Monday, November 17, 2008

Not surprisingly Joesph Stiglitz has Some Good Ideas on How To Fix Everything

Nobel Prize laureates Joesph Stiglitz has been busy over the last two months writing about the economy. But of interest for us here, is his 'State of the Economy' piece in Vanity Fair "Reversal of Fortune." Let's break it down... Dr. Jack style.

The real meat of the essay is towards the end, but he does pick apart the policy decisions that got us into this mess. And he places much of this blame on George W. Bush. This is a tad harsh—there were fundamental policy problems prior to Bush taking office. But Stiglitz is correct to place more blame on Bush's handling of the economy (if you can call it that) than other non-critics:
...the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.
He is on the mark with this assessment. What is happening today is a result of the spend today worry about tomorrow... tomorrow ways of the last five plus years. The Bush administration encouraged everyone to spend, spend, spend. Aside from cutting the capital gains taxes, Americans weren't encouraged to save money.

I haven't railed against it too much here, but I am against our current policies towards corn ethanol. Giving any sort of tax credits or subsideis to corn ethanol production is silly as Stigliz sums up:
Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy.
And on to fixing the current housing mess:
Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.
A ways back I was critical of the Feds handling (or lack there of) concerning inflation. Stiglitz points out that I was off base:
The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.

It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.

This makes total sense. Worrying about inflation during a recession or depression is silly, and when the cause of inflation is not a result of domestic economic forces, attempting to control it is only more difficult for central bankers.

Finally, like any good economist, Stigliz believes that American economic policy should follow:
Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.
If growth is the goal of capitalism, then techonology is probably the biggest force in economic expanision. And techonology and innovation comes about though strong education. We could have a debate about how big of a role the government should play in the building and maintaining infrastrucutre; but I think the government should play a bit, if not the biggest role, in infrastrcutre projects.

Anyway, I highly suggest checking out the entire essay, there are some really good ideas, sorry common sense, in there.

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