Joseph Stiglitz and Paul Krugman on Economic Policy

Joseph Stiglitz and Paul Krugman on American Economic Policy

America’s luminaries of economics leave no doubt: Bill Clinton and George W. Bush have damaged their country economically

By Stefan Deges

[This article originally published in: Rheinischer Merkur, February 27, 2004 is translated from the German on the World Wide Web, http://www.merkur.de/aktuell/ku/sb_040901.html.]

Gregory Mankiw is one of those brilliant economists with the unusual gift of summarizing economic connections. “In the long-term, jobs migrating from the US to low-wage countries is advantageous”, the first economic advisor of George W. Bush, said a few days ago before an amazed band of journalists in the White House.

The echo may not have surprised Mankiw if he had read Paul Krugman’s new book “The Great Unraveling”. The economist from Princeton University claims Bush should not be burdened with economic logic. On order of the president, Mankiw turns to the press daily to revise his statement.

There is an election campaign in America and Bush fears a lost vote behind very lost job. The number of jobs in the US has fallen three million since the Texan assumed command in Washington. The president obviously doesn’t want to admit that the supposedly liberal Bush philosophy based on tax cuts for the rich is counter-productive. Cheating, cronyism and incompetence mark the policy of the White House, not economic reason. “We face one of the most wicked rogue governments of this earth”, Krugman said.

This sounds familiar since the documentary filmmaker Michael Moore equated the US under Bush with a banana republic. However Krugman’s book is not only polemical toward the US rulers. “The Great Unraveling” is the accusation of a social democrat in an evidentiary process against George W. Bush and his guiding star Dick Cheney. The complainant imagines himself in the middle of a revolution. “I obviously speak of the radical right in our country, a movement that has everything in its clutches: the White House, the Congress, a large part of the administration of justice and most of the media.”

That the White House covers illegal practices by issuing rules enabling corporations to evade all controls is an explosive thesis. Krugman begins his argument by documenting the energy program drawn up by ex-energy manager and vice-president Cheney after his energy corporation dictated its content. Another evidence of cheating focused on the first man in the state. The investigation of George Bush’s insider trading was stopped although the examining authority identified a crime.


Search for a Middle Course

Krugman presents himself as a witness. A collection of commentaries published during the past three years in the “New York Times”, constitutes the large part of the book. In these articles, Krugman peals off Bush’s economic policy like an onion by questioning all of Bush’s fiscal and industrial decisions. On tax policy for example, the president in a television interview announced that $1.3 trillion in tax revenues would be paid back to the citizens. This would be a quarter of the American budget surplus. Hoopla, Krugman thought. Is 1.3 times four 4.6?

Krugman has always doubted the free market. When he began his scholarly career, the general belief in Keynesian economic control collapsed. For the first time after the war, growth died down and unemployment and inflation increased drastically. However the alternative program of the market liberals did not solve the problems. Rather their prescriptions enlarged the social inequality in the US. On the other hand, Krugman for three decades has sought a middle course between the market economy and state control. The economist who is seen by many as a candidate for the Nobel Prize not surprisingly already forecast the catastrophic budget deficit of the US when the US first began to justify tax cuts with de-control of the markets. In 1999, Krugman already warned that the stock bubble would soon burst.

Even before Krugman, Joseph E. Stiglitz made a name for himself as an exponent of a middle course between the market and the state. Three years ago Stiglitz received the Nobel Prize after showing in many theoretical studies that markets cannot be efficient because everyone does not have the same information. In 2001, he summarized these insights in the book “Shadows of Globalization” that quickly developed into the Bible of globalization critics. At that time he made Stanley Fischer, acting director of the International Monetary Fund, responsible for the misguided policy of the fund that relied undifferentiatingly on liberalization.

In his new book “The Roaring Nineties”, the former chief economist of the World Bank criticizes the economic policy of Bush’s predecessor Bill Clinton. Like Krugman, Stiglitz also denounces the glorification of Federal Reserve Bank chairman Alan Greenspan. He also castigates the American law of proper accounting because it gives false incentives and promotes conflicts of interests.

Deficient Loyalty to Principles

However Stiglitz mainly complained that the prescriptions of the United States abroad were different from what it practiced at home. Other countries were told to privatize pension security while the US developed its state system. With threatening corporate bankruptcies, Washington demanded that American investors be quickly paid. In the US, on the other hand, the bankruptcy law protects stricken businesses from the access of creditors.

“The worst mistakes that we made in the Roaring Nineties can be summarized in our deficient faithfulness to principles”, Stiglitz says today. However what appeared as the self-criticism of a star-economist who advised Bill Clinton for eight years is in truth a subsequent apportioning of blame to Robert Rubin. The Secretary of the Treasury in the Clinton era over-stressed the interests of Wall Street.