Tied to the mast
…but orange now and black

Stiglitz on the international optics of America’s recession response

Former World Bank president, Clinton admin. veteran, and Nobel laureate economist Joseph Stiglitz steps back and turns an economic historian’s eye to the question of what legacy America’s recession response will leave in the global economics debate:

And among this one’s legacies will be a worldwide battle over ideas—over what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day…. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism.

He summarizes the arguments of the American-style capitalism opponents:

Free-market ideology turned out to be an excuse for new forms of exploitation. “Privatization” meant that foreigners could buy mines and oil fields in developing countries at low prices. It meant they could reap large profits from monopolies and quasi-monopolies, such as in telecommunications. “Liberalization” meant that they could get high returns on their loans—and when loans went bad, the I.M.F. forced the socialization of the losses, meaning that the screws were put on entire populations to pay the banks back. It meant, too, that foreign firms could wipe out nascent industries, suppressing the development of entrepreneurial talent. While capital flowed freely, labor did not—except in the case of the most talented individuals, who found good jobs in a global marketplace.

He continues…

Among critics of American-style capitalism in the Third World, the way that America has responded to the current economic crisis has been the last straw. During the East Asia crisis, just a decade ago, America and the I.M.F. demanded that the affected countries cut their deficits by cutting back expenditures—even if, as in Thailand, this contributed to a resurgence of the aids epidemic, or even if, as in Indonesia, this meant curtailing food subsidies for the starving. America and the I.M.F. forced countries to raise interest rates, in some cases to more than 50 percent. They lectured Indonesia about being tough on its banks—and demanded that the government not bail them out. What a terrible precedent this would set, they said, and what a terrible intervention in the Swiss-clock mechanisms of the free market.

The contrast between the handling of the East Asia crisis and the American crisis is stark and has not gone unnoticed. To pull America out of the hole, we are now witnessing massive increases in spending and massive deficits, even as interest rates have been brought down to zero. Banks are being bailed out right and left. Some of the same officials in Washington who dealt with the East Asia crisis are now managing the response to the American crisis. Why, people in the Third World ask, is the United States administering different medicine to itself?

He then goes into the damning specifics… but I’ll let you click on the link for those. I do want to note that he begins with the statement of faith that “America’s economy will recover…”

Yes, it probably will, but this graph, put together by Innocent Bystanders (flagged by Sullivan) is pretty horrifying for someone looking to get into the job market in the next two months:

Shit is a straight line pointing unabashedly at 100.

I’ll follow Sullivan’s lead and flag that just because those numbers are worse than projected doesn’t mean that the stimulus was ineffective… just that our collective understanding of global economics is really crappy and we’re shooting in the dark.

Getting back to Stiglitz’ point though, America thinks of itself as a profligate country. There’s a major sense of disempowerment in the face of public demand, such that demonstrably stupid policy (farm subsidies, the Californian system of making tax and spending decisions, etc. etc.) are considered politically impossible to overturn. That the rest of the world sees we North Americans as profligates then shouldn’t come as much of a surprise.

What’s held that from being a damning fault is that America’s profligacy seemed self sustaining, and in the face of the other goods it offered (freedom of speech, freedom of religion, prospects for employment, education and movie stardom…) the sum was positive. Obama was a quick fix to that shifting equation but numbers need to start to change, and America, through real reform, needs to show itself not to be trapped in the gravitational well of its own mass.

And then we have David Paterson:

“Think of the lobbyists who have invested in themselves to try to persuade legislative leaders and legislators on issues…”

Why won’t someone just please think of the lobbyists!


5 Responses to “Stiglitz on the international optics of America’s recession response”

  1. I saw that graph (and the report) on some other blogs, too. It is so frustrating.

    The case for the massive stimulus bill was that without one, Obama and his administration promised we would be heading towards a “catastrophe.” If they actually believed that rhetoric, why does it show unemployment levels with/without his plan, essentially being the SAME, especially by 2012.

    At best, that graph suggests the near trillion dollars of stimulus has only a short, three year term impact on unemployment, and then it’s impact is only 2% points better than their “prediction.”

    To counter by saying their “without” prediction is too generous, doesn’t make me feel any better about their level of competence to handle this situation in the first place.

    Ok, I’m done venting! Peter Schiff 2012! =)

    • Taking up your point about it being a “1 term solution,” to give them sum credit, I think you’re comparing things that oughtn’t be compared (a lump sum with an ongoing %). The stiumlus was a lump sum, and so what it should be compared with is the area between the two lines (which effectively represents wages lost by actual workers).

      In principle–and I don’t know my Keynes well enough to put this with more specificity–there’s a multiplier that was supposed to make the total of wages saved (or created) that much more than was spent, or would’ve been spent by the private sector if the stimulus had taken the form of tax breaks.

      That’s the case that was made. But that’s a totally abstract point now since we’re clearly completely off the predicted rails.

      • I’m a little confused as to what you’re referring to in your comments in so far as “lump sum” and “ongoing %.” I’m referring to the % trend lines above, not lump sums of jobs, or anything else.

        I’m talking about the discrepancy in the case made for stimulus, vs. what that graph shows. The administration and its supporters warned of a Depression Era catastrophe — ie. 25% unemployment, if we chose to do nothing at all.

        Why then, is that not reflected in their own projections (and right, I know the projection has obviously been proven wrong, but that’s not my point). Why claim we’re facing the Great Depression all over again, but then show a trend line that, regardless of a stim. plan, is essentially the same.

        To me, that makes me worried that they never believed their rhetoric in the first place, and that this is in fact, a crises over-hyped, for the purpose of pushing through democratic spending programs that they’ve wanted for a while now (see the various pet projects that were appended by lawmakers to the ARRA bill).

  2. I take your point. What I was referring to was the stimulus as a lump sum pumped into the economy, to be compensated for by the wages it would generate in absolute terms in preserved and created jobs over the period of the crisis (essentially the area between the two trend lines). The case was that the stiumulus was worthwhile because, essentially, the area between those two lines was greater, in terms of the dollars, than the cost of the stimulus.

    No case was made that the stimulus would lower unemployment for anything but the period of the crisis.

    I remember there being whispers of depression on the horizon, but I actually remember Obama’s statements, and the statements from his economic team being relatively guarded. What was on the record as the stimulus was being debated was that it would save or create 3.5 million jobs, which is presumably what is reflected in that graph (though I can’t say that what that means is 100% intuitive).

    Again though… this is totally irrelevant at this point, since obviously the projections were clearly off the mark.

    • Ah, now I see what you mean by lump sum. That would make more sense.

      I would like to think that my problem is that I listen to too much cable news pundits, who are likely to sensationalize any crisis (Thus, the Time Magazine post you made earlier!). But I know the administration took part in that language as well. This is not the strongest of examples http://www.npr.org/templates/story/story.php?storyId=100477204

      but I don’t have time to find a better one. He talks about it being not your “run-of-the-mill” recession. I know I’ve heard his voice say “Depression” several times before. I’ll keep looking.

      But perhaps you’re right about it being a moot point to debate. I just never like contradictions in my politicians.

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