Disciple of Stiglitz?


Apparently, I (unknowingly) come from the same School of Economics as Joseph Stiglitz.

In a speech to Wharton Investment Management Conference last month, the Nobel prize-winning economist laid out his critique of what’s wrong with the U.S. economy. He believes that several Bush policies have only made economic problems worse.

Stiglitz’s criticisms (direct quotes in italics) will be all too familiar to readers of The Big Picture:

·   President Bush’s economic policies have failed to spur growth, while exacerbating rising household indebtedness;

·  Increased productivity was a squandered opportunity. Higher productivity should raise living standards — at least when the economy is growing at its full potential. Instead, companies get by with fewer workers and less hiring, and unemployment rises: "In the last four years, we have failed the challenge of increased productivity and lost the opportunity it affords because we have not had enough economic growth."

·   The economy has limped along, losing jobs for the first four-year period since the Great Depression: "We should have created something like six million or seven million new jobs. In fact, we have lost net one million new jobs. The only part of employment that’s growing is the public sector. The private sector is down 1.5 million."

·   The unemployment rate (5.4% in September) understates job problems — it doesn’t include people who have dropped out of the job market.

·   The unemployment rate fails to account for underemployment – that is, people who work part-time, often without benefits, but want full-time work.

·   Since the tax cuts failed to stimulate the economy much, it forced the Federal Reserve it lower interest rates to historically low levels — and yet there’s still too little business investment. Stiglitz blames excessive investment in the 1990s. (the post-bubble overhang);

·   Companies don’t want to borrow — even at low rates — because there is still too much excess capacity (sound familiar?);

·   Reducing taxes for wealthy Americans wouldn’t help the economy,
(In 1993, President Clinton raised taxes on the wealthiest 2% of Americans, and that didn’t hurt the economy);

·   Cutting the corporate dividends tax rate wasn’t originally intended as a stimulus for a sluggish economy — it was merely a tax cut for the rich:  "They said that a dividend tax cut would lead to higher stock prices, and that would lead to more investment. Think about how the economy got into the downturn. It got there in part because of overinvestment;"

·   Instead of lowered tax on dividends, we should have provided investment tax credits for companies;

·   The dividend tax cut, he said, ended up exempting some dividends from any tax. Some corporations don’t pay tax. If these firms pay dividends and those payments are tax exempt for shareholders, then the government never taxes this money. "So now the problem is zero taxation."

Hard for me to argue with much of this . . .

Joseph Stiglitz and Pete Peterson: What’s Wrong With the U.S. Economy and How to Fix It
17 Nov – 30 Nov 2004

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  1. Chibi commented on Nov 19

    Basically it comes down to applying a Supply Side solution to a downturn created by oversupply, no?

  2. David Bennett commented on Nov 19

    In response to one of yor note (since my responses may not be making it back consistently and since IMO public discussion has advantages to private) a related feature of “conservative” economics is the DOLLAR.

    Now in the National Review it isn’t just Kudlow, but Canto. The Weekly Standard which strives for some objectivity has after a bit of qualifying come down against the weaker dollar, and my skim of conservative blogs is that this is a dominant opinion.

    The gist is that liberal gloom and doomers are trying to drive it down. Evidently there is some conservative distrust of market forces because there is a clear worry that despite the dollars fundamental strength the subversives will succeed in driving it down thus possibly causing consumer inflation and though they are loath to mention it now, possibly popping the credit bubble which I understand may drive down stocks and real estate, an asset deflation feeding panics.

    This is the kind of economic thinking which does influence the Bush administration, though I am not convinced that it does buy into every “conservative” (I realize there is a variety of belief in these spectrums, but there is also some powerful mass ideology mindlessly taken p by the more popular commentators) economic sillyness it is another symptom of notions clustering on the right.

    Indeed as I noted in my response I wish I had bookmarked several NRO articles claiming the runaway inflation was not defeated by Volkner, but Reagon tax cuts and budget deficits.

    So as bad as “establishment” economics may be we are getting some scary pseudo forms being argued as ideology. If the dollar falls and pains result the goal is to blame “liberals” for undermining the nation just as the right is struggling to find plausible media villians for problems in Iraq.

    I wish the Democrats would make more sensible responses, but my reading of the last election is that while they do latch onto some of the problems, the amalysis is as skewed as the Republican and avoids many difficult issues. Thus the dollar crisis if it does emerge will be the result of budget deficits (certainly a factor) but the guilt of the US consumer will be denied, just as oil suply problems are caused by greedy manufactuers who don’t produce 35 mpg trucks, not consumers most of an age (baby boom and younger) to have been fully aware of the potential consequences of using lots of gas. This indeed shows the lie of the “environmental awareness” allegedly taught our children in the last thirty years.

    Overall our political system is dominated by forces which promise easy solutions with someone else bearing the burden.

    I’m not as pessimistic as I might be, historically the “market” of politics has been dominated by poorly thought out beliefs, emotions and all kinds of things that frighten the believer in reason, but the compromises and balances have worked out to approaches that while muddled and in places bordering on the insane probably resulted in a better system than if one was designed by “intelligent, informed” people such as myself.

    However there has also been a role for more, expet and specialized opinion. For example in the hysteria of the sixties and early seventies certailnly many who were rightward inclined did hold to the sanctity of Constitutional protections. The brainstorming of Liddy and others in the aminstration over things like detention camps for youth and minorities didn’t have a chance.

    Similarly there are many establish figures, quite a few conservative that can see dangers and problems and do have real powers. But there have been real shifts in popular conceptions. Thirty years ago there was some sense of the common good, a “systems thinking” that realized that great individual wealth was mantained by a larger society, the goal of citizenship. The idea that “work” was the dominant good was fixed so punishing wealth created by it in terms of taxes was dodgy.

    Now we have a system where “entrepeneurship” defined as primarily structural advantages and capital, the motives of real entrepeneurs are less financial, as much as I question Bill Gates he would have been happy in 1979 if he could make a few million doing what he liked; is considered the primary good. I have even heard MBAs attact scientists because they were parasites feeding at the public trough.

    I hate to bring up regional differences but I think a part of the problem is due to the rise of the south and some rural areas in the Republican hierarchy. These areas were more fedal in economic structure, not so aware of the complexities of wealth. “Ownership” in itself is good and productive, a notion prevalent in South America. The problem with this base is that they are not subject to rational argument, they are insecure and defensive. For example they will decry dependance on federal dollars but their states take in more money than they give in (on avarage) in contrast to “liberal states” which give to the kitty and could actually profit from tax cuts. Similarly when it comes to morality the south has 3 times the murder rate of the liberal Northeast. The rhetoric is opposite the reality.

    To individuals possessed by the noton that their personal possession of wealth is a producer of wealth, and that any reduction is wrong; the current tendencies make sense. Consciously or not republicans are moving towards a position where any individual with a certain degree of wealth and power can start tweaking compensation so that it is increasingly given in areas subject to less or even no taxes.

    The mind set is occuring in many places. Greenspan has suggested that the general fund (taxpayers as w whole with significant contributions by the wealthy) should not have to pay back money borrowed from the SS fund (taxes on wages below a sum.) This transfer of wealth of course pushes forward the crisis since SS will be broke in a dozen years not the thirties. And of course such crisis leads for the need to radical action.

    I was (insert word here) by yesterday’s reports that the Bush administration was mulling ending deductions for employer contributions to health plans to pay for other tax cuts. Where employers did actually cut these contributions it means greater burdens on a system already heavily financed by government and it seems to me that moral employers will simply shift the contributions to wages which employess will use for tax deductable health care thus reducing the allged revenues while other especially the younger and healthy will forgo insurance increasing the cost for those who keep it and also increasing the number winding up in emergency rooms without insurance and all the social costs that workers who lose in the “I won’t buy insuarance because the averages favor me lottery” incur.

    There are some very odd economic notions emerging, and I’m not sure if they’re much more rational than those that guided communism.

  3. spencer commented on Nov 19

    As long as we continue to base policy on the theory that cutting taxes on individuals leads to stronger capital spending and a better economy we will continue to spiral downward.

    In the US economy capital spending is financed by business savings and individual savings has little or nothing to do with it. Roughly, from WW II to 1980 it was a simple flow of funds.
    Individual savings financed the housing sector with business savings financing capital spending, the small cyclical federal deficits, and had a small surplus to finance abroad. But we decided to change policy and create a structural federal defict and tax policies aimed at increasing private savings. Although private savings has fallen almost continuously since that time, it has had no impact on investments. Business savings still finances capital spending, but it no longer has a surplus for other investments.

    Moreover, even the stock market actually plays a very, very small direct role in financing investments — look at IPOs as a share of investments. The primary role of stocks is to provide liquidity for investments that have already occured, not finance new investments.

    Under Republican policies designed to encourage private savings since 1980 private savings have essentially disappeared. Why cann’t someone look at this factual case and make a big deal of it?

  4. JWC commented on Nov 19

    This is over my head, but I’m learning. Interesting comments. Wish I knew what the answer is but I fear it will get worse before it gets better. Hopefully the latest idea about tax cuts/lose of state tax deductions and health care deductions is just a trial balloon that will get shot down. Being retired from health care, I hate to think what will happen to the system if even more people are without health insurance.

    I would think Big Pharm, an ardent support of Bush, would not be too happy about this as people without drug cards will certainly not be able to afford their medications. I was just put on a new med that at market price would be $185 a month, instead of my $20 co-pay.

    Grandma Jo

  5. David Bennett commented on Nov 19

    Over one’s head, but learning is one of the more intelligent comments. I periodically remind people that my blasts of bombast are hurriedly written and are often of notions forming.

    The health care situation is odd and I think there is a mass energy directed towards pushing the crisis. I am a california voter and I think that on balance the votes on our propositions showed a fairly intelligent public. We had 3 related to health care. One which hit the wealthy to get more money into mental health passed. the other 2 failed. One would have hit phone bills to help pay for emergency services, now this is the really weak link (which the medical profession tends to blanket blame for all rising costs) and it’s undermining does threaten us. The second would have required employers above a certain size to require health care, seeing as how he burden of their health crisis falls on us, the billions in yearly costs for a economically bankrupt state…

    The argument that this drives out jobs is questionable. In California most of the low paying jobs will remain here because they can’t go elsewhere. If Macdonald’s wants to sell it’s burgers here it has to stay. We pay deeply for minimum wage workers making 70% of what they did 30 years ago, especially because here one bedroom apartments have gone up from a little more than a weeks gross at minimum wage to about a month.

    Now it may be people don’t register this. Similarly they may really resent a few extra cents on their phone bill even if it increases the odds of fast treatment for a car crash.

    But I think a part of this is a sense that the system if broke, push it and break it, force change. Partial fixes compound a problem where we pay 35% on administration (twice the industrial average) on total costs that are nearly double the percentage of GNP as the rest of the industrial world.

    Societies are often driven by apparently irrational emotions and they are perhaps sometimes the best catalysts.

    Examined objectiviely many conservatives seem driven by “apocalyptic urges,” push the government until you can drown in a bath tub. Ignore problems, not just McCain, but Lugar and hagel are becoming bad people on the right because of their doubts about the war. Liberals such as Friedamn who supported it get huge criticism on finding faults. Hillary was just about accused of being a traitor because while supporting the war she wanted more troops. Ditto for Biden.

    Socially we are in a interesting phase I think. I used to hope for more mass participation and now we are getting it with less stability from the old “establishment” rudders. The right is very effective. First it was underground publishing, often welling in millions, then talk radio, now the net. Even though they still use the “old media” as absolute proof when it prints stories that hey agree with, they are openly spreading the notion that their new media is better. Things like “fact checking” which provided some controls are deemed irrelevant, similar a lot of their theoretical work is done outside of academia and journals, there is no peer review. Not that the old system worked perfectly, but it did have strengths.

    Most people don’t understad these and as establishment authority weakens they aren’t there by default. This means that those who are learning must be willing to speak in the many small gatherings. In a sense we are in a position were we have to being “expert knowledge” things like inner and traditional structures to greater opular awareness. Things are coming into our hands whether we like it or not and our “normal” spheres of influence are two and threes.

    I certanly have my own axes that I’m sharpening. None of us are objective. But we can examine “facts.”

    For example to what degree are stock investments “new investment.” Essentially only to the degree that a company sells them and invests or an individual who started a company grabs his money and invests it elsewhere. Thus a purchase of Microsoft is an investment in world health since Bill Gates (as much as I dislike his business practices and products he is a truly great man) is the biggest contributor to world health outside the US government and he does it more effectively and has saved millions of lives.

    However helping to stop AIDS in Africa is not reason that conservatives wil tell you to buy Microsoft which doesn’t even need cash. So you buy created wealth and hopes that it increases some more. It is not entrepenurial investment. Most stocks are pretty much like this.

    And even when the purchases are feeding companies too big a boom can create distortions as it did in the nineties and again. There is such a thing as “too much money” in an industry which can distort other industries (eg. the SF bay office real estate market hasn’t recovered from the overbuilding spurred by the dot.com boom.) Also an argument which hasn’t had wide credence since the eighties (when we feared Japan) but still remains plausible is that focus on stock price can distort company management in ways which damage long term productivity.

    Quite simply absent direct investment in a small bvusiness or small investor access to venture capital funds (which might be expanded to include more normal business) the only way the average individual can directly invest in enterepeneurship and business expansion is put money in banks where it can be borrowed. But under current economic conditions this is rewarded negatively. We’ve ended putting up a lot of our money into “everbank.com” in FDIC protected New Zealand CDs which bring 5% and provide some protection if the dollar falls.

    The stock market is a wonderful institution. It does provide funding for new companies and older companies which want to sell stock. However a much bigger role is to make existing wealth liquid. For the most part when you buy stock you don’t create wealth, the wealth is already there. It’s like buying gold. And while booms in stock and real estate can feed economic growth they can also feed frenzies. Which often results in busts. So on balance you don’t care more wealth, just more disruption and it’s not always creative.

    But like I said a lot of the rightwing is tied to the apocalyptic impulse, the true left is similar and liberals are anemic, reinforcing the notion that it’s time to break things and see what happens.

    My opinions.

  6. Barry Ritholtz commented on Nov 19


    I’m still not convinced that

    1) Supply side economics works;

    2) Its readily definable in a way most economists agree upon;

    yes, over capacity and lack of demand are keys to the problem

  7. David Bennett commented on Nov 19

    Grandma Jo:

    I should also have mentioned corportate bonds as another way the ordinary individual can invest. Unlike bank deposits these go to corporations.

    However trends here are worrisiome. The price for “junk bonds” (companies with dodgy credit) have increased, these bonds pay fixed sums which means the interest rate had decreased, evidently only a few percent over those of safer bonds.

    This implies people believe in 2 questionable assumptions, inflation is controlled or for other reasons (fear of collapsing the economy) Greenspan will not significantly raise fed interest rates (if you get better return in safe babk deposits the value of risky bonds go down) and that economic conditions will be good enough that the risky companies won’t default.

    This exemplifies an issue that gets touched on in seekingalpha.com the flaws in existing investment media and advisors. It seems a lot of people don’t know about the risk. Also the fact that they are putting money into this kind of investment indicates (like the stock market bubble of the nineties or the real estate speculations now) that we have too much lose money floating around.

    As for pharmacy companies reacting to the trial balloon floated by the White House on ending deductions for health plans, this is a good point and reminds us that there are checks and balances even in private political negotiations.

    However many people also don’t understand the complex relationships and types of business. Liberals especially tend to lump it all together, but in fact the Democrats are often considered to be pro big business while Republicans are consideed pro business of al types big and small.

    There is some truth to this, the Republicans have jumped on many issues crucial to small business such as complex regulations and put their stamp on them, thus “simplified tax” (very important to an immigrant grossing a 100k a year who has to hire hundrd dollar accountants and lawyers, less important and indeed a competive advantage to a corporation with departments for these things) is identified as “flat tax.”

    Corporations vary a lot. For example the key members of this administration tend to come from a certain kind of company. Bush made his money from a ballpark subsidized by government (a city) which also through in land. Cheney comes from a company that was part of a oligopolial industry making much of it’s profits from the federal government.

    So while drug companies might give lots of money to the Republicans (and also the Democrats) the nature of the enterprise they represent is not necessarily popular to many in the mainstream. Indeed like all technology companies they depend on government funded research for the pure science which many Republicans consider a waste. With budget deficits scientists are worried. Especially because with investors increasing directing companies the limited amount of pure science and “blue sky” research done by corporations is also considered wasteful. We already lost the bulk of Bell Labs which rivalle the greatest universities in Nobel Prizes, IBM still does well. But if the “hedge funds” ever get controlling stock you can expect the quantum computers and the like have a good chance of going out the window.

    Basically you have a lot of complex interests and which ones political forces take will depend on many things. For example my impression is many conservatives are in (a Quixotic) battle against a falling dollar which is contrary to the interest of US manufacturers (who would theoretically gain market share here and abroad) and allied with reatailers and real estate which is scared silly by the higher interest rates that a lower dollar might result in.

    So while I doubt if the idea of no deduction on health care will go through the fact that some very powerful corporate interests would oppose it isn’t an absolute protection.

  8. Public Opinion commented on Nov 24

    Steiglitz on the US economy

    Joseph Steiglitz, the Nobel prize-winning economist, recently outlined his views of what is wrong with the U.S. economy. He did

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