Interview with Joseph Stiglitz

Joseph Stiglitz was born in Indiana in 1943. He currently teaches at Columbia University, where he is chair of the university’s Committee on Global Thought. During Bill Clinton’s administration, he was a member of the Council of Economic Advisers then later its chairman from 1993-97. He then became chief economist and senior vice-president of the World Bank from 1997-2000.

Stiglitz helped create a new branch of economics, the “economics of information,” exploring the consequences of information asymmetries. In 2001, he was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information.

His books Globalization and Its Discontents and Making Globalization Work were widely acclaimed. His latest book The Three Trillion Dollar War, published in March 2008, discusses the cost of the U.S. war in Iraq not only to the United States but to the world and proposes an exit strategy for American troops there.

In an interview with Carmela Cruz, Stiglitz shares his thoughts on the U.S. recession and its global consequences, the boom-bust economic cycles of the past three decades and “the limitations of market mechanisms,” the need for better ways of measuring improvements in people’s lives beyond the GDP, and his latest book.

Carmela Cruz: Is the United States now in recession? Will a U.S. recession drag the rest of the world with it or will it spare some countries and, perhaps, realign global economic order?

Joseph Stiglitz: By all accounts, the United States is in a major slowdown, almost surely a recession. It is likely to be the worst downturn in the past quarter century – far more serious than just an inventory correction. It affects the financial system, which is at the heart of the economy.

While the growth of China and India mean that the world may not be as dependent on U.S. growth, the United States is still the world’s largest economy. A slowdown in the United States will affect all countries, some, of course more than others. Those like Mexico that are heavily dependent on the United States for their exports will be most affected.

The downturn will be another marker in the realignment of the global economic order. Already, the world has been moving away from a reliance on the dollar as the reserve currency, especially as the dollar has proven to be such a poor store of value. It was more than symbolic when the U.S. icons Merrill Lynch and Citibank had to turn to the sovereign wealth funds for a bailout.

Cruz: The U.S. Congress has approved a $152 billion economic stimulus package to cushion the impact of a recession. Will it work? At what expense? How much further can the Federal Reserve cut interest rates?

Stiglitz: The stimulus package was too little, too late, and poorly designed. Yes, it will stimulate the economy, but not enough to avert the major slowdown. It was not designed to maximize bang for the buck, in other words the stimulation per dollar of deficit spending. For instance, increasing unemployment insurance would have been far better. It was also not designed to address America’s long run problems. After all, insufficient household consumption is not a pressing problem in the United States. And many heavily indebted households will use the money to pay off pressing debts.

One of the problems is that the overhang of debt and deficits makes it difficult to design a stimulus package of the size required.

Cruz: At least 100 financial crises, each preceded by a cycle of boom and bust, have ravaged economies the world over the past 30 years. How ill-equipped have banks, central banks, and financial institutions become to head off the crashes that they could predict, sometimes years before they occurred? Can the cycle be ended without posing serious challenges to the limits of capitalism?

Stiglitz: This downturn has been predicted by experts for years. Yet the risk management systems employed by banks and credit agencies failed to recognized the deep-seated and inherent problems. This suggests that, for all the advances in risk management techniques, the market mechanism indeed has limitations, which have produced booms and busts throughout the history of capitalism.

Cruz: In your book, Making Globalization Work, your preferred solutions to problems such as climate change, poverty, trade imbalances, and financial instability call for bold, concerted effort among nations. These include a uniform environmental tax on toxic gas emissions and a major overhaul in existing international institutions, like the International Monetary Fund, if not the creation of new ones like a global reserve system. Critics say the world you envision is utopian and unattainable because of current asymmetries and injustices. Clearly, for both national governments and international institutions to be ready for a fairer, globalized world, they must first be founded on a stable symmetry of individual freedom and responsibility. Does this make a stronger case for reversing of globalization than remaking of it, as you have proposed?

Stiglitz: In my book Making Globalization Work, I present a comprehensive agenda – not only a vision of where we should be going, but practical steps to take in the short run that would at least make globalization work better. In framing this agenda, I was very aware of the various forces that have inhibited change – including those who are benefiting from the current system, and was particularly attentive to identifying reforms in which all, or at least most, individuals would be winners.

Cruz: How would a greater US protectionism, as a result of current economic troubles, affect the promotion of globalization?

Stiglitz: There has always been an element of hypocrisy in American trade policy and rhetoric. The free trade agreements should more aptly be called managed trade agreements. America’s trade representative has often ignored the adverse effects of trade agreements on many in developing countries. Now the declining standards of living not only at the bottom but even in the middle – people whose concerns have been virtually ignored by the Bush administration – are beginning to be expressed. It makes imperative the kinds of reforms in trade globalization that I call for in my book.

Cruz: You have praised the economic successes in East Asia despite some countries’ poor human rights records. But as chief economist at the World Bank you spoke of fighting corruption as an important component of development, and in your Nobel lecture you quoted John Maynard Keynes’ insight into the ruling influences of economics and political philosophy in shaping the world. Were you not ready to acknowledge the moral imperatives involved in uplifting not just economies but people’s lives?

Stiglitz: I have always argued that success entails more than an increase in GDP and that a relentless pursuit of increasing GDP could actually lead to lower long-run standards of living. I am now chairing the Commission on the Measurement of Economic Performance and Social Progress established by the president of France, with members from all over the world. What we measure affects what we do. There is a moral imperative not just to increase GDP, but to improve people’s lives, and we need better ways of measuring our success in achieving this objective.

Cruz: What is your latest book about?

Stiglitz: My latest book, The Three Trillion Dollar War: The True Costs of the Iraq Conflict, written with Linda Bilmes of Harvard University’s Kennedy School, shows just how costly this mistaken war has been. It is now the second longest, the second most costly war in America’s history. It is even more expensive than World War I, even adjusting for inflation! We calculate the costs to the budget and to the American economy. But the costs, as we point out, go well beyond that. There are costs to the global economy, with the brunt of the costs being borne by Iraq itself. There are also costs to America’s security. While we were focusing on weapons of mass destruction that did not exist in Iraq, another country joined the nuclear club; while we focused on a country with no connection to 9/11, matters became even worse in Afghanistan, a country in which there was a connection. America is less safe now, and our armed forces, so depleted by five years of fighting, are in a worse position for meeting any threats that might confront the country.

The book ends with a set of policy recommendations, how to prevent, or at least make less likely, the problems we have encountered. For instance, no country should rely on emergency appropriations, five years into a war. America has short-changed its troops and its returning veterans –a short-sighted policy that is not only immoral, but costly. We present concrete reforms that would stop this mistreatment now. Most importantly, we provide a framework for thinking through an exit strategy. This is a subject to which the Bush administration gave too little thought when it embarked on this ill-conceived venture.

Carmela Cruz is a freelance journalist based in Manila and a contributor to Foreign Policy In Focus (www.fpif.org).