Truthful Economics

There are three economists that I trust, that have been telling the truth:

• Paul Krugman
• Joseph Stiglitz
Nouriel Roubini

Here's a video of Stiglitz talking to students at Columbia about the current economic crisis:

Notice what he says:

• The trick to keep the US economy going despite insufficient aggregate demand was to encourage the poor to borrow to spend via a big credit expansion which led to a housing bubble and a collapse in the savings rate.


• The growing inequality in income distribution is causing the collapse in the economy. In other words, the Right which keeps arguing you have to give tax breaks to the rich so that trickle down economics will make us all rich are lying. The rich save. The poor spend. If you want to have a vibrant economy you need to let the poor have a healthy stake in society with a fair share of the income.


• The "cure" that the IMF forced on the far East countries during the 1997 Asian economic crisis -- a "cure" that forced them to cut social spending and force unemployment up to 40% -- has led these countries to build huge reserves so that never again will they allow the US-dominated IMF tell them they have to gut their domestic economy in the face of a panic/recession. This is bad for the world economy because it depresses world consumption. (And notice that while the US pushed this "medicine" on them, this isn't the medicine the US has ordered up for itself. Instead, here there have already been two stimulus packages despite unbalanced budgets and huge balance of payments problems. The hypocrisy is shocking.)


• The same people who made policy mistakes in the past are still in charge of policy decisions today (Larry Summers, Ben Bernanke, Timothy Geithner).


• The "paradox of thrift" is a serious problem during a recession. Currently US consumers have moved from no saving to a 6% savings rate (and probably will go to 10%) means that the economy will not "bounce back" to previous levels. This recession will linger.


• The current loss of weath is $15 trillion or just over 100% of the annual production. So the "wealth effect" means that 5% of spending will disappear, so the GDP will drop by 5-6%, and it won't be coming back anytime soon.


• First criticism on the policy response: the stimulus was too small. It ignored that the fact that 1/3 of public spending is at the state level, so while federal spending is growing, the state level spending is shrinking because of balance budget amendments (this creates a $150-$200 billion shrink in the GDP).


• Second criticism on the policy response: they poured money into the banks but nothing into the housing foreclosures. His analogy: this is like giving a mass blood transfusion to a patient with internal hemorrhaging but doing nothing about the hemorrhaging. The housing bubble should have been obvious because incomes under Bush didn't go up in real terms but house prices skyrocketed. Stiglitz calls for a "homeowners Chapter 11", but the banks (and Bush/Obama) have gone in the opposite direction: they have made it harder to get bankruptcy relief for a mortgage. As he points out, it is easier to renegotiate a debt on a boat than on a house.


• Third criticism on the policy response: the bailouts of the banks has created a one-way bet. Zombie banks have no penalty for taking risks. If they lose, they stay dead, but if they win, then the bank stockholders get to keep the profits. The goal of the bailouts is to get banks to re-start lending. Bush's TARP I failed. It didn't re-start lending. Bush forced the merging of banks, but this has only made the "too big to fail" problem even worse.