Joseph Stiglitz, Nobel Prize-winning economist and professor at Columbia University. His latest book is Freefall: America, Free Markets, and the Sinking of the World Economy.
As President Obama defends the success of his one-year-old $787 billion stimulus package, we speak to Nobel Prize-winning economist Joseph Stiglitz, who says the stimulus was both not big enough and too focused on tax cuts. Stiglitz is the author of the new book Freefall: America, Free Markets, and the Sinking of the World Economy, which analyzes the causes of the Great Recession of 2008 and calls for overcoming what he calls an "ersatz capitalism" that socializes losses but privatizes gains. [includes rush transcript]
This is a rush transcript. Copy may not be in its final form.
JUAN GONZALEZ: President Obama defended the success of his one-year-old $787 billion stimulus package Wednesday. Speaking on the first anniversary of the day he signed the American Recovery and Reinvestment Act into law, Obama said it helped prevent the country from sliding into a depression.
PRESIDENT BARACK OBAMA: One year later, it is largely thanks to the Recovery Act that a second depression is no longer a possibility. It’s one of the main reasons the economy has gone from shrinking by six percent to growing at about six percent. And this morning we learned that manufacturing production posted a strong gain. So far, the Recovery Act is responsible for the jobs of about two million Americans who would otherwise be unemployed.
JUAN GONZALEZ: President Obama’s comments come in the midst of a bitter debate between Democrats and Republicans over the success of the stimulus bill. The White House is now aggressively trying convince Americans of the virtues of the stimulus package.
This week Vice President Joseph Biden and other administration officials are traveling across the country, talking up the Recovery Act and trying to clear up public confusion between the bailout and the stimulus.
On Wednesday, Obama also acknowledged the limited success of his stimulus package in tackling rising unemployment.
PRESIDENT BARACK OBAMA: You can argue, rightly, that we haven’t made as much progress as we need to make when it comes to spurring job creation. That’s part of the reason why the Recovery Act is on track to save or create another 1.5 million jobs in 2010. That’s part of the reason why I expect Congress to pass additional measures as quickly as possible that will help our small business owners create new jobs, give them more of an incentive to hire.
AMY GOODMAN: Well, for more on the success of the stimulus, what to expect from the Obama administration and Congress, and the state of the American and global economy, we’re joined now from Chicago by the Nobel Prize-winning economist Joseph Stiglitz. His latest book analyzes the causes of the Great Recession of 2008 and offers suggestions for how this country can learn from what he describes as a "near-death experience" instead of continuing what he calls an "ersatz capitalism" that socializes losses but privatizes gains. His book is calledFreefall: America, Free Markets, and the Sinking of the World Economy.
Well, Joe Stiglitz, welcome to Democracy Now! Why don’t you start off by assessing this first anniversary of the stimulus?
JOSEPH STIGLITZ: Well, it has made a difference. I think President Obama is absolutely right that, were it not for the stimulus bill, unemployment would be higher, much higher, than it is today.
And we should be clear that the unemployment rate that we have today is unacceptable. Unemployment is almost ten percent. But more telling, more than one out of six Americans who would like a full-time job cannot get one now.
The problem with the stimulus was not that it didn’t work, but it wasn’t big enough, and it wasn’t as well designed as I would have — I would have liked. Two problems. What was needed was a stimulus of at least 50 percent larger. Even the President’s own economic adviser talked about the need for a $1.2 trillion bill. But unfortunately, President Obama wasn’t given that choice. Even before it was presented to him, it was downscaled to a choice between $600 and $800 billion, and he pushed for the larger number.
The second problem was that about a third of it is in tax cuts. And with Americans burdened with debt, with the uncertainties in the job market, much of that tax cut went into savings, not into spending. And the nature of a stimulus is you have to spend it. So while the money may have given them more security, may have provided individual benefits, it did not provide the stimulus that, for instance, directing money to help states maintain their universities, schools, teachers, would have done.
You know, the unusual situation we have today is there are a lot of youth unemployment, but the schools, the universities are being cut back so that they can’t use this time to build up their skills. Other countries have really tried to do it much better, tried to make sure that at least if you can’t get a job, you can get skills that increase your productivity.
JUAN GONZALEZ: Well, Joe Stiglitz, isn’t there a question in terms of how the administration even tried to sell this bill to the American public that’s created the enormous confusion and the pessimism now among the people, in terms of how many jobs were actually created? Because they always talked about saving or creating new jobs, when the reality is that it appears that the bulk of the stimulus basically went to saving jobs, not creating any, obviously, net gains in US employment.
JOSEPH STIGLITZ: Yeah, I agree with you. There were actually two problems in, you might say, marketing. The first is that the administration, at the same time, continued the massive bailout of the banks. And that was a terribly designed measure, where money was poured into the banks, that was defended on the grounds that it would restart credit and the flow of credit. It didn’t work. There were no restraints. And the fact that as we were pouring money into the banks, they were pouring money out in bonuses, really got the ire of the American people. So that was the first problem.
The second problem one is, as you said, that they talked about this ambiguity of saving or creating. But that was a difficult one to try to explain. The economists call this the “counterfactual” — what it would have been, but for the stimulus. And that’s a hard concept to try to explain to people: if we didn’t have the stimulus, the unemployment rate would have been even higher.
Interesting thing was, part of the problem, the administration was overly optimistic about where the economy was going, which is part of the reason that they didn’t have the size of the stimulus that they needed. They thought the unemployment rate was going to peak at about ten percent and that they were going to bring it down to eight percent, as opposed to other people, like Mark Zandi, who were talking about unemployment peaking around 12 percent, and they’d be bringing it down to ten percent. I was among those who were more pessimistic about where the direction of the economy was going, and unfortunately, the bears, people like me who didn’t — who thought that there were real problems, proved to be correct.
AMY GOODMAN: In that case, Joe Stiglitz, has the White House asked you to join them?
JOSEPH STIGLITZ: No, no. They have from time to time talked about, you know, advice on particular issues. We’ve kept in contact, but they have — you know, any administration has their team that they’re going to have to rely on.
AMY GOODMAN: But quite seriously, and then you look at President Obama’s team, and what is your assessment of them? So they don’t choose you, who’s gotten it right, but they do, for example, the bigger team, the ones in charge, Larry Summers, Timothy Geithner. What’s your assessment of them?
JOSEPH STIGLITZ: Well, you know, they’re — they are very devoted. I do think that they have the interest of the country at heart.
There is a problem, and a problem that I talked about in my book Freefall. Actually, there’s more than one problem. One of them is that they were so associated with the failures of the past that even were they to give the correct advice, there would be a suspicion. There would be a suspicion, partly, as I say, because they’ve been very closely connected with some of the measures that were clearly done to benefit the financial sector, the banks.
Two examples. They were — one of them was very closely associated with the repeal of the Glass-Steagall Act that allowed the “too big to fail” banks to get even bigger. For commercial banks, that are supposed to do boring banking, and the banks, the investment banks, that are supposed to manage money for high-income people, they allowed those to get together, and the culture of risk-taking took over the whole industry. They were responsible for the law that said we will not allow the regulators to regulate derivatives, these — what Warren Buffett called “financial weapons of mass destruction.” One bailout, that of AIG, costing taxpayers $180 billion. So, you know, that was the first problem.
The second one is that it’s not always clear that people change their mindset so quickly. If you believe that markets are always self-correcting, that they always take care of themselves, that you don’t need regulation — even when the evidence comes in, that that’s not true — the question is, do you think it’s a minor adjustment that’s required, or do you think there’s a more major overhaul that’s required? Is there a problem with the plumbing — we just need to unclog the plumbing, and everything will flow quickly? Or is the real problem with the design of the system, the balance between the market and the state? And the risk is that they will be too aligned with the mistaken economic philosophy that has dominated the last three decades.
AMY GOODMAN: We’re talking to Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University, has just written a new book. It’s called Freefall: America, Free Markets, and the Sinking of the World Economy. We’ll be back with him in a minute.
AMY GOODMAN: We’re talking with Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His latest book is called Freefall: America, Free Markets, and the Sinking of the World Economy. Juan?
JUAN GONZALEZ: Well, Joe Stiglitz, one of the things that intrigued me about your book was the effort that you did to look at the historical development that preceded this Great Recession of 2007, 2008. You actually trace the origins of some of the aspects of the crisis back about a decade to what was happening in the third world, especially in Asia, all of the countries that experienced crises in 1997, 1998 — Thailand, Malaysia, Indonesia. And it reminded me very much that people forget that the Great Depression of the 1930s was actually preceded by an enormous crisis in the third world in the 1920s that, if people had been looking, would have told them what was about to happen here in the United States. Now, you had a front-row seat in that, because you were involved with the World Bank back then. Could you talk about what happened in the late ’90s and its relationship to the current crisis?
JOSEPH STIGLITZ: There are actually two connections. One of them is that we were seeing played out around the world the consequences of the kinds of deregulation, financial market deregulation, that had begun in the United States and around the world in the era of Reagan and Thatcher. In the quarter-century before that, the world had experienced the first extended period in which there was no financial crisis since the beginning of capitalism. Financial crises had happened over and over and over again, and after the Great Depression, we passed a set of regulations in the United States, and similar ones in other countries, that at last had provided an element of financial stability. We had stopped the banks from engaging in the excesses that had repeatedly marked their behavior.
We forgot that, those lessons. We deregulated. Unfortunately, the World Bank and the IMF were at the forefront of that in the days and the years before I arrived, and the result of that was that there were literally more than a hundred financial crises around the world in the period after the deregulation movement began. And the consequences were really serious. I saw, for instance, Indonesia, in the central island of Java, the unemployment rate got up to 40 percent. You know, I can remember people saying, you know, “We’re so much smarter than we were back in the Great Depression, we know how to prevent another recession of that depth.” But we were as smart then as we are now, and the right policies were not put into place, and Indonesia went into this really serious depression.
The second link is a forward-looking link. Because of the way the US Treasury and the IMF managed those crises around the world, the policies they pushed on these countries, the economic downturns turned into recessions, recessions turned into depressions. I talked to the prime minister of one of these countries, and he said, quite frankly, “We were in the class of ’97. We saw what happens if you don’t have enough reserves.” And then he went on to say, “We’ll never let this happen again.” And he and countries all over the developing world started to save. They started to build up reserves, hundreds of billions of dollars every year.
Now, this led to greater security for them, but it has contributed to a global problem. If people aren’t spending, there’s a lack of global aggregate demand, a lack of spending that will sustain the global economy. In a world of globalization, it is global aggregate demand that matters a great deal.
So, what we are now seeing, and we’re likely to see in the future, is that this problem, already serious, is going to get worse, because the countries that did better in this crisis were the countries that had built up the most reserves. China has built up reserves of over $2.3 trillion. Yeah, it’s a huge amount of money. China is the one country that never went into a recession. Growth did slow down from about 12 percent down to seven, eight percent, maybe for some quarters even lower than that, but it’s back to nine percent. It could do that because it had these huge reserves. So the lesson that countries are learning is save, don’t spend. And, of course, if the countries follow that lesson, then the global recovery will be very anemic.
AMY GOODMAN: Coming forward to today, Joe Stiglitz, I wanted to turn to President Obama in his State of the Union address, who called for a freeze on government spending, except, well, notably, in relation to spending on war. The record $3.8 trillion budget Obama unveiled the following week boosts money for war while cutting domestic spending. This is what he said.
PRESIDENT BARACK OBAMA: Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.
AMY GOODMAN: That was President Obama in his State of the Union address. Your assessment of this? You’re also author, with Linda Bilmes, of The Three Trillion Dollar War. What about the cost of war and the spending freeze on everything but war?
JOSEPH STIGLITZ: Well, first, wars are very expensive, and that was the point that Linda and I made in our book, that much of the cost of the war is beneath the ground, dishonest accounting, costs that we’re going to have to pay, for instance, for the disabled. The fraction of those fighting in Iraq and Afghanistan that are coming back disabled is enormous. It’s now almost one out of two. And many of these disabilities are very, very serious. And we are going to be paying these costs for a half-century going forward. So we should remember that these costs are larger than the costs that they’re admitting to.
But going back to the basic economics of what we’re talking about here, two points I’d make. The first is a point that Linda and I made in our book, and that is, spending on the war is spending that does not stimulate the economy. It provides the least bang for the buck in terms of the economy of almost any other kind of spending. In Iraq and Afghanistan, we’ve used large numbers of foreign contractors. Money that’s spent over there doesn’t have a second round of effects back at home. What we count on when we spend money in other areas is that we spend the money, the people who receive the money spend the money, that creates more jobs, and then they spend the money. And that round — that circulation of the money around keeps building up. But if we spend the money over on war costs, we don’t get those kinds of indirect benefits.
Secondly, unlike other kinds of spending — on investments, on education, infrastructure, technology —- we don’t get extra tax revenues from the extra growth. When we spend money on these other areas, the economy grows. When the economy grows, tax revenues increase. It’s reflecting the same kind of shortsighted behavior perceptions that got the country into trouble in the first place. It’s not the national debt today that matters; it’s the national debt five, ten, fifteen, twenty years from now. If we spend the money well and that creates a stronger economy, that will create more tax revenue. And just like a firm borrows to make profits in the future, it makes perfect sense for us to borrow to create jobs today and to get more tax revenues in the future, and our national debt will actually be lower if we spend more money now.
JUAN GONZALEZ: Well, Joe Stiglitz -—
JOSEPH STIGLITZ: The final point, the President —-
JUAN GONZALEZ: I’m sorry. Go ahead.
JOSEPH STIGLITZ: You know, I just want to emphasize the point, the jobs problem is much more serious than the President seems to realize. We’re not going to be out of this by 2011, 2012. Even the administration and the CBO have said unemployment -— in their, I think, optimistic projections — is not going to get back to normal at least until the middle of the decade. So the timing here is also off.
JUAN GONZALEZ: Well, Joe Stiglitz, you’ve also urged a second stimulus package, especially focusing on the problems that state governments are going through, because, obviously, as real estate has collapsed, the value of real estate throughout the country has collapsed, that means that property taxes, which are a huge portion of local state revenues, have also collapsed. And this is going to be a problem for years to come, in terms of states being able to balance their budgets.
JOSEPH STIGLITZ: That’s exactly right. And the important point is that the states have what are called “balanced budget framework.” That means that the revenues are going down, and they’re going down by over $200 billion a year. As the revenues go down, they either have to cut back spending or raise taxes. This is a negative stimulus to the economy. So the stimulus at the federal level is being offset by the negative stimulus at the state level.
Same problem happened in the Great Depression. One of the reasons the Great Depression lasted as long as it did was that as the New Deal kicked in, the states were contracting. And the result of it was that we didn’t really recover for years from the Great Depression.
AMY GOODMAN: We’re talking to Joe Stiglitz, Nobel Prize-winning economist. His new book is called Freefall. You know, in our headlines, we just read that Yvo de Boer, the head of the climate change talks in Copenhagen, is quitting, is resigning. He won’t be there for the Mexico City talks. You’ve been very involved with the issue of climate change. Talk about what needs to be done and what you feel isn’t being done by this country.
JOSEPH STIGLITZ: Well, let me first try to give a link between climate change and the economic recovery. What is so disturbing about our current global economic situation is that we have this enormous excess capacity, and we have these unmet needs, unmet needs that we have to retrofit the global economy to meet the challenges of global warming. We have a couple billion people living in dire poverty around the world. We need to have investment to increase their standards of living. So we have this incongruity of excess supply and unmet needs. And our economy and our political leaders can’t seem to bring the two together.
In Copenhagen, if we had succeeded in raising the price of carbon — the cost of carbon emissions that pollute the atmosphere are going to impose enormous costs all over the world. If we had succeeded in doing that, that would have provided a market signal. It would have told firms, you have to invest to reduce your carbon emissions. There would have been this retrofitting of the global economy to meet the needs of global warming. That would have stimulated an enormous level of investment and stimulated a lot of spending. And that would have been the critical thing that could have gotten us out of the current Great Recession.
But as it is, what we did is left even greater uncertainty. Where are we going? The result of that is that — greater hesitancy even to make the kinds of investments that we were in the process of making. So, in fact, the failure in Copenhagen has its economic consequences right now.
JUAN GONZALEZ: In your book also, in terms of dealing with or analyzing the current crisis, you try to make the point that, really, this crisis was not the result of decisions of any few individuals, but you say, precisely, “This book has a different aim. Its view is that essentially all the critical policies, such as those related to deregulation, were the consequence of political and economic ‘forces’ — interests, ideas, and ideologies — that go beyond any particular individual.” If these forces resulted in the current crisis, what kind of policies are you proposing that would get us out of the crisis?
JOSEPH STIGLITZ: Well, the point is that, you know, a lot of attention has been focused on, say, Alan Greenspan or Bernanke for the failures of regulation that led to the crisis. And what I was trying to do here is to say, if Greenspan hadn’t been there, there would have been somebody else. Reagan would have appointed another person who believes that regulation isn’t needed. And if you have regulators who don’t believe in regulation, you’re not going to get effective enforcement of regulation.
Right now we’re seeing some of that, the same mixture of ideology, interests, that are stopping us from restructuring the regulatory framework. So you see the outpouring of money, trying to persuade Congress not to adopt the regulations that are obviously needed. We should have learned from this experience, but so far, very little regulatory reform has been done. They use these arguments like, “Oh, we can’t go overboard. We’ll stifle innovation.” The fact is, as Paul Volcker has pointed out, there is — this innovation was not innovation that was positive. Only the bankers did well; not even their shareholders and bondholders did well. But the economy did disastrously. The taxpayers have lost. The workers have lost. Homeowners have lost. So this innovation has not been beneficial. So this conjunction of ideology, wrongly framed ideas, and interests are stopping now the regulatory reforms that are needed.
And finally, you asked the question, well, what’s behind all this? It’s obviously campaign contributions. Five lobbyists for every congressman. And unfortunately, in the Citizens United case before the Supreme Court, things have gotten worse. The Supreme Court basically allowed them to unleash the amount of spending to try — you know, we always had the best government that money could buy, and now the price has just gone up. And the likelihood of our political process being distorted has gotten worse.
AMY GOODMAN: The latest news in the New York Times about the crisis in Europe, and particularly in Greece, reporting that Wall Street tactics that were akin to what caused the subprime mortgage disaster are being used to enable governments to hide their mounting debts. And what they were talking about was the deal created by Goldman Sachs that helped Greece obscure billions in debt from the budget overseers in Brussels. What did Goldman do? And what do you think of this?
JOSEPH STIGLITZ: Well, our banks were very creative in their accounting. They first used this creative accounting to avoid paying taxes, but then they discovered that you could use the same kind of creative — more accurately called “deceptive” — accounting to deceive investors, move things off balance sheet, hide what was going on, and do very well by yourself, even if, in the long run, other people are going to pick up the tab. And in this, in the case of the banks, it was the American taxpayers who’ve picked up a lot of the tab, but also, of course, the shareholders and the bondholders.
They then started marketing this kind of deception all over the world. And there are ways that you can move things off balance sheet so that the costs that you’re going to have to pay, years into the future, are not apparent. You see revenues coming in. The particular issue at the time was Greece was trying to get into the EU. It had to satisfy certain conditions about the deficits and the debt. And these were very clever ways of making it appear as if they were actually meeting the criteria, when in fact, of course, the problems persisted.
What is so upsetting to many people in Greece and all over Europe — I just came back from two weeks in Europe — is that the banks, after causing the crisis, after the governments having bailed out the banks, having had to spend a huge amount of money to stop a depression or a deep, deep recession caused by the banks, these same banks are now attacking the countries, criticizing them for the deficit that the banks’ irresponsibility helped create, and are trying to manage a speculative attack against these countries, the result of which is they are demanding that salaries be cut, wages be cut, meanwhile saying, “We need to keep our big bonuses. Don’t attack our bonuses. That’s necessary for the working of a market economy.”
JUAN GONZALEZ: And Joseph Stiglitz, finally, the issue of the derivatives market, this ticking time bomb, unregulated, no transparency. Most people don’t even know, even on Wall Street, which particular deals have been made and what they entail. Your assessment of how the Obama administration is moving on the front of bringing some regulation into the derivatives market?
JOSEPH STIGLITZ: The derivatives market, let me just emphasize, was very critical in the deceptive accounting in Greece, important in the deceptive accounting that led to the freezing of the credit markets, because no one knew what their financial position was. And you could see what happened in AIG, where one moment it said it had a $10 billion problem, the next moment the taxpayer had to put in $89 billion, wound up $180 billion, money that some of which went to Goldman Sachs, which you mentioned before. We’ll never get that money back. So, those are the dangers that these derivatives can expose. We should have known that, because back in ’98, one hedge fund, LTCM, almost brought down the entire global economy. And so, we should have known the riskiness of that.
The Obama administration has not proposed doing anything adequate about these. Some of the new things that the Obama administration proposed in January deal with other problems that, until then, had not been adequately dealt with — the problem of “too big to fail” banks. But the problem of these under-regulated derivatives remains, and therefore the risks remain.
Let me just emphasize, a part of this is this lack of transparency. One of the things is the Obama administration is trying to encourage more of the trading to go to standardized products traded on exchanges, but it isn’t really going to force it. And the depository institutions, the “too big to fail” institutions, that we underwrite — we the taxpayers bailed them out — are continuing to write most of these derivatives. So, in the end, these are insurance policies without the kinds of regulation that insurance normally requires, without the kind of careful analysis that insurance normally requires, but at the end, the US taxpayer bears the big losses when these gambles don’t work out. And so, while they’re, in a sense, sold as insurance, not regulated as insurance, they’re really gambling products, but they’re gambling where the potential losses are going to be borne by the US taxpayers. And we just haven’t done anything significant about this.
AMY GOODMAN: Joe Stiglitz, we’re going to leave it there. We want to thank you very much for being with us. The new book he has written is Freefall: America, Free Markets, and the Sinking of the World Economy. He’s a professor at Columbia University.
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