Sticking with Stiglitz

I like Joseph Stiglitz. He is an economist that tells it straight. I put him up there with Paul Krugman and Brad DeLong.

Stiblitz, a Nobel prize winner in economics, has published an opinion piece in the Daily News: Egypt's only Independent Newspaper in English. (Right, not the NY Times, not the Washington Post, no the LA Times, but in an Egyptian newspaper. What's with that? Oh... he published it under Project Syndicate, but I guess there aren't a lot of US media outlets interested, so it gets published in Egypt as a "major outlet" for the academics under the aegis of Project Syndicate.)

Read the whole thing, but here is the key point:

...even if Obama and other world leaders do everything right, the US and the global economy are in for a difficult period. The question is not only how long the recession will last, but what the economy will look like when it emerges.

Will it return to robust growth, or will we have an anemic recovery, à la Japan in the 1990’s? Right now, I cast my vote for the latter, especially since the huge debt legacy is likely to dampen enthusiasm for the big stimulus that is required. Without a sufficiently large stimulus (in excess of 2 percent of GDP), we will have a vicious negative spiral: a weak economy will mean more bankruptcies, which will push stock prices down and interest rates up, undermine consumer confidence, and weaken banks. Consumption and investment will be cut back further.

Many Wall Street financiers, having received their gobs of cash, are returning to their fiscal religion of low deficits. It is remarkable how, having proven their incompetence, they are still revered in some quarters. What matters more than deficits is what we do with money; borrowing to finance high-productivity investments in education, technology, or infrastructure strengthens a nation’s balance sheet.

And this bit from earlier in the article is well worth pondering:

Economists are good at identifying underlying forces, but they are not so good at timing. The dynamics are, however, much as anticipated. America is still on a downward trajectory for 2009 — with grave consequences for the world as a whole.

For example, as their tax revenues plummet, state and local governments are in the process of cutting back their expenditures. American exports are about to decline. Consumer spending is plummeting, as expected. There has been an enormous decrease in (perceived) wealth, in the trillions, with the decline in house and stock prices. Besides, most Americans were living beyond their means, using their houses, with their bloated values, as collateral. That game is up.

America would be facing these problems even if it were not simultaneously facing a financial crisis. America’s economy had been supercharged by excessive leveraging; now comes the painful process of de-leveraging.

Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. After all, when banks don’t know their own balance sheets, they aren’t about to trust others’.

The Bush administration didn’t see the problems coming, denied that they were problems when they came, then minimized their significance, and, finally, panicked. Guided by one of the architects of the problem, Hank Paulson, who had advocated for deregulation and allowing banks to take on even more leveraging, it was no surprise that the administration veered from one policy to another – each strategy supported with absolute conviction, until minutes before it was abandoned for another. Even if confidence really were all that mattered, the economy would have sunk.