agrees that there was a problem with deregulation. I think that there was a deeper problem with the banking sector, but even the banks agree that the regulators weren’t doing their job. No one believes that we ought to return to that world, but that’s in theory.
Of course, the financial sector doesn’t want to face regulation. So, while they blame lack of regulation rather than their own misbehavior, they’re not very enthusiastic about changing rules, because the rules after all, have done very well by them. So, there will be a fight going forward, and it is likely there will be some regulations, but not enough—not enough of finance and not comprehensive enough. By that I mean that too many people want to say that this is a problem of just the financial sector.
But the financial sector’s problems reflect, in part, the problems of corporate governance. They had incentive structures that led to excessive risk-taking without suffering the consequences of that. We have to understand that some of the problems we saw are more pervasive, and we’ve seen them before, such as with Enron and WorldCom. So when you see so many problems, and in so many ways, you have to conclude that it’s not just a problem with a few bankers, and it’s not a problem just in the banking sector or even the financial sector.
Q: Moving on to another subject about which you’ve co-authored a book: the Bush wars and their cost, which you’ve estimated to be $3 trillion. How did you arrive at that figure?
Stiglitz: That was an estimate, and it was actually in the range of slightly less than $3 trillion to over $5 trillion. That was the overall cost, not only on the budget but to the economy. It was a conservative estimate. We broke it down both into the Iraq War and the Afghanistan War.
The book was based on some alternative scenarios about how the war in Iraq would go in terms of length. It appears that if we stick with the disengagement phase, it will be toward the lower end of our range, though there is a lot of uncertainty about what will happen as we disengage. But as we’ve been pulling out of Iraq, we’ve been putting more troops in Afghanistan, and from what everybody has been saying—my discussions both here and in Europe—that’s not going well and has a real possibility of becoming a quagmire.
Q: You were invited to dinner with President Obama. How did that go?
Stiglitz: President Obama is very, very thoughtful. I think he understood some of the issues—indeed, I’d say that he understood most of the issues. At the same time, the hardest questions can’t even be fully articulated in a short meeting like that.
Q: Would you be willing to be part of his Administration?
Stiglitz: If the President asked you to help, I don’t think anybody could refuse, unless one felt that one couldn’t be effective. One has to always ask the question: Where can one be most effective in helping shape policies? It is always difficult when you’re inside because you’re very constrained. It is a consensual process. They try to build consensus, and therefore you’re exerting more influence within the Administration but less influence through the broader political process. And that is just a difficult judgment that one would have to make at the time about to what extent would they listen, to what extent would you have influence on the outcome.
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Amitabh Pal is the managing editor of The Progressive.
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