Wednesday, March 24, 2010

Is Stiglitz part of the solution or the problem

I try to be a pragmatist and that compels me to wonder why my most famous and awarded economist colleagues want to line up on the extremes of thought with respect to our most pressing economic problems. Today I saw a piece by Joseph Stiglitz, Dangers of Debt Reduction ( ) and for the life of me I just can't figure out why he wants to spread such nonsense. Few serious economists are advocating a quick resumption of balanced budgets. This blog exists to explore if there is a sensible centrist way to approach our current problems. This post singles out Stiglitz' article as a good example of a non-centrist and ignorable piece of work. Pardon me if I try to list some of his revelations and conclusions.
  • Even with the recent government deficits, the main risk to the US economy is high unemployment and weak growth
  • Thus we should not quickly reduce government deficits.
  • Government investments in education, infrastructure, and technology should lead to smaller deficits in the future. What counts are national assets versus liabilities.
  • Unlike when government spends more on wars and give-aways to financial firms, government investments build national assets.
  • When the economy does perk up, we should reduce deficits largely through taxes on bad things like pollution, taxes on bad guys like the financial industry, and taxes on speculative activity.
  • Reducing government spending is not a risk worth taking
Okay my friends, this sounds pretty logical -- or does it? We have very large national government deficits and debt today. We have the baby boom ready to fall off a very steep cliff requiring a lot of government support. Economists can give you estimates of how much debt will be accumulated under various scenarios.

And Stiglitz is suggesting that we can solve these challenges largely by having government spend more on social investment while eventually raising more revenues by taxing bad things, bad guys, and bad behavior. While giving us not a clue as to how much tax revenues would come in from the fiscal dividend of higher growth and assets or from his sin taxes -- he seems extremely confident that our problems will be solved. I would love to see at least a faint attempt to estimate when and by how much his policy recommendations will lead to economic and financial stability in the US over the next 10-20 years.

Of course, that would be good for starters. What about answering some questions...

What is the risk that government will wait too late -- start reversing deficits once the economy regains its strength? He says this risk is smaller than the risk of reducing the deficit too soon. How does he come to that conclusion? What do the 1970s say about government's ability to easily reverse course after years of strong spending on military and social programs? If deficits and debt are not reversed quickly enough, how might that impact US interest rates, stock prices, exchange rates, inflation... Are there any historical examples of countries that have had such problems? Is it not worth expending a few words on the real expected benefits of spending more today on education or infrastructure? Of course, we all hope government will spend that money wisely but is there no evidence to suggest that this too is a risky endeavor -- that sometimes governments waste money? Aside from advice given to transforming nations, how many economists advise rich industrial countries to use government investment on education and infrastructure as the main way to generate economic growth and reduce government deficits?What is the cost in terms of jobs and economic growth when you focus your attention on penalizing business with higher taxes? Is there any ceiling on how high you would go with respect to tax rates on the rich and business?

Stiglitz won't answer any of these questions because he has attained a status that let's him print this kind of dribble without any real support or analysis. He spoon feeds us gruel because he thinks we are too dumb to think for ourselves. Of course, he writes this kind of stuff because he likes being the darling of the left and he knows that people in power will love having their shoulders rubbed.

What really needs to be done today is a lot more complicated than Stiglitz makes out. Stiglitz' one-sided account does not do justice to a more seasoned and complete answer for today's enormous fiscal challenges. Dangers of debt reduction indeed!


  1. Kinda off topic but when Ike graduated from West Point his first orders were as part of a convoy going coast to coast. In WWII his dislike for Patton was tempered by Patton's understanding of the basic theorem of military engagement; "the winner is the one who gets there firstest with the mostest" immortalized by Pierre Gustave Toutant de Beauregard.

    It is often forgotten that the US Interstate Highway system was the brain child of Ike; not so much for its benefits to commerce but because it would allow quick deployment of troops and supplies. At the time the Interstate system was decried as wasteful spending, or worse. Perhaps part of this distain was the result of the ill will towards Germany after WWII combined with Hitler's building autobahns there.

    I see it is time for me to follow Goodwins rule and quit now; since Goodwin claims that as soon as Hitler is mentioned in a post things start to go down hill.

  2. Mike,

    I am trying to make this blog a place where people can discuss macro issues. I am afraid that if the comments get too far afield from macro my work will be for naught. Thanks for understanding.

  3. To try and bring my comment back to the topic of govt spending on infrastructure (I consider the Interstate Highway System the single largest infrastructure expenditure by the US govt.) I thought my post pointed out that the single largest infrastructure expenditure was the result of a early life experience by a military man who was elected prez and pushed not so much as infrastructure for moving commerce; but as a means to quickly move men and material in case of military action in country. Much of the opposition to this infrastructure expenditure was based on the fact that a really bad guy (Hitler) built a similar highway system in his country for similar reasons (to move German troops and supplies quickly) and America did not want to "be like Germany".

    Rather like velcro and teflon which were developed for the space program, but found much wider use in everyday life, the Interstate Highway System was not viewed as a wise expenditure at the time; in fact many peeps thought it was a waste of money. Yet today it is a vital part of our economy and it is hard to imagine modern life with out it.

    The bottom line to my attempted point is that Ike faced great opposition to building the Interstate Highway System in much better economic times than we have now; and yet his white elephant at the time wound up being a vital part of today's economy. Even if Ike used the wrong reasoning to justify building a road network for the nation there seems little doubt that the end result was a big OK.

    Picking winners and losers in govt. spending is no easier today than it was when we were kids in the 1950s.

  4. Hi Larry,

    I would be interested to see your analysis on how the Interstate Highway System changed macro economics in the US.

  5. Larry,

    As I have said before, I am not an economist. With that said, this guy sounds like he is not playing with a full deck. Can't understand how supporting social programs is going to reduce our deficit. It almost sounds to me like a smililar argument that Obama is making abut how his healthcare plan is going to save money and reduce the deficit. I am glad I am not managing our household finances with their thinking. Would not be any new house going up if I did. I don't need a degree in economics to figure that one out. Have a good weekend.

  6. Mike and Bob,

    Thanks for the comments. First, for Bob -- Stiglitz, in the article I cited, doesn't really equate social programs with social investment (though he might in other articles). As Mike points out -- there are some examples of social investment (building roads, telecom, investing in R&D, etc) that seem to work -- that is they give big payoffs -- and maybe even bigger than expected. As Mike also points out -- social investments can be winners or losers and it isn't always easy to know ahead of time. Bob -- you understand ROI (rate of return on investment) and you understand the importance of leverage. In this particular article by Stiglitz, he is indicating that a stimulus plan today with spending on infrastructure supported by lending or by higher sin taxes would be worth the risk. My point is that he didn't prove his case. He has not articulated a program that would be anywhere near as effective as the highway program -- and at a time when higher government debt or higher taxes on business and saving could be very dangerous.