February 2, 2010
The Obama and Bush administrations' inadequate responses
Since the U.S. government finally acknowledged what's now widely referred to as the Great Recession, its response has fallen short. While Stiglitz said the Obama administration was a welcome relief from the previous administration, it hasn't done enough, he said. His criticisms focused on the economic stimulus package and money for banks. Government money simply hasn't flowed to where it would do the most good.
The Obama stimulus package was too small and poorly designed, Stiglitz said. For example, implementing a tax cut as part of the 2009 stimulus program was a mistake. President Bush's February 2008 tax rebates had shown that most of the money wouldn't be spent and thus wouldn't stimulate the economy.
The Bush administration also erred by funneling money to the banks without doing anything to help individuals with their mortgages. Stiglitz likened that policy to giving a blood transfusion to a patient without addressing their internal bleeding. When President Obama finally acted on mortgages, it was too little, too late. As a result, the problem is being stretched out, and more people will face foreclosure in 2010 than in 2009.
Regulations, meanwhile, have not been changed to eliminate banks’ misplaced incentives. But Stiglitz said that Obama's recent proposals to reform the banking industry (the “Volcker Rule” and a tax on large banks) show he finally recognizes that he needs to do more about "too-big-to-fail" banks, proprietary trading, and excessive risk-taking.
The most important next step: Pass a new stimulus
Implementing a second, better-targeted stimulus plan is the most important step that President Obama can take, Stiglitz said. The economy remains very weak, almost one in five Americans who want a full-time job can't get one, and that fraction rises to almost half among African-American youths, he noted.
Some say that employment always lags economic growth. But Stiglitz said that economic growth won't be fast enough to keep up with new entrants into the job market. Without a new stimulus package, "We'll be lucky ... to get to five, six, or seven percent unemployment by 2012 or 2013," he said.
The economy remains weak because consumers are saving after years of consumption that was fueled by the belief that housing prices would rise indefinitely. The U.S. savings rate, which has averaged 7% over the long run, fell to 0% during the housing bubble. In the short term, Stiglitz said, the savings rate may rise above 7% (it is approximately 5% now) as consumers boost their saving to make up for lost housing and retirement wealth and react to the fear that they could lose their jobs.
The federal government needs to make up for this lack of consumer spending. A new stimulus package should include aid to state governments and investments, Stiglitz said. Sending money to the states to make up for budget shortfalls, he said, is a quick way to inject money into the economy. States such as California have made cuts to balance their budgets, including furloughs, deferred hiring and budget cuts in their university system. In the process, they've hurt citizens, especially the unemployed.
Stiglitz stressed investments that will produce returns of 6% or higher, thereby reducing long-term national debt. Investments in education, infrastructure, and technology will deliver such returns, he said. For example, Americans have given up on growing high-paying manufacturing jobs at home. But Germany is very competitive in manufacturing, he said, because it spends much more heavily than we do on training and technology. Stiglitz also said he was disappointed by the lack of a carbon emissions agreement in Copenhagen in December 2010. Such an agreement would have spurred investments, he said.
Stiglitz's recommendations go beyond an economic stimulus package. "Deficit-financed stimulus spending alone remains a temporary palliative," he wrote in his book, which recommends a "large distribution of income, from those at the top who can afford to save, to those below who spend every penny they get." He also suggested "a new global reserve system so that developing countries can spend more and save less" and the reconstruction of the financial system.
Stiglitz concluded his book with a question. "Will we seize the opportunity to restore our sense of balance between the market and the state, between means and ends?” he asks. “The real danger now is that we will not."
Susan Weiner, CFA, is a writer specializing in investment and wealth management. Contact her through http://InvestmentWriting.com.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
