Stiglitz on the Economic Malaise The Plagues Europe and the US

|Peter Boettke|

For economists of my generation (PhD 1989), Joseph Stiglitz was clearly at the top of the professional mountain during our studies.  His theoretical contributions seemed to touch every field of economic science, and he wasn't affraid to think big thoughts even though he work was by the standards of the time quite technical.

But in the early 1990s, Stiglitz went to work in Washington and turned his considerable talents since then to questions of political economy, political philosohy, and public policy.  He has become a sort of ideological warrior for public policies that are concerned with rampant market failure, and inequality born of disproportion wealth and power.  He has also specialized in exposing what he considers to be ideologically driven stupidity in public policy by those on the opposite side of the economic policy spectrum from himself.  However, for whatever combination of reasons I find Stiglitz always worth reading and listening to, which I cannot say about Paul Krugman. Perhaps it is because Stiglitz more often than not attempts to link his current policy arguments to the economic theory arguments that he won the Nobel Prize for during the more scientific stage of his career.  Krugman is like wrestling with jello, Stiglitz like wrestling with a bear. The bear can eat you, but at least you know what you are dealing with.

Neither Stiglitz nor Krugman are very happy with the policy state of the world, but neither am I -- but from the opposite end of the economic policy spectrum.  My view is that we have intellectually paniced in the economic emergency room, and have spent the last 5 years engaged in public policies that strive for short term relief from economic disruption at the cost of long run economic growth.  They believe we haven't tried hard enough to curb the excesses of capitalism and to control the economic forces at work in our democratic societies of the west.  From both the perspective that I hold and the perspective they hold, the economic malaise that plagues Europe and the US is invoked as evidence that the public policy path chosen was not the best path that could have been followed.

What do I point to for my position?  Public debt, the Fed balance sheet, lingering unemployment and discouraged workers, and anemic economic growth.  I draw my insights by following Larry White and George Selgin (on monetary policy), Casey Mulligan (on labor market) and Richard Wagner and Lawrence Kotlikoff (on fiscal policy).  Or in a more longer term perspective some blend of Adam Smith, J. B. Say, Mises and Hayek, and Buchanan, what I call mainline economics in my book Living Economics.  They draw their insights from Keynes, neo-Keynesianism, and New Keynesianism, or what could be termed the mainstream macroeconomic consensus.  We look at the economic world through a different analytical window, and that changes the interpretation one puts on the facts they see out the respective windows.

I predicted to an economist friend (David Henderson) during the first year of the Obama administration that before he left office in 8 years we will experience 1970s style double digit inflation and double digit unemployment.  It appears that my prediction will not prove to be accurate by any standard accepted measures, but if you look at some alternative measures my prediction actually isn't as off as it might appear.  The great economic malaise of our age still appears to me to resemble the economic malaise of my youth in the 1970s and not what I have read about the Great Depression of the 1930s.  Still for my bet with David, I will honor standard measures and thus unless something really unusual happens I will lose and owe David some money -- but since I tend to believe the alternative measures my payment will be cheaper in real purchasing power than what we agreed to back in 2009.

But what about the other side, how do they explain the economic malaise?  Stiglitz has a very nice summary of his perspective at Project Syndicate.  What I continue to find frustrating in these discussions is how readily economists of the Stiglitz persuasion can attribute the bad economic outcomes to bad public policies, yet still blame the market economy for the bad economic performance.  There is simply no doubt that the past 5 years (I would argue for a much longer period) has been defined by policy efforts to control the market economy and to guide the economic steering wheel (to use an old phraseology of Abba Lerner).

The debate will no doubt continue, I just hope that this time around (as opposed to the 1940s) there will be enough intellectual fire-power on the mainline side to effectively resist a new professional consensus emerging and establishing a lock on the economic imagination that takes us away from price theoretic explanations and an appreciation of the self-regulating capacity of the market economy when allowed to operate unhampered by regulation and macroeconomic management.  

Stiglitz, looking through his different window, concludes: "On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?"  

 

Comments

[BAllanHansen]

Pete,

Where do you think your prediction went wrong? Did the Obama administration fail to do something you expected or did people respond to their actions in ways you had not expected?

[Peter Boettke]

1. I think there is some measuring issues.

2. I probably had some miscalculation of the money demand and money supply situation that resulted in my overly pessimistic view of Fed policy

3. The consequences I was thinking about are long term consequences and they haven't worked their way through the system yet.

What I don't see is an issue of the failure of predictability for the reasons that Morgenstern identified so many years ago -- namely that a prediction/warning if heeded is in fact doesn't produce the predicted outcome. I don't think Bernanke et al were concerned with the inflation predictions.

4. I am still puzzling my way through how to understand our recent monetary policy history. I am not persuaded by market monetarism, but I am analytically persuaded by monetary equilibrium theory.

So I can sleep at night, I quite my discomfort by thinking it is some combination of (1) mismeasurement and thus hidden inflation, and (3) the consequences are coming down the pike.

[Barkley Rosser]

Pete,

Unemployment even conventionally measured did briefly top 10%. What is going on with monetary policy is indeed very complicated and clearly things are not operating as they used to for a variety of reasons.

Regarding Stiglitz and Krugman, I fully agree that Joe has far more gravitas and credibility than Paul, whatever one thinks of their views.

[Peter Boettke]

BTW, I thought this was a very interesting interview with Stiglitz by Russ Roberts.

http://www.econtalk.org/archives/2012/07/stiglitz_on_ine.html

And Barkley --- Stiglitz to me is still the towering economic theorist of his generation, so I cannot think of him as a hack even when he goes over the top about issues. I don't think of Krugman's actual contributions --- which are not trivial -- in the same light, so to me when he goes off the rails it isn't as surprising (in short, this was always in him). There is probably all sorts of things wrong with my interpretation, but that is how I come down on it. Stiglitz -- listen; Krugman -- cringe.

[Sabhlok]

"I predicted to an economist friend (David Henderson) during the first year of the Obama administration that before he left office in 8 years we will experience 1970s style double digit inflation and double digit unemployment."

Well, that's mid-January 2017. Three more years to go. I see a distinct possibility that you'll win. Kotlikoff is on the money with his debt calculations. This is basically a ponzi game and barring a miracle, the trajectory is downward for US, not upward.

True, you should have agreed not just to unemployment but to some measure of standardised unemployment (that counts for those who drop out). I'd not be too despondent about your chances, though.

Sleep well. Keynesian delusions are just that. Even Keynes would not agree with American policies were he alive today.

[plus.google.com/109940749078801852015]

I think many of us failed to heed Mises' warning about taking the quantity theory too literally. Of course, the money supply did not expand with the Fed's balance sheet as it had in the past because the Fed paid interest on reserves.

However, inflation failed to appear for similar reasons that caused the Bank of Japan to fail to create inflation for over 20 years. Low interest rates and QE infinity don't work mechanically. For low interest rates to work, someone has to borrow. Consumers are borrowing a little to buy cars and houses, but not enough to ignite price inflation.

To grow the money supply fast enough to ignite inflation, businesses or the state must increase borrowing. Businesses aren't because taxes and regulations make the US a poor place to invest. The state isn't because it had hit its credit limit.

For QE to work, the seller of bonds to the Fed must spend his cash on consumer goods. If he just buys another asset, in the stock market or real estate, he won't cause price inflation.

I don't expect to see price inflation for probably another 20 years unless the feds reduce corporate taxes and regulations dramatically.

[Roger McKinney]

The plus.google post above is me.

Another problem with predicting price inflation is the fact that the structure of production is fragmented across nations. Raw material production from mining is spread all over the world. The US excels in capital equipment and consumer durable production, but imports most consumer goods from overseas, especially China. Money loosens the joints between the levels of production, but international trade does so even more. So investment in higher order production via credit expansion may not stimulate price increases for consumer goods since those goods come from another country with different fiscal and monetary policies. Someone younger and smarter than me will have to figure out how to adopt the Austrian structure of production to an international one.

Also, if the new money created by the Fed goes into buying consumer goods, for the most part that means buying imports; the money goes overseas. Of course, that should cause the dollar to fall in value and the price of imports rise, but it won’t if the exporting country has a loose monetary policy, too. Much of the new money went overseas as investment and much went into assets such as stocks and bonds.

[plus.google.com/106148273717283195471]

Your prediction has no been realized yet, probably due to... "In Economics, mistakes are often made by analysts... because the holding of other things constant clause is forgotten, or the magnitude of the consequence is not dutifully noted". (Why are there no Austrian socialists?)