In FDIC We Trust

I continue to read current economic thought on the state of the economy and the state of the Obama administration’s response.  I don’t’ know if you’ve ever made a trip to Project Syndicate, but it’s an interesting site where you can read contributions by brilliant people to newspapers around the world.  It’s another one of those places that I’ve found since I’ve completely given up on the US MSM’s ability to provide real news, insight, or criticism of the world today.

Joseph Stiglitz is a frequent contributor. He’s a 2001 Nobel Laureate Economist.  This is a contribution of his to The Guatemala Times from March 6, 2009.  It’s called How to Fail to Recover.  I’ve talked a lot about how the stimulus package isn’t big enough, that it contains too many tax cuts and that it is a bandage approach to a systemic problem that started in the financial system with bad lending practices egged on by Washington and greedy megainvestors.  I feel vindicated because that is Stiglitz take too.

The stimulus package appears big – more than 2% of GDP per year – but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.

Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40 billion.Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America’s automatic stabilizers the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.

In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.

The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems which are or will be facing increasing problems with their banks.

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