A deserter from the battle of ideas
In his new book, heavyweight economist Joseph Stiglitz imagines he is making a profound contribution to the debate about the recession. In truth he offers only shallow and rehashed arguments.
Joseph Stiglitz is a big-name, Nobel laureate, American economist. He is the former chair of President Bill Clinton’s Council of Economic Advisers, and the former chief economist at the World Bank. He is currently a professor at New York’s Columbia University, and heads a number of important bodies, including the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (which may sound impressive, but reminds me of ridiculously long titles like Borat’s ‘cultural learnings of America for make benefit glorious nation of Kazakhstan’).
From such credentials, you might conclude that Stiglitz is a establishment figure, but in fact many consider him a renegade. Over the years he has developed a reputation as an outsider, a liberal rogue who challenges the status quo. When a member of Bill Clinton’s cabinet, he was reportedly at odds with treasury secretary Robert Rubin and his deputy Larry Summers, whom he considered too pro-market. At the World Bank, he heavily criticised the US Treasury and the International Monetary Fund for their ‘shock therapy’ policies in the developing world, and was pressured to leave.
Some on the liberal-left hoped that President Obama would bring the 67-year-old Stiglitz back into government, but, as we know, that didn’t happen. And, from outside the White House, Stiglitz turned his guns against his fellow Democrats in office. In July 2009, he published a prominent op-ed piece in the New York Times entitled ‘Obama’s ersatz capitalism’, which criticised the administration for its handling of the financial crisis (1).
Stiglitz has now published a new book, Freefall, in which he elaborates on his understanding of the financial crash and economic downturn. He traces the genesis of the 2008-09 ‘Great Recession’ back to financial-sector deregulation begun under Ronald Reagan in the 1980s and Federal Reserve policies that ‘replac[ed] the tech bubble with a housing bubble’. Government policy ignored or facilitated certain financial industry practices, such as dodgy mortgage lending and Wall Street’s ‘innovative’ risk products, which led to the meltdown.
Many of Stiglitz’s criticisms of the Obama administration’s response hit the mark. He slams Obama for adopting what he calls a ‘muddling through’ approach. Continuing Bush’s bailout of the banks – and extending it to other industries, like autos – rewarded failure. Rather than rationalise the insolvent banks under government ‘conservatorship’, the administration did something ‘far worse than nationalisation’: ‘ersatz capitalism, the privatising of gains and the socialising of losses.’ It developed complex and opaque initiatives, like the Public-Private Investment Program, which were effectively methods to fund the banks without having to go back to Congress to seek approval.
According to Stiglitz, the stimulus package was too conservative and lacked a vision for more fundamental change in the economy. He argues: ‘Instead of redesigning the system, the administration spent much of the money on reinforcing the existing failed system.’ The rescue moves may have stopped the haemorrhaging, but the US economy still faces the prospect of years of Japanese-style malaise. He concludes that Obama ‘only slightly rearranged the deck chairs on the Titanic’.
Despite scoring points, however, Stiglitz’s critique of the Obama administration is ultimately superficial. He does not fully grasp the depth of the problem. He is too narrowly focused on the financial sphere: the various contributing factors he cites are primarily financial in nature. At times, he does seem to recognise the crisis is not exclusively financial in nature: ‘This downturn is complex – a financial crisis compounding and interacting with an economic downturn.’ He also recognises that the ‘financialisation’ of the economy (that is, its reliance on the financial sector for growth) is problematic. But he does not develop these points, nor tie the stagnation of the real economy to the crashing of the financial one.
Since most of the root causes of the crisis identified by Stiglitz are financial, so too are his proposed remedies. Many of his suggested financial reforms are reasonable and deserve a hearing (and some – like the recent Obama proposals to impose new restrictions on proprietary trading – look like they may be implemented). But, if you understand the crisis as being fundamentally due to problems of the real economy that express themselves in the financial sphere (as I do), then these measures are hardly sufficient. Rather than pour energies into clamping down on finance, it would be more fruitful to explore ways to expand the real economy.
When Stiglitz, towards the latter part of the book, talks about ‘longer-run problems’ that need to be addressed, he dredges up everything but the kitchen sink: ‘healthcare, energy and the environment, and especially climate change, education, the aging population, the decline in manufacturing, a dysfunctional financial sector, global imbalances, the US trade and fiscal deficits’. Such a list remains abstract, and unconnected to the financial crisis he discusses in the first part of the book.
But as it happens, these points about Stiglitz’s understanding of the causes and proposed solutions were the least of my problems with the book. He is far from being alone in adopting a focus on finance, and in contrast to many other analysts, he recognises the need for a restructuring of the economy. As he rightly states: ‘The magnitude of the task ahead is enormous: the sectors that are ailing – or causing Americans to suffer – and badly need restructuring (finance, manufacturing, energy, education, health, transportation) represent more than half the economy. The rest of the country cannot simply rest on the laurels of the high-tech sector, or even the achievements of the higher-education and research establishments.’
No, what I found more problematic with the book was Stiglitz’s lack of engagement with current arguments. At the outset, he writes: ‘This book is about a battle of ideas, about the ideas that led to the failed policies that precipitated the crisis and about the lessons that we take away from it.’ But if that is his objective, he has failed. Stiglitz is no warrior in the battle of ideas – he’s more of a deserter, running away from tougher arguments.
At numerous points, Stiglitz sets up straw men to knock down. He writes: ‘Some say our economy suffered an “accident”, and accidents happen.’ No quotes or footnotes are offered to back up these ‘some’ who are supposedly arguing this point. Likewise, Stiglitz cites ‘Wall Street’ as if it was a person with views, and again, with no references.
He lays much of the blame for what he sees as the administration’s inadequate response on Obama’s economic advisers. But rather than take on the cabinet’s arguments, he questions their motives. For example, the Obama team has argued that its support for the banks was required in order to stop a complete meltdown that would harm everyone, and that in practice, their rescue has worked. Most economists, including some who are otherwise critical of the administration, share this view (often expressed along the lines of ‘when the house was burning down, you had to put out the fire, you couldn’t just argue about it’). But Stiglitz does not offer a counter to this argument. Instead, he says that economic advisers Timothy Geithner and Larry Summers bailed out the banks – and rejected the alternatives that Stiglitz favours – because they were ‘so tightly linked to Wall Street’.
While dodging today’s prevalent arguments, Stiglitz takes refuge in yesterday’s battles. He bangs on about ‘free market capitalism’ as the ideological root of the crisis, and pronounces that the September 2008 collapse of Lehman Brothers ‘may be to market fundamentalism… what the fall of the Berlin Wall was to communism’. But there has been little evidence of ‘market fundamentalism’ in recent times. Stiglitz himself identifies that state support for the economy is a longstanding fact; for instance, he says Obama’s bailouts are ‘just another (albeit large) expansion of what had been happening for more than a quarter century: the establishment of a corporate welfare state.’ And yet, he does not hesitate to blame the so-called free market for the economy’s woes.
Perhaps surprisingly for a Nobel prize-winning economist, Stiglitz’s chapter on the debate in economics is one of his weakest and most distant from the present. It is a pedestrian effort, and it feels as if we are taken back in time to a 1980s rant against Reaganomics. Stiglitz seems to be self-satisfied and vindicated that laissez-faire ideology has taken a severe blow from the financial meltdown. But what he does not address is why a turn away from a belief in the market today has not led to an enthusiastic embrace of his old-style Keynesian state intervention. Instead, governments in the West have pursued short-termist rescue plans – all fire-fighting and no vision – while the public lacks faith in the capacity of both capital and the state.
As Stiglitz moves away from the specifics of the financial crisis and towards broader social issues, he reveals a number of commonly held prejudices. He blames ‘the pursuit of self-interest – greed’ for economic woes and predicts that ‘finance executives will continue to receive outsized bonuses’. By joining in banker-bashing, he undermines his earlier point that the crisis is a structural one. And he doesn’t limit his criticism to bankers: he writes about poor Americans going on a ‘consumption binge’, living beyond their means. Furthermore, Americans need to reject ‘rampant materialism’. Instead of focusing on wealth creation using the standard measure, gross domestic product (GDP), he – in all seriousness – recommends a Gross National Happiness Index, dreamt up by the Himalayan Buddhist kingdom of Bhutan (yes, of course, Bhutan is the answer!).
Oddly, for a book that states the hope that a ‘near death experience’ leads to ‘thinking about what kind of society we would like to have’, Freefall is imbued with a strong sense of pessimism. Whenever the lack of political change is raised, Stiglitz is quick to refer to the influence of lobbyists, who successfully quash any reforms. Rather than encourage bottom-up, public-led change, he pins his hopes on top-down, government oversight: ‘the chances that democratic processes will prevail will depend on reforms in campaign contributions and electoral processes.’ No wonder he is pessimistic. His book’s lack of engagement with prevailing ideas indicates an impatience and a frustration that wise men like him can’t just get on with their favourite reforms. In this, Stiglitz shows that he is truly a part of the American establishment, as much as those who are the targets of his criticisms.
Sean Collins is a writer based in New York.
Freefall: Free Markets and the Sinking of the Global Economy, by Joseph Stiglitz, is published by Allen Lane. (Buy this book from Amazon(UK).)
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