Joseph E. Stiglitz (1) served and later chaired the Council of Economic Advisers (CEA) during the Clinton Administration from 1993 to 1997. He was awarded the John Bates Clark Medal (1979) and he Nobel Prize in Economics (2001). After leaving the CEA he moved to the World Bank. He taught in the past at Stanford and now teaches in Columbia University. He also served at the OECD and several other positions to which he has been appointed throughout his career.
Stiglitz wrote “The Roaring Nineties” in 2003 to offer an insider’s view of economic policy making and the economic boom and bust of the nineties. I loved the book. I use to make some annotations and marks in the books I read. I counted the ones I made reading this book: 52.
Stiglitz is frank in admitting that all the focus that the Clinton administration had at the beginning of the term in passing laws to improve the living of the disfavored ones was suddenly put aside due to the mantra of deficit reduction. He openly regrets it several times throughout the book and offers some criticism on the administration he took part in and others before and after. Especially Reagan’s and Bush II’s.
Now, in 2014, there are many who brag about their seeing of the bubble that caused the financial crisis which burst between 2007-2009. It would be rather easy to see what they really said beforehand. See what Stiglitz published in 2003:
“The huge tax cuts of 2001 and 2003 were larger than the country could afford. The surplus of 2% of GDP of 2000 was converted in short order to a deficit of 5% of deficit – a huge turnaround in a short space of time. Americans were not saving enough to finance this deficit, and so the country, in effect, turned to the rest of the world. The country is living well beyond its means, borrowing more than a billion and a half dollars a day. […]
Households took on more debt because interest rates were low and they could afford it. But as interest rates inevitably rise as the economy strengthens, households will find it difficult to service their debt. This will be further aggravated in the years to come as large budget deficit means interest rates will be higher than they otherwise would be, putting an extra burden on the country. Many households will be forced into bankruptcy. Many will be forced to rein in their consumption. There is a strong risk that the real state bubble will break, or at the very least, prices will stagnate […] What is clear, however, is thar the Bush-Greenspan strategy, entailing greater reliance on low-interest rates and mortgage refinancing to maintain the economy through the period 2001-2004, and tax cuts for the rich, providing far less stimulus to the economy than would have been provided by investment tax credits or tax cuts for the poor, was a risky one, and has put the future of the American economy in jeopardy.” (emphasis is mine)
The risk then became an issue, which is still lasting 10 years later. This comes just in the preface of the book. Stiglitz specialization is information asymmetry. He gives some examples of such asymmetry in different passages of the book when analyzing errors, incentives, etc., in accounting, auditing, special interest agendas.
Let me quote some of the gems I had marked in his book:
“[…] one of the reasons that the invisible hand may be invisible is that it is simply not there”
“[…] “Voodoo” economics of Reagan, who somehow believed that by cutting taxes you could raise tax revenues […]”
“Developing countries were told to open their markets to every imaginable form of import […]. Meanwhile, we maintained stiff trade barriers and large subsidies of our own on behalf of U.S. farmers and agribusiness, thereby denying our market to the farmers of the Third World. […]
These were not the only examples of what struck those abroad as blatant hypocrisy.”
“We scolded the developing nations about their disrespect for intellectual property laws that we, too, had scorned in our days as a developing nation. (The United States didn’t get around to protecting the rights of foreign authors until 1891)”
“[…] the folly of the Reagan tax cuts. […] a theory scrawled on the back of a napkin, called the Laffer curve – after Arthur Laffer, who then was at the University of Chicago- which claimed that as taxes got higher and higher, people worked less hard and saved less […]”
“Over the years, I have become convinced that the confidence argument is the last refuge of those who cannot find better arguments; when there is no direct evidence that deficits directly promote recovery or adversely affect growth, then they do so because of confidence.”
“Fiscal responsibility was supposed to be the province of the conservative Republicans, but after twelve years of fiscal profligacy, a tax cut that Reagan said would pay for itself through energizing the economy but did not, it was left to Clinton to do the dirty work, without the help of the Republicans, who voted unanimously against Clinton’s deficit reduction plan. Their opposition confirmed the more diabolic interpretation of the Reagan tax cuts. They didn’t really believe in supply-side economics, the theory that the tax cut would spur the economy so much that tax revenues would actually increase. Instead, they knew that there would be shortfalls, and they hoped that the shortfalls would force a cutback in government spending. The true agenda was thus to force large cutbacks in the size of government […]”
“[…] the IMF was founded, under the intellectual aegis of Keynes: to provide with the money necessary for expansionary fiscal policy in an economic downturn. But the IMF has forgotten its original mission […]”
“The New Economy-the innovations which continue to fuel the productivity growth and form the basis of this country’s long-run strength depend on the advances of science, on researches at universities and research labs, who work sixteen-hour days and more in the tireless search to try to understand the world in which we live. These are the people we should have been rewarding, and encouraging.”
I think that with these excerpts you get a glimpse of the directness of the book. It touches economic policies, creative accounting and accounting standards, conflicts of interests, incentives, the case study of Enron, employment, the role of central banks, the danger of quick adoptions of deregulation, corporate hypocrisy, globalization…
I strongly recommend the reading of this book (about 380 pages).
(1) You may follow him in Twitter.
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