Joseph Stiglitz takes issue with the view of economists (well, economists surveyed by Bloomberg and the Wall Street Journal, which not surprisingly have a Pollyannish optimistic streak) that the economy is in or on the verge of a recovery.
The real issue is the ongoing con job. Team Obama has made it clear that it sees restoring confidence as paramount, when anyone with consumer marketing experience will tell you that advertising campaigns that make exaggerated claims about the product often don’t simply fail (as in customers see through the hype) but often backfire (buyers discount future ad messages about the product). The press has had a manipulated feel, with readers on sending news stories that have misleadingly positive stories with Panglossian headlines and upbeat initial paragraphs that are often undercut by other material in the same article.
So in our new branding, “the economy is no longer in a freefall” has become “recovery.” The self-congratulatory tone among US financial regulators (who should instead be engaging in serious self-recrimination for failing to foresee and prevent this crisis) is premature. The financial system has been patched up and put back together with considerable continued official support, and more important, policies in place that allow banks to go back to the craps table with the taxpayer sopping up any mess. This is not a sound foundation for growth.
Admittedly Stiglitz is far from a seer; he thought the Clinton budget-balancing program would lead to a slowdown. Nevertheless, his views are a useful reminder that we are not yet out of the woods.
From Bloomberg:
The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said….
Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn — an occurrence that economists call a “W-shaped’ recovery.
“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”… He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them…
“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter,” he said. “But the question going forward in 2011 is the stimulus is coming off, and that’s a negative.”…
“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”…
Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.
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I have to add the perennial caveat here that Summers and Stiglitz hate each others’ guts, and any criticism of one by the other should be taken with your metaphorical salt. Following the initial stimulus and PPIP, both he and Krugman were promptly out saying that the demand-side stimulus was much too small to work. Now they call it very large and successful.
I place absolutely zero stock in our continued prima facie analysis of stimulus as having been successful. Not only was it vastly too small when measured by the framework under which it was concocted, but very little of it has been spent yet. I still think the stimulus is not remotely responsible for any improvement, but that instead, asset(equity & junk bond) prices recovering for their inimitable reasons has caused
Lehman’s bankruptcy also strikes me as revisionist history. While dramatic, it was not the singular devastating event so many hold it out to be. Credit markets were already souring badly again, and underlying economic trends were very negative at that point. It will probably end up as utterly symbolic anyway.
But most infuriating of all to me is how this has been cast as entirely a capital markets problem. It’s not at all. They’ve been pathogenic in their ability to act as fomites, but they’re not the disease. There remains a set of fundamental issues in the global economy that have absolutely not been addressed whatsoever. Michael Pettis is the closest I’ve seen to doing justice to the massive unresolved problems remaining.
Show me Keynesian multipliers working, or show me M2/CP, total wages, and revenues growing steadily, and show me healthy rises in the real equilibrium interest rate. I’ll find that compelling.
Just don’t show me more pissing wars between Stiglitz and Summers. There is no meat there at all.
Ahem. I still think the stimulus is not remotely responsible for any improvement, but that instead, asset(equity & junk bond) prices recovering for their inimitable reasons has caused a bit of restocking and end demand, but I see very little in the way of sustainable recovery, and nothing to justify any belief that stimulus is the driver.
I should always finish my paragraphs before
the short period of American triumphalism, where we dominated the global scene
Who is this ‘we’ Stiglitz is talking about ? Most Americans have spent the last 20 years struggling. The whole thrust of the article is of an elite talking to other elites – in other words, anti-democratic, and a big of the problem to begin with.
Like many here, I agree with Stiglitz’s doubts about all the greenshoots PR. I still see the likelihood of depression in 2011 as high. I see what Stiglitz calls malaise and the rest of us would probably call Japanification as possible but less likely. I think his kick about replacement of the dollar as the world’s reserve currency continues to miss the politics and agendas of all parties to such a move. It is sad that only a few economists at even this late date are as tethered to reality as he is.
This brings me to a long article by Paul Krugman in the NYT “How did economists get it so wrong?: http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&hp
It is a brief precis of economic thought and concentrates on developments in 20th century economics. I found it really frustrating. He says that economists were enamoured with the math, which is actually fairly funny when you consider that it was their failure to do even simple arithmetic that led to disaster. Krugman does touch on equilibria and rationality in his criticism. He even brings up irrationality but can bring himself to invoke the Austrian school, instead referencing “behavioral finance”. But what really irked me was his framing of a lot of his discussion in terms of salt and fresh water economists. He naturally puts himself with the saltwater economists that he thinks got it mostly right. How silly this dichotomy is is that he places his mentor Bernanke in this group as well. There are also lacunae. He doesn’t mention the growth of the paper economy, fraud, or financial innovation, all subjects that economists mostly missed.
The problem as I see it is that economics has been a charlatan field for the last 40 years. It is still dominated by charlatans but Krugman continues to accord their quackery a certain degree of respect and this includes Bernanke and Fed policy in response to the meltdown:
“a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse”
This kind of thinking, especially in so far as it continues to ignore the really frightening fundamentals of the economy will lead to another surprised “No one could have predicted” down the road.
I read Krugman’s huge Sunday magazine piece. How can he write at such length about what has happened without ever bringing up fraud and other criminality? This disaster is only partially (and perhaps only peripherally) about the failure of economic theory. Mostly, it’s about the financial services industry successfully capturing their regulators and then engaging in massive theft in broad daylight.
Stiglitz was actually on good ground with Clinton’s actions: it _should_ have led to a slowdown. But we had easy Al Greenspan giving him cover and the country disaster with excessively low rates producing an incipient housing bubble and an actual equities bubble through most of the Nineties. Clinton was gifted with soaring tax revenue from capital gains, for example, and in much the same way domestic hot money papered over what should have been contraction-inducing conditions.
This situation only speaks more loudly to the ‘failure of economics’ narrative, however. Really the biggest failure of economics is a failure to engage with reality. The reality of the Nineties was too low rates and markets blowing gaskets thereby. But the models of the mandarins just couldn’t get their figures around that, and came up with different readings. So economists scratched their heads and said, “Why doesn’t the headless chicken croak?” It is the unwillingness of the discipline to actually bring the realities of market behavior into their prognostications which leads to the loopy scenarios they generate far from the world we live in. Stiglitz checks in with reality more than most, and I listen to him more than most therefore.
The most alarming part is that he doesn’t even question moving away from the dollar, just whether it will be orderly or chaotic. I wonder if he has posed what long term effects that the end of the dollar as a reserve currency will have on the US.
The current PR needs a realty check.
Unemployment is still growing, albeit at a moderating rate. Personal Income is soft to moderately declining. Production is stabilizing at a very low level relative to earlier performance and retail sales continue soft. Add to this the lost wealth effect of house price declines and stagnation coupled with a stock market that is moving up but nonetheless substantially below the highs of three years ago.
At the core of these circumstances is the fact that there remain substantial losses to be realized in the banking system.
This isn’t the early stage of a recovery, this is the early stage of a bottom that may prove to be a plateau that preceeds a further collapse of economic activity.
The deleveraging that appears to be in progress is being impaired by all of the ‘stimulus’ efforts that do little more than displace purchases and distort price signals.
In this environment, it is questionable as to whether Mr. Stiglitz will be entirely forthright in his comments because, I fear, he recognizes that the public and his peers are as yet unwilling to face up to the fact that as a nation we have been profligate spenders enabled by easy credit and a fiat currency. This is a mess that did not spring up overnight like field of mushrooms. This is a mess that has been 40 plus years in its creation.
Anything that now comes down the road purporting to be a recovery will be little more than theater empty of any substance.
I agree w Yves’ comments. But there will be no soul-searching amongst the elite. They love the move to more concentration. See of course The Quiet Coup by Simon Johnson.
I also agree w ndk 12:35 AM that there is little meat in the BB article. Perhaps it was worth 2 paragraphs, not many.
I also agree w Retirement 8:02 AM re BB’s unquestioning printing of these odd comments on a transnational currency. As if Europe doesn’t have enough troubles w the euro.
@Siggy says: “…he recognizes that the public and his peers are as yet unwilling to face up to the fact that as a nation we have been profligate spenders enabled by easy credit and a fiat currency. This is a mess that did not spring up overnight like field of mushrooms. This is a mess that has been 40 plus years in its creation.”
I’d say more like 2400 years in its creation. As Hannah Arendt observes in “On Revolution”: “If one wishes to blame any single author for the so-called materialistic view of history, one must go as far back as Aristotle, who was the first to claim that interest…should rule supreme in political matters.” The historical view proselytized by Adam Smith, Marx, Mises, Friedman and many others was therefore not at all original to them.
Arendt goes on to point out that the American Revolution did provide a short respite from the materialistic view of history:
“The social question interfered with the course of the American Revolution no less sharply, though far less dramatically, than it did with the course of the French Revolution. Yet the difference is still profound. Since the country was never overwhelmed by poverty, it was ‘the fatal passion for sudden riches’ rather than necessity that stood in the way of the founders of the republic. And this particular pursuit of happiness which, in the words of Judge Pendleton, has always tended ‘to extinguish every sentiment of political and moral duty’, could be held in abeyance at least long enough to throw the foundations and to erect the new building–though not long enough to change the minds of those who were to inhabit it. The result…has been that the revolutionary notions of public happiness and political freedom have never altogether vanished from the American scene; they have become part and parcel of the very structure of the political body of the republic. Whether this structure has a granite groundwork capable of withstanding the futile antics of a society intent upon affluence and consumption…only the future can tell.”
Though it took it 240 years to get there, it currently appears that America is following in the footsteps of the French Revolution, where, as Arendt explains:
“Freedom…has shifted places; it resides no longer in the public realm but in the private life of the citizen and so must be defended against the public and its power. Freedom and power have parted company, and the fateful equating of power with violence, of the political with government, and of government with a necessary evil has begun.”
Arendt concludes on a rather pessimistic note:
“In conclusion, one can hardly deny that Crevecceur was right when he predicted…those who in all earnestness say, ‘The happiness of my family is the only object of my wishes’, will be applauded by nearly everyone when, in the name of democracy, they vent their rage against the ‘great personages who are so far elevated above the common rank of man’ that their actions transcend their private happiness, or when, in the name of the ‘common man’ and some confused notion of liberalism, they denounce public virtue… On a more sophisticated level, we may consider this disappearance of the ‘taste for political freedom’ as the withdrawl of the individual into an ‘inward domain of consciousness’ where it finds the only ‘appropriate region of human liberty’; from this region, as though from a crumbling fortress, the individual, having got the better of the citizen, will then defend himself against a society which in its turn gets ‘the better of individuality’.”
I’m always confused. If we increase spending and that’s going to help the economy, how is it possible that if we reduce the spending it won’t harm the economy? My fault obviously is in the assumption that we will ever cut spending.
Increasing spending to boost the economy leaves a nice warm feeling of increased wealth. The problem is that it isn’t really increased wealth, it’s an increase in the leverage of our balance sheet that makes us feel better off. All is fine as long as you never actually consider the long term implication of this debt and how we will be able to pay it off.
Compare it to an individual making $40k per year. With debt he feels wealthy in a $20,000 car. Without debt he’s driving around in a $4,000 clunker. Is he really better off financially with the $20,000 car? Not really but he sure feels better off as long as the bills never come due.
“Feeling better” materially in America has become an economic Special Olympics. Everyone gets a little medal, everyone feels great about their personal effort, nothing has been accomplished on the larger scale.
They had to do this after they allowed corporations to export all the blue-collar jobs that up to the 80s meant financial security to families. Replace real jobs and pensions with easy debt and casino-operated 401K. People feel good, nobody connects the dots that spell out “you are boned”. Problem solved.
Where the economy is concerned you can’t just give away a better standard of living unless you intend to steal it from the future, which is what has happened.
On the larger scale of generations, the last 40 years of “feeling good” in the aftermath of the destruction of material industry has cost us everything. There is perhaps no future from this point for anything we thought we knew about the global economy, and perhaps no future for American-style democracy. Though on the latter count, it might have been dead for a while already.
cougar
a W shaped recovery as in Dubya – Geo. WWWWWW BUSH. It is incredible to me Americans think – at least most seem to – that the US can engage in $T+ of spending for 2 – count ’em – failed military operations lasting some 8+ years SO FAR and not have a financial breakdown at home.
Of course the recovery can’t be sustained.
Why?
It’s a mental recovery.
(Not the recession!)
“He [Stiglitz] said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them…”
By what theory?
With reference to which evidence?
More like – “we all agree amongst ourselves that this is the case, therefore, it is the case”.
Truth by democracy?
And what is this wonderfully efficacious regulation that is supposed to make the problem go away? The problem with Stiglitz, is that he keeps mindlessly reasserting his ‘lax regulation’ thesis, but never quite gets around to telling us what regulatory changes he wants made. Details are never forthcoming. He simply asserts. Regulation is simply ‘that which fixes the problem’. It’s true. Just ask Joseph Stiglitz. He’s got a Nobel prize.
“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter.”
But if the original problem was in the capital markets, why would an increase in agggregate demand be the remedy? Who said demand was a problem, and why? The ‘solution’ seems to be quite asymmetric with the cause.
It’s like saying; “Well, banks were tightening lending standards in an attempt to repair their balance sheets, so we decided to raise aggregate demand”.
Right. Makes sense.
What has demand got to do with bad banks?
“When the only tools you’ve got are fiscal and monetary policy, everything starts to look like a demand problem.”
Where have you been the last two years? We have had an $8 trillion bubble go splat. We have had some $13 trillion in wealth destruction. We have nearly 7 million unemployed and an un- and under- employment rate of 16.8%. We will have 48% of mortgages underwater by 2011. We had a financial meltdown last September from which credit markets have not and will not recover. So we have consumers who are tapped out, deeply endebted, and scared. And you are seriously wondering where there is a demand side issue?
As for too big to fail, the re-imposition of Glass-Steagall, elimination or strict limitations on exotic but dangerous financial instruments, and caps on market positions and leverage would go a long way toward limiting systemic risks.
Nothing you mention is specifically a demand issue.
I stand by my points above.
according to me the most alarming part is that he doesn’t even question moving away from the dollar, just whether it will be orderly or chaotic. I wonder if he has posed what long term effects that the end of the dollar as a reserve currency will have on the US.
Sounds a lot like what I’d emphasized to a guy recently – “not so bad” does not = “good” . If economists thought the pessimism was overdone, they are swinging the pendulum a little too hard to the other side. It’s not hard to see the source of the markets irrationality – stimulus packages. It is also not difficult to know when crunch time is – when the stimulus packages are not reinforced or continued. Question is: does any government or political leader have the male anatomical parts to pull the plug? Incidentally wouldn’t it be a letter “W” sponsored by the governments of the world?
Sounds a lot like what I’d emphasized to a guy recently – “not so bad” does not = “good” . If economists thought the pessimism was overdone, they are swinging the pendulum a little too hard to the other side. It’s not hard to see the source of the markets irrationality – stimulus packages. It is also not difficult to know when crunch time is – when the stimulus packages are not reinforced or continued. Question is: does any government or political leader have the male anatomical parts to pull the plug? Incidentally wouldn’t it be a letter “W” sponsored by the governments of the world?
Obama probably actually believes that the recession will be very short and we are either already in a real recovery or will be in the next few months. Otherwise his actions and statements make no sense. He doesn’t face reelection for another three years, enough time to be honest with Americans about the extent to the crisis and develop proposals for reform. With what he is currently doing, if there is no quick recovery he will look like Herbert Hoover.