Dr. Joseph Stiglitz

If you’re an anarchist, conspiracy theorist, pitchfork populist or member of the Tinfoil Hat Brigade, you must certainly reckon this week’s guest as one of the Secret Masters of the Universe. Joseph Stiglitz is professor of economics at Columbia, a 2001 Nobel laureate, and served as Senior Vice President and Chief Economist at the World Bank from 1997 to 2000. In other words, as an architect of globalization, he was the target of every rock thrown at the 1999 Seattle WTO protests. His criticisms of Bank polices proved apposite enough to eventually get him fired, but, for this scholar so memorably fascinated by asymmetry, subsequent status as one of the world’s most-quoted academics is curiously symmetrical.

Events of the past week have added a little prestige to bankerly wisdom, so Stiglitz was busy with the media while in town peddling his book The Three Trillion Dollar War: The True Cost of the Iraq Conflict (co-authored with Linda J. Bilmes). An imposing job of forensic accounting got up as political tract, the study, to paraphrase e.e. cummings, indicates a giant mound of s. we all must eat.

CityBeat: You’ve been asked this today I’m sure, but how much of this week’s ongoing economic disaster can be traced to the war?

Joseph Stiglitz: It’s clearly played an important role in two important respects. First, I think the war had a lot to do with the increase in the price of oil. There could be debate about how much, but even if it’s only responsible for 30 percent, 40 percent, the chain of logic is that with the price of oil climbing, Americans were spending more money abroad. The Fed responded in what I’d say was a shortsighted way to the weakness of the economy by keeping interest rates lower, lending standards lower, and it’s precisely those lower rates, the flood of liquidity and the lower regulatory standards, which led to the current problem. Now, I think that you could argue it may in fact be the war that broke the camel’s back. The system has an enormous amount of resilience, so it can take a certain amount of abuse. People can gamble and it can survive. The second way, very important, goes back to 2001; when we had our economic downturn, we had a surplus of two percent GDP. It became clear in August 2007 something needed to be done, but they didn’t get around to it until February 2008. What it did was very mild and it was mild because we were constrained by a very big budget deficit. Even Bush’s advisor – now Fed Chairman – [Ben] Bernanke identified this as a main difference between 2001 and 2008.

Yes. The Clinton surplus, now gone.

Yes. It was still extant at that time. Now, in 2009, we’ll be looking at the largest deficit in our history.

Lordy. Give us the bad news, as if that wasn’t bad enough. Can a major and long-lasting world recession be far behind?

Um. Well. Um. [Long pause, as the professor makes a mildly discomfited face.] Economists are always two-handed, so I’ll be a two-handed economist. On the one hand, in many ways, this current financial meltdown, which is just beginning, is more complicated yet not so serious as the Great Depression – yet could easily become so. But the real consequences have been much milder. The Great Depression saw 25 percent unemployment. Most economists would say we now know how to combat that through Keynesian measures and there’s no need for us to wind up in that situation. That’s probably what’s behind some of the extraordinary events this week: the government going into the insurance business, the mortgage business, the government becoming the largest insurer, the largest mortgage company. Talk about socialism, we have it! It’s an irony the biggest increase in the role of government in the economy would happen this way.

As capitalism collapses.

Right. This is a pattern we’ve seen over and over again. Financial markets always want a bailout and always resist regulation. We had bailouts in ’89, ’94, ’97, ’98. Financial markets frequently get bailouts, then lecture poor people about self-reliance.

What else are poor people for? Please explain to our readers how if any business owners among them tried to use Uncle Sam’s accounting in their own affairs, they’d soon go to the penitentiary.

The point we made in the book is that the government’s system is called “cash accounting,” and every business larger than a corner grocery is required to use “accural accounting,” which means if you have a liability, you show it. It has to be subtracted as a cost of production. The government only records transactions at the time they occur. That clearly can be very misleading and lead to bad decisions. This war, in particular, has many formidable downstream costs, costs we have not paid. For instance, in the case of the Iraq war, we’re paying $12 billion a month, but we have another $600 billion bill we’re likely to pay because of disability and another $200 billion to reset the military back to pre-war strength. These expenses can be equal to or exceed what we have paid already.

The pig is only halfway down the python. Somebody has to ask the Max Bialystock question – if dishonest bookkeeping got us into this mess, then why can’t it get us out?

Good question. Dishonest bookkeeping hides reality. The reality is we spent those resources. Not only did we spend it, we borrowed it. That means there are a lot of IOUs floating around. More so than since the Revolutionary War, we’ve had to turn abroad for finance. Those are pieces of paper that say you have to pay and there’s no easy way of getting out of that. One way is hyperinflation and pay in worthless dollars, but that would be a cure worse than the disease.

So, the U.S. will globalize its loss?

Well, the debt is globalized. We benefited enormously from globalization. We exported large numbers of these toxic mortgages. Things would be twice as bad had we not taken advantage of globalization. Secondly, the one thing keeping America going right now is our exports, and that’s happening because the dollar is so weak, so we’ve exported our downturn. Weak dollar means strong euro, which means strong exports, which means Europe has now gone into a monetary recession. As we use that as a solution to our problem, it’s only short-term, because as they go into recession, so do we.

What was the biggest surprise of your time at the World Bank?

What do you mean?

Well, they pulled back the curtain and let you inside. How was what you found different from what you expected?

This may sound strange, but it was how bad the IMF was. I’d read articles about IMF riots and you sort of go, “Well, this is all exaggerated,” but then you get into negotiations and meetings with the IMF and they were the worst participants in any discussion – in their economic analysis, their arrogance. I’d also not fully appreciated the extent to which the U.S. Treasury dictated to the IMF, and the extent to which the U.S. Treasury goes its own way. In a meeting with the president, he said something to me like, “Did you see what the IMF is doing?” He’d read an article in the paper and didn’t realize this was his U.S. Treasury that had told the IMF to do what it was doing. The Department apparently considered that too small a matter to bother the president with.

A trifle.

Yes.

Will this election make that much difference?

Yes. It will make an enormous difference. Whoever is president will have an extraordinarily difficult time dealing with the Iraq war and its aftermath. Even if he leaves the war, here’s all these downstream costs, the “peace dividend” isn’t going to be anywhere near as large as a lot of people thought. Cleaning up the mess of the last eight years is going to be very difficult, and that mess includes the economy. You asked about a Great Depression earlier. Well, there’s ways to avoid one and ways to bring one on. In East Asia in the ’97 crisis, we knew how to avoid a depression there and the U.S. Treasury brought one on instead. I have every confidence one of the two candidates will bring on a Depression. Without intending to and without understanding.

Or the wit to reject the counsel of fools.

Including the counsel of those who got us into the mess in the first place. Alternatively, they might avoid a downturn, but wind up with an economy so impaired, like the current strategy of mega-bailouts of the size no one would have thought possible six months ago so that they could avoid short-run consequences.

The government famously shortchanges veterans, but the most harrowing parts of The Three Trillion Dollar War all seem to come together to form the realization that the cost of treating the veterans will be monstrously high and borne mostly by ordinary people.

It’s not too expensive to pay, just as the war isn’t too expensive. The point is, our living standards will be lower. That’s the point. It’s a lot of money, no matter how you look at it. Of that, three trillion, probably closer to four or five trillion, is the care of veterans. It’s a big bill. Four years ago, the president was talking about fixing Social Security. Well, the entitlement of caring for our veterans is now bigger than the “hole” he went wild over. It’s serious, but we’re wealthy enough to manage it. It’ll particularly pinch people at the bottom and middle who haven’t been doing so well in this country.

Do you see any political action down the road by Americans called upon to socialize the loss?

I like the way you put that. “Socialize the loss.” Well, I’m from Gary, Indiana, and went back there not long ago. They use it in movies to portray the ghetto. Well, the people there are angry. They say, “Three trillion dollars for the war? We can’t get three cents out of Washington!” There will be even more anger. $85 billion goes to AIG and the President vetoes a bill providing health care for uninsured poor children saying we can’t afford it.

Whither globalization?

One of the reasons it’s been so widely criticized is that the pretext, context, and project of globalization was used to sell a particular kind of market fundamentalism. The current debacle is leading to a rethinking in the more conservative areas that unfettered markets are not a good thing. Areas which are not conservative have already rethought, so in a sense, globalism-as-market-fundamentalism is over. We’ve benefited by globalization, but, on the other hand, there are people saying, “Well, you’ve ruined us.” So I think there’s going be a caution from now on regarding the doctrines of unfettered free markets. Part of the mantra of globalization is the march of American-style capitalism is going to be a much harder sales job.

So, the idea you can sell the American Dream as part of some imperialist project is no more?

It’s gone at least for a while. It always had a hard sell when people realized the kind of income inequality we have here, the large numbers of people in prison, our health care system, all the guns. They look at our society with bewilderment. There was always our amazing economy to marvel at and some parts are still very strong. One of the things that impresses people from other countries the most is our universities, which are not part of our for-profit sector.

Another export source is pop culture/show-biz, oft-deplored as radical by the same people who deplore universities.

That’s exactly so. Our agriculture does very well, too, since it’s heavily subsidized by the government.

Would you take a job in an Obama administration?

[The professor’s eyes glitter and he plays with a tiny smile before laughing.] Well, if the president asks you, it’s pretty hard to say no. At the same time, one would want to be in a place where one could most affect policy outcomes. There are two ways to affect policy – by trying to shape ideas and public opinion and by slugging it out in battles of politics. I did the latter for a number of years and I like the other much better. If he asked me, I couldn’t say no, especially with the difficulties we face today.

Is the American Century over?

Well, even before this, Europe was as much an economic powerhouse as the U.S. China saves much more. If you look at the fundamentals, we still are dominant in some sectors. John McCain got into trouble for saying it and I don’t know why, but the fundamentals are still sound. What is CityBeat anyway? Is it like The New Yorker?

Um, in some respects, yes. Thank you, Professor Stiglitz.