Joseph Stiglitz on the causes of the current crisis

Roger Pielke Jr. takes a critical look (here and here) at a novel theory of the recession from Nobel Laureate Joseph Stiglitz in Vanity Fair, the eminent economics journal. This is an extended version of the comment that I made on the second posting.

The Stiglitz theory would make a bit of sense if it were not for what he misses.

  • Your evidence that other countries, like, Germany, have similar increases in productivity but not the endemic problems.
  • That output per capita is identical in National Income Accounting with income per capita. Therefore, the long term rise in per capita income is a result of increased productivity per capita.
  • Since the start of the industrial revolution, real per capita output has risen (in the wealthy economies) more than 200 times. If there has been no corresponding increase in per capita income, unemployment would be greater than 99%.
  • Stiglitz quite rightly points to the rise in personal debt. He makes no mention of public sector debt. In the USA and in Britain in the period 2000 to 2007 government finances swung from a small structural surplus to significant structural deficit. If deficit-financed investment is expansionary, it was not just the low interest rates that kept the boom going but the fiscal stimuli. Similar structural deficits were present in many European countries like Greece, Portugal and Italy.
  • In the 1990 Japan entered a prolonged slump. In the following decade the economy stagnated despite huge public works investment like Stiglitz advocates. The Japanese national debt spiralled to 300% of GDP, with nothing to show for it, except a lot of fantastic roads to nowhere.
  • Japan was fortunate in that its borrowings are at near zero interest rates. The European economies are not so fortunate. Those European economies with large deficits reached a crisis tipping point when interest rates exceeded 7%. To save the economy, radical contractionary policies have been implemented.

I would therefore contend that Keynesian fiscal expansion in the USA or elsewhere would not only be ineffective (coming on top of other fiscal expansion), but carries a huge risk of making matters dramatically worse. Morally I believe that economic policy-making has a powerful analogy to medical practice. It is not just a matter of diagnosing properly the type and extent of the ailment. It is providing, at a minimum, a remedy for which there is a reasonable expectation that the patient will be better off being treated than not. Like with a GP, an economist has a duty of care in what they advocate, particularly when there are very clear and evident risks. Joseph Stiglitz seems to take no such care.

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