Stiglitz on the Economic Malaise The Plagues Europe and the US
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?"