An Authentic New Year’s Resolution for our Economy
Posted: January 2, 2011 Filed under: Barack Obama, U.S. Economy | Tags: joseph stiglitz, third way 43 Comments
Joseph Stiglitz is one economist whose research influences mine and whose grasp of the big questions and answers that the discipline of economics can provide causes me constant amazement. He’s won just about all the prizes you can possibly win from your peers and the powers that be in recognition of his contributions to the field. Stiglitz has also consulted for almost all the institutions that create economic policy.
Most importantly, his contributions aren’t just theoretical abstracts alone. His contributions have brought theory down from the philosophical level to the ‘make it work’ level of policy. He was the visionary behind the Clinton economic policy that defined a new economic philosophy called the “third way”. The third way was really a pragmatic view of government’s role in a market economy based on naturally and unnaturally occurring flaws in markets that cause them to collapse or fail or not produce the most efficient out come. His theories teach us that some times you have to step in to correct the limitations of the market in the real world.
He has a new article up at Project Syndicate called ‘New Year’s Hope against Hope’. The man is very brilliant and has produced theorems that are both complex and significant. (My Risk Theory Seminar which included his theory of screening is responsible for a large number of my gray hairs.) However, the resulting narrative of his theory and work is always practical, pragmatic, understandable and spot on; once you get pass the math.
Here’s why I wish he had the ear of our tin ear president.
In fact, 2010 was a nightmare. The crises in Ireland and Greece called into question the euro’s viability and raised the prospect of a debt default. On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were not it not for legal snafus that raised doubts about America’s vaunted “rule of law.”
Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity! The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels.
There will also be a decline in competitiveness. While has China kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put, most Americans didn’t share in what many called the Great Moderation, but was really the Mother of All Bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?
Yup, that’s the BIG question that Obama should be asking himself: “Should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?” How can they bail out the perpetrators and punish the innocent? There are no big thinkers in the District at the moment when we really need one.
Mister President, please put Dr. Joseph Stiglitz on speed dial.
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Nice post as always. Your defense of Stiglitz has made me a fan now. I also liked BB post about psychopaths. Our society is resembling the characters in Animal House more and more and more. And the news just keeps on getting better….
http://finance.yahoo.com/news/Oils-surge-in-2010-paves-the-apf-1258480888.html?x=0
Asshats.
Hillary 2012
I just read something emailed me by a reader here about corn prices going through the roof now and how that was going to impact the price of meat and dairy products. I’ve mentioned that I figured that would happen shortly.
For the states that are big corn producers, should this not bode well for them? And what about our agricultural exports? Surely the economic downturn isn’t causing LESS food to be required worldwide….
Well, it’s got a double edged sword because it’s transferring resources that would go to other food products to corn which makes other things relatively more expensive because there’s less of it. So, any one in the state that relies on corn goes bankrupt if they can’t afford corn. If they were just corn producers it might be okay, but chances are they also produce beef or pork (e.g. Nebraska and Iowa) so it helps one industry and kills the other. So, it could be worse or a wash depending on the contribution of each industry. Then, if gas prices are going up and corn prices are going up, ethanol prices go up too. It’s a matter of degrees and how big each of those increase are and how they are distributed. It could be a short run windfall and then a long run problem. Prices shooting up destabilize other markets that rely on those goods. Of course, it’s just one part of food production and it’s one part of the larger economy so it might not be big on the country level. But I imagine it will make meat very expensive in the mid term. If farmers can’t find their animals, they’ll slaughter them. Meat will be cheap in the short run, but then they won’t breed or buy cows or pigs to raise. Hence, prices up after that.
That puts a damper on the use of corn as a fuel then, doesn’t it? Or is this spike in corn prices temporary? I know Hillary suggested that we do a Manhattan project-style undertaking of new energy sources and corn was at the top of everyone’s list…..
Ethanol is a boondoggle. We need something else but even if we do ethanol, there’s no reason to use corn. The Brazilians use silage from Sugar Cane. I had a friend trying to get me into the business because evidently you can use left over chicken grease that chicken plants don’t want and they’ll pay you to haul it off and then you can make gas out of it. The Corn states just love the subsidies.
HA! I know a few bio-diesel guys in Kansas that tried to get me in the same thing! I knew the Brazilians used sugar cane, but I thought that was because they have such an abundance of it. I don’t know of anything we have in that kind of abundance here in the states except corn. I will say this though. Unlike ’08 which was an election year, if gas prices stay above $3 nationally as predicted, there will be no reason for the oil companies, or OPEC for that matter, to increase supply. That and the continued foreclosures will be the opening salvo to a really bad year economically for this country…..
Yea, and 2010 was a smaller than average harvest, I think, unlike the bubble in 2007-08 when the harvest was larger than normal.
I’ve already switched all my livestock, except the diary does, from grain. Time to start mixing my own grain, maybe, to avoid corn.
These kinds of shocks in the price system really hit the dairies hard. I hope we don’t see more dairy people committing suicide. It’s heart-rending to me.
Here’s another article about commodity prices.
http://www.wsws.org/articles/2010/dec2010/food-d31.shtml
This quote really gets me:
He’s talking about food. How do people stop ‘using the product’ if it’s frapping FOOD!?!?!?!
I will probably do a post about this shortly, once I get my thinking cap back on.
I absolutely do not thing food stocks should be used for energy sources. That’s insane. Ethanol can be made from garbage and left over stuff. Taking good quality farm land out of food production is kafkaesque.
From your article:
This just makes me sick. BP should be on it’s knees, breaking up and paying off billions in fines and restitution. BP should be dismantled and used to fund clean energy initiatives. Gah. It’s so disgusting.
There one of those international conglomerates that is so big they have more clout than most nations.
Been talking/writing about hoping against Hope for some time now:
http://letthemlisten.wordpress.com/hope-against-hope%E2%84%A2/
Nice that more people are saying it these days, esp. a brilliant mind like Stiglitz who can expand on it with his economic depth.
You’ve got a much more sly version of that term! I see where you’re going and I like it!
This has me confused from the agweb piece:
Is the article saying that our production will be 832 mill. bu compared to the year before’s production of 1.7 billion? If so, why? Are there folks here deliberately trying to reduce production to drive price up?
So, I don’t understand it all by any means, I have to admit. I’m not a gambler and have trouble thinking like one, and that’s what corn futures seem to be to me.
In May 2010 record crops were forecast:
http://www.ethanolproducer.com/articles/6592/wasde-record-corn-supply-forecast/
In Dec 2010 record crops were recorded, but, weather worries and problems in shipping due to snow and ice were slowing down distribution of corn and wheat and making the prices go up. AND record usage of corn in ethanol production (why, oh why, are we SO stupid) makes corn even scarcer.
http://in.reuters.com/article/idINL3E6ND00V20101213
Since the futures market is gambling, they are worried about the carry-over, basically the left over the USA has for next year. That’s the lowest it’s been in a long time probably because corn has been used for ethanol.
The article from harper’s that I spoke about in my last post explains this in more detail, how the gambling works, why people are buying mythical futures, why it’s a bubble, etc. The article ends saying another bubble was not only possible, but entirely likely. So here we go.
Here’s that link again:
Click to access the-food-bubble-pdf.pdf
I actually came by this a.m. to put in this link on a sad situation in San Diego CA.
I wonder how many others have just quietly done themselves in, in a state of hopelessness?
Feels weird to say thanks for such a heartbreaking link, so I’ll just say it’s an important link and I appreciate you bringing it here.
wonk-no it wasn’t happy, happy, joy, joy, but I thought it was so indicative of what the country (us little folk) is going through. And I don’t see any improvements on the horizon when the Repubs take over the house.
It is a devastating indictment of our current situation and a huge red flag, imho.
Yep, I think this is going to become an increasing problem along with crimes that victimize others. Some people in desperation do themselves in and some do in others.
Also I’ve thought for a long time that Americans have become more and more dependent on pharmaceuticals to deal with stress, anxiety, depression and sleeplessness during relatively easy times, and that as tough times stretch out those chickens will come home to roost as well.
Lastly, I think drinking to excess has become more acceptable, even cool. There was a fairly long period when overdrinking and alcoholism was not cool and recovery like Betty Ford was a better sell than a glamourpuss tipping back a bottle of Belvedere. But that’s changed somewhat now. I think the early roots of this turn-around were in popular TV shows like Absolutely Fabulous and Cybil with the consequences of alcoholism and over drinking being funny rather than tragic, and then prosperity made wine drinking and boutique grain alcohol drinking (Grey Goose vodka or Sapphire Gin or cocktails like Appletini) cool and more accessible in excess. Look at how popular the book “Hello Vodka it’s Me Chelsea” was (I loved it too, it’s very funny), and that’s all about the fun of excessive drinking and how cool it is. Then comes financial crisis and economic downturn, foreclosures and job loss or even just career stagnation and if the alcohol was already flowing before this then isn’t that an easy remedy for disappointment and frustration?
We’re in for some very difficult times. Compulsive gambling is another one.
I’m sorry, Kat, while I respect him and agree with many of his observations, I still think Stieglitz is thinking too conventionally and in doing so coming to bogus conclusions.
Starting from the belief that we’re in a recovery, which Stieglitz clearly does or else he wouldn’t refer to a “slower recovery” and “longer delay before unemployment falls to acceptable levels,” is, in my opinion, wrong.
We are not in recovery. IMO any economist who does not accept that truth, no matter what their conventionally-arrived-at little numbers tell them, isn’t dealing realistically with the situation.
The mechanisms by which rich people get richer spun off the table and were put back in place, but that’s all. And it’s skewing the numbers. Our working class and middle class cannot prosper in this environment, nothing is in the works to change that nor is there any indication it’ll magically change by itself, and without that we are not in recovery and by no reasonable measure will “unemployment fall to acceptable levels.” The way unemployment will reach an acceptable level will be with the public relations trick of accepting a “new normal.” And that’s a potentially catastrophic “fix.” Simply put, I don’t believe that the rich getting richer while the middle class loses ground is recovery, slow or otherwise.
I think it’s because they’re stuck in the land of the pure economic definition of ‘recovery’. Scuttling along the trough for a decade is a weird thing to characterize as ‘a recovery’. The Krugman article you cite below is riding that pony too. Yes. It’s technically a recovery, but this isn’t a recovery in any normal sense.
And Kat, I think Paul Krugman is similarly wrong.
A few comments plucked from his column today:
He states that as a fact and implies if we wait long enough that scenario will reduce unemployment to an acceptable level, but it’s merely an assumption based on historical data. And the truth is the situation we’re in right now has no historical precedence. Every other time in our history we have had some kind of manufacturing base, and growth equalled increased need for working/middle class workers. But what do we make now and how are things made? If people buy more books, for instance, there won’t be a need for workers who create physical books, not like before this downturn – that’s done with computers and machines, especially ebooks. And many jobs that were created in the prosperous 90s were cut after 2008 and are now considered unnecessary. That’s true all over – jobs themselves have disappeared and they’re not going to reappear just because rich people are spending money. Some unemployment will be relieved, of course, but not to the extent Krugman and others seem to be assuming.
And this infuriates me about Krugman. Not sure if Stieglitz does it too, nourishing the delusion that Republicans are the problem and Obama is a victim of circumstance.
I completely agree about a modern WPA but he blames Republicans and that’s just not the case. Obama made these kinds of choices already, with a majority of Democrats supporting him, he wasn’t forced by the GOP. Rather than creating a modern WPA he created the Cat Food Commission, and the role Republicans will have is playing bad cop to his good cop but they’re both after the same thing.
We are f’d, but in my view the reason that’s the case is because of Bush and Republicans, because of Obama and his Dem supporters, and because of economist/media types like Krugman who decide the position they’re going to take is to go along with the Dem/GOP narrative rather than be an independent thinker.
No, Stiglitz doesn’t apologize for Obama. At least I haven’t read anything. I have no idea why Krugman keeps pushing the Old Okun’s law thing. There’s evidence that the historical numbers from the Kennedy-Nixon years are much higher than they are now. That’s because you can now take your tax stimulus to China et al.
I wish he’d quit the narrative. It isn’t helping any one.
Happy New Year everyone.
Zal and Kat,
I haven’t had the time to catch up on all the readings but you guys are doing a terrible job with Paul Krugman’s column.
1st of all, although PK and Stieglitz are empiricists, they go out of their way to dig behind to the sometimes good looking data and make it clear that there’s more to it.
PK today:
Zal, you picked out one sentence out of a fairly nuanced context:
The whole column supports the overall point many people are making, which is that many leading indicators may be looking good, but we’re not out of the woods yet and there’s still a loooong way to go. It’s certainly not the time to even think about cuts.
Does it get clearer than this?
So, where are Krugman and Stiglitz wrong in their analysis?
Now, back to catching up on all the stuff that went on here.
I think Krugman is overly optimistic about the Okun Law impact. Other than that, I agree we’re in a hole with a long way out. Other than that, his analysis is spot on. I completely agree with Stiglitz. We need to fight this move to austerity or we’re going to be farther down the rabbit hole than Alice shortly.
and happy new year!! good to see you!!!
It’s not just about austerity.
Obama’s been spending trillions and that’s not helping, not anywhere near enough to justify the debt we’re racking up and the interest that’ll multiply it. Spending, the way Obama’s doing it, has made the problem worse. If the smartest economic team took over right now they’d have more to dig us out of than Obama did when he took office — this entrenched unemployment, foreclosures, housing market, and the many debilitating tentacles that’ve grown from it, in addition to Obama’s bad spending, is making solutions much harder to create and implement. And if he keeps making the same kinds of choices, which he will, it’s going to continue to get worse. I mean, Kat, surely you realize that they’re not going to literally impose austerity. What they’re going to do is keep spending on war and such (you won’t see Congressmen’s benefits or Obama’s perks cut), and the “austerity” will be to social services and such, and forget about WPA type programs. So the complaint that austerity will be the problem is just nonsense – they’re still going to run deficits, just not deficit spending that’ll help the economy. It’s not as simple as austerity or spend, that’s just the narrative that Obama and Republicans want because it distracts from the fact that they’re spending badly.
That’s a good point. Obama has exacerbated some of the worst of it … and I know it’s not literal austerity. You can believe that the banks will still be given low interest rates and that the military adventures will be funded. It will be austerity in terms of what’s necessary to help households and domestic consumption. That’s the stuff that’s required to pull us out of the deep hole.
Zal,
you’re making it way too easy. Blame Obama and we have the culprit. It’s much more than that.
I hate to be in position of defending Obama, but he is not the only one to decide where and how spending goes. We fault him for not even putting up a fight (because he probably adhere to some of the Right-wing ideology), but we’re stuck in a situation where the government has to spend the money, because the private sector is not doing it.
Stuff like this “Obama’s been spending trillions and that’s not helping, not anywhere near enough to justify the debt we’re racking up” is actually what Republicans are using to advocate austerity.
The main problem we’ve had is that the spending has not been forceful enough and it comes loaded with Right-wing goodies, and Obama willingly goes along with it.
Yes I know. That’s why Obama’s the primary culprit. He did that and they’re using it to make an argument that justifies what Obama’s Cat Food Commission oh-so-surprisingly recommended.
He spent hugely and badly, though it was in many instances the way the GOP would spend, and since Republicans were the opposition, his spending that way gave them the ammunition to argue for austerity. As I said, the power Republicans have is the power Obama gave to them; t’s obscene.
Additionally, based upon Obama’s choices before and after being elected POTUS, I’ve believed all along that he doesn’t believe in or fight for policies based in Democratic principles so he’s the culprit in that way as well. He’s not the victim of Republican pressure, he’s making these choices and deciding what to fight for and what not to fight for.
He did not fight for WPA style programs, he did not fight for universal health care or a public option or prescription drug reimportation, he did not fight for potent financial regulations (did you see that Goldman Sachs is offering its wealthy private clients the chance to invest in Facebook to the tune of $50 Billion, no IPO, or that Obama is “considering” appointing William Daley, who’s a JP Morgan Chase executive, to a top WH post?). He’s doing the GOP’s dirty work, being protected by Dems like Krugman who would blast a Bush or McCain for the same stuff but refuse to hold Obama responsible, and empowering Republicans to bring on more of the same.
How much more blasting of Obama does Krugman have to do? Just last week he called people who believe in Obama as a Progressive “delusional”, he has blasted Obama over and over and over again for believing in and advancing Right-wing “myths”.
He just can’t do it in very line of every column he writes.
Obama certainly has his defenders but Krugman is not one of them, not by a long.
I’m stunned we’re having this discussion based on today’s column.
Happy New Year mablue…;)
Hi mablue2, happy New Year.
Pick any paragraph or line from Krugman and I can make the same point. The point is he and Stiglitz are being very appropriate and conventional, and not making any f’ing sense in the real way we desperately need.
My point is on one hand they say we’re in a recovery and on the other they say things like that. As if in their capacity as public commentators there’s some usefulness in repeatedly declaring the economist analysis that we’re in “recovery” and at the same time the intelligent reasoning liberal’s analysis that the arithmetic says suffering will continue as far as the eye can see. It’s as if they’re doctors saying the baby is recovering and also saying the baby is hemorrhaging and will continue to hemorrhage as far as the eye can see. It doesn’t make sense even if there are texts that describe previous incidents of something else the baby’s experiencing as “recovery.”
Although there are conventional models, nifty graphs and all, that support their definition of “recovery,” it’s stupid and it’s not helpful to suggest if we just keep on going as we are now eventually we’ll be fine. They’re giving an assist to ObamaCo’s politically expedient narrative that’s formulated to deceive — because if we keep going as we have the past two years the middle class and the elderly and all economically vulnerable citizens will be anything but fine. We are really seriously in trouble, it’s getting worse, not better, not “recovery,” because unemployment is becoming more deeply entrenched, people are losing their homes, the very structure of people’s lives is changing for the worse and will not improve without massive intervention, and in that scenario the notion that we’re in “recovery” is simply perverse.
I know they’re economists and function within established boundaries of thought and certain word definitions but they also are smart human beings and can think for themselves if they want; they both are important voices from the Left and they ought to have been yelling from the rooftops for two years now that the President is failing. Also that he’s lying.
They are mincing words, referring to recovery, using that word that very clearly implies our economy is moving in a direction leading to health — and in truth real-life indicators suggest we are moving in a direction in which there will be suffering for as far as the eye can see: that’s not health. Bolstering the narrative that we’re in recovery only helps Obama get away with his horrendous choices like anemic stimulus and impotent financial regs and health care reform that doesn’t help the economy and the citizenry as it could have, and tax cuts for the rich. By repeatedly affirming we’re in recovery they’ve giving cover to Obama’s wrong choices that added trillions to our deficit and positioned him to start cutting services for the very people who will be suffering as far as the eye can see, which Krugman will then blame on Republicans.
Krugman continues to protect Obama and that’s inexcusable because the “suffering will continue as far as the eye can see” that he recognizes is because of Obama.
They need to drop the technical definition of recovery and employ something less theoretical to what we have now … yes it’s a ‘recovery’ but it’s not anything but a recovery in the strictest sense of the word. Krugman tries to explain that, but he’s still trying to give Obama wiggle room.
I wonder if Krugman’s editor at the NYT has something to do with that because when he writes at Truth Out, he’s more shrill about that.
Here’s Borosage at Truth Out on Krugman:
But again, Borosage even says Obama got it right in a speech. Obama ALWAYS gets it right in a speech. Obama never does what he says and that’s the real bottom line.
Speaking of David Stockman; especially his warfare state comment
Watch me run screaming from the room with my hair on fire NOW!!
He Worked for Goldman Sachs — But He Didn’t Inhale
More on Obama’s investment bankers-in-waiting … yes there a bunch of them up for empty slots.
oh, and this comes from a BUSH economist
I am just getting caught up on this tread. May I ask – where did you find the Stockman Video. You have been very busy today. Have you had a chance to listen to all of it,
I am through half of the video, When I read his book years ago, I thought he had a lot of valid points, however he is all over the place.
Are you going to discuss this further tomorrow.
Stockman is a very complex person, He ran a teir 2 company here down the road from where I live. He got in a lot of trouble financially with the company and then kind of dropped out of sight. I understand he evaded the charges. The interviewer is doing a pretty good job. I totally agree with his veiws on Pauson having paniced
Yes, I listened to the entire Stockman interview. I don’t agree with everything he says but a lot of it makes sense. He used to work for John Anderson and he’s not from the wacky religious side of the Republican party.
Wasn’t planning on discussing this because I wasn’t sure any one was interested.
I’m here at my desk writing a grant so I’m going back and forth. I check in here ever so often. The Stockman Video is from Reason.TV. Rickpa linked to it on his facebook. Stockman actually gave me some hope at some point that Reagan might be more reasonable than some thought he would be since he came from John Anderson’s office. I found this interview really interesting because he does give some behind the scenes information on Reagan selling out on huge spending on the warfare state and other things.
I have Stpcmans hard cover and paper back book. Would be willing to loan the paper back to you. I had loaned a hard cover out and never got it back. Found hard cover replacement in a used book store and will never loan that out again. Stockman realy gives a good account of Reagan inner workings and the influence of Laffer and Kemp on Reagan. He tried to work Laffer in but admits failure and gives the reason why.
It is interesting that while at Harvard, Stockman was a live in baby sitter with the Moynahans (sp?). He was taking a class from David Broder and heard Andersen was looking for a new Reaserch person. Liz Moynahan called Pat at the White house and Andersen was there and the interview was scheduled.
I liked John Andersen and Tim Penny who was from Minn. Andersen tried the third party stuff and that floundered.
Umm – Stockman, abortion and grant writing. Pretty full plate
I liked Tim Penny too. I have the Stockman book actually. I kind’ve had a crush on him a LONGGGGGGgggg time ago.