[PAA-Discuss] Good info from Stiglitz

Sun Feb 7 15:31:44 EST 2010

Obama's muddled solutions

The president is trying to please everyone, but he needs to take tough
action to prevent the US economy's second freefall

*	 <http://www.guardian.co.uk/profile/josephstiglitz> Joseph Stiglitz 

*	Joseph Stiglitz <http://www.guardian.co.uk/profile/josephstiglitz>  
*	guardian.co.uk <http://www.guardian.co.uk/> , Saturday 6 February
2010 12.00 GMT 

Defeat
<http://www.guardian.co.uk/world/2010/jan/20/massachusetts-election-barack-o
bama> in the Massachusetts senatorial election has deprived US Democrats of
the 60 votes needed to pass healthcare reform and other legislation, and it
has changed American politics - at least for the moment. But what does that
vote say about American voters and the economy?

It does not herald a shift to the right, as some pundits suggest. Rather,
the message it sends is the same as that sent by voters to former president
Bill Clinton 17 years ago: "It's the economy, stupid!" and "Jobs, jobs,
jobs". Indeed, on the other side of the United States
<http://www.guardian.co.uk/world/usa>  from Massachusetts, voters in Oregon
<http://www.nytimes.com/2010/01/27/us/28oregon.html> passed a referendum
supporting a tax increase.

The US economy <http://www.guardian.co.uk/business/useconomy>  is in a mess,
even if growth has resumed, and bankers are once again receiving huge
bonuses. More than one out of six Americans who would like a full-time job
cannot get one; and 40%
<http://www.csmonitor.com/USA/2010/0108/Number-of-long-term-unemployed-hits-
highest-rate-since-1948> of the unemployed have been out of a job for more
than six months.

As Europe learned long ago, hardship increases with the length of
unemployment, as job skills and prospects deteriorate and savings gets wiped
out. The 2.5-3.5m foreclosures expected this year will exceed those of 2009,
and the year began with what is expected to be the first of many large
commercial real-estate bankruptcies. Even the Congressional budget office is
predicting that it will be the middle of the decade before unemployment
returns to more normal levels, as America experiences its own version of
"Japanese malaise".

As I wrote in my new book Freefall
<http://books.wwnorton.com/books/978-0-393-07596-0/> , Barack Obama
<http://www.guardian.co.uk/world/barack-obama>  took a big gamble at the
start of his administration. Instead of the marked change that his campaign
had promised, he kept many of the same officials and maintained the same
"trickle down" strategy to confront the financial crisis
<http://www.guardian.co.uk/business/financial-crisis> . Providing enough
money to the banks was, his team seemed to say, the best way to help
ordinary homeowners and workers.

When America reformed its welfare programs for the poor under Clinton, it
put conditions on recipients: they had to look for a job or enroll in
training programs. But when the banks received welfare benefits, no
conditions were imposed on them. Had Obama's attempt at muddling through
worked, it would have avoided some big philosophical battles. But it didn't
work, and it has been a long time since popular antipathy to banks has been
so great.

Obama wanted to bridge the divides among Americans that George W Bush had
opened. But now those divides are wider. His attempts to please everyone, so
evident in the last few weeks, are likely to mollify no one.

Deficit hawks - especially among the bankers who laid low during the
government bailout of their institutions, but who have now come back with a
vengeance - use worries about the growing deficit to justify cutbacks in
spending. But these views on how to run the economy are no better than the
bankers' approach to running their own institutions.

Cutting spending now will weaken the economy. So long as spending goes to
investments yielding a modest return of 6%, the long-term debt will be
reduced, even as the short-term deficit increases, owing to the higher tax
revenues generated by the larger output in the short run and the more rapid
growth in the long run.

Trying to "square the circle" between the need to stimulate the economy and
please the deficit hawks, Obama has proposed deficit reductions that, while
alienating liberal democrats, were too small to please the hawks. Other
gestures to help struggling middle-class Americans may show where his heart
is, but are too small to make a meaningful difference.

Three things can make a difference: a second stimulus, stemming the tide of
housing foreclosures by addressing the roughly 25% of mortgages that are
worth more than the value the house, and reshaping our financial system to
rein in the banks.

There was a moment a year ago when Obama, with his enormous political
capital, might have been able to achieve this ambitious agenda, and,
building on these successes, go on to deal with America's other problems.
But anger about the bailout, confusion between the bailout (which didn't
restart lending, as it was supposed to do) and the stimulus (which did what
it was supposed to do, but was too small), and disappointment about mounting
job losses, has vastly circumscribed his room for manoeuvre.

Indeed, there is even skepticism about whether Obama will be able to push
through his welcome and long overdue efforts to curtail the too-big-to-fail
banks and their reckless risk-taking. And, without that, more likely than
not, the economy will face another crisis in the not-too-distant future.

Most Americans, however, are focused on today's downturn, not tomorrow's.
Growth over the next two years is expected to be so anaemic that it will
barely be able to create enough jobs for new entrants to the labour force,
let alone to return unemployment to an acceptable level.

Unfettered markets may have caused this calamity, and markets by themselves
won't get us out, at least any time soon. Government action is needed, and
that will require effective and forceful political leadership.

www.project-syndicate.org

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://paa-tx.org/pipermail/discuss_paa-tx.org/attachments/20100207/aef4eebb/attachment.htm>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: joseph_stiglitz_140x140.jpg
Type: image/jpeg
Size: 42505 bytes
Desc: not available
URL: <http://paa-tx.org/pipermail/discuss_paa-tx.org/attachments/20100207/aef4eebb/attachment.jpg>