On the Hot Seat

Nobel laureate assesses economy, assigns blame

(Pat Greenhouse/Globe Staff)
By Robert Gavin
Globe Staff / February 7, 2010

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Joseph E. Stiglitz won the Nobel Prize in Economics in 2001. While he was in Boston to promote his book on the financial crisis, “Freefall: America, Free Markets, and the Sinking of the World Economy,’’ he spoke with Robert Gavin of the Globe staff.

What was the message of Scott Brown’s election to the US Senate?

You might say, it’s the old Clinton message, “It’s the economy, stupid.’’ There are real reasons for people to be unhappy. Were it not for the stimulus package, the unemployment rate wouldn’t be 10 percent, but rather 11, 12, 13 percent.

But some people say the election was a repudiation of this big government approach.

That’s totally wrong, from an economist’s point of view. If we had not spent that money, the unemployment rate would have been much higher. I think people confuse the $787 billion stimulus and the $700 billion bank bailout. The bank bailout failed in that it didn’t lead to more lending, and taxpayers got cheated. That confusion has helped fuel the anger.

What do you think President Obama has done wrong?

Money went into the banks without conditions. In 1996, we passed the welfare bill for the poor and said if you’re going to get welfare, you have to go to training. We put conditions on the poor. When we put the banks on welfare, we didn’t put them on any conditions. And they didn’t use the money to help the economy.

What would you have done?

I would have begun with a vision of the financial system I wanted. I would have played by the rules of capitalism: When you go bankrupt, you don’t get a bailout. I would have had a new regulatory structure. And a bigger stimulus.

Is a second stimulus the right way to go?

It’s clear we need a second stimulus. Two things I would do: Make up for the shortfall in the revenues in states, so they don’t have to fire teachers and close down public services when we need them most. Secondly, make high return investments in technology, education, and infrastructure.

Should we be concerned about $1 trillion-a-year deficits?

We should. Resources are scarce, and we shouldn’t waste money. If we spend money on a bailout for banks for which we get no return, we have more debt and nothing to show for it. It raises questions about the Iraq and Afghanistan wars, which are adding to our liabilities and not our assets. On nonreturn investments, we have to think very hard.

Is it too late to get the economy going again?

It’s more difficult given the debt is larger, but it’s not too late. Politically, Obama has a more difficult task, but not an impossible task. The difficulty is too many Americans interpret what has happened as a failure of the stimulus, rather than what almost all economists will say, that the stimulus wasn’t big enough. That’s a real challenge for him.

Who’s most to blame for this mess?

The bankers. They undertook too much risk, gambled, and the only people who walked out with money were banking executives. The regulators share some blame. I also blame economists. Economists gave the theory, so called, that you don’t need regulation. Not all economists, but this was a strong view in the profession that provided ideological armor to banks and regulators.

Do you think Federal Reserve chairman Ben Bernanke deserves a second term?

He allowed the economy to go to the brink. He’s not provided the intellectual leadership on the reconstruction of our financial system. The manner in which the rescue was conducted had no consistency, and that policy inconsistency led to the problems. I also feel very concerned about transparency, about democratic processes. When you make mistakes of that colossal magnitude, you ought to be held accountable.

In your book, you talk about the economy being out of balance. What’s the proper balance between government and the market?

The government has played an important role in every successful economy. The government needs to regulate. There’s also a positive role in creativity. Most of the advances in basic science are based on government support. The Internet, for example. A lot of people are afraid if we have regulation, it will stifle innovation, but actually the government plays a very critical role in stimulating innovation.

How long is it going to take to fix this mess?

We’re not going to get out of this very quickly. There are fast and slow ways of doing damage, but no easy way of undoing damage. It would be optimistic to say we will return to normal levels of unemployment [of about 5 percent] before 2012 or 2013.