- 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!