Joe Stiglitz is introduced by EPS Chair Jamie Galbraith. The room is full and buzzing. CityEconomist is in the first of three rows of chairs facing our speaker. Jamie, son of much-missed EPS leader John Kenneth Galbraith, is here from the University of Texas at Austin, and doesn't hesitate to acknowledge the grand contributions of some sons of Texas to the current financial fiasco.
Certainly, the investment bankers in the Big Apple and mortgage hustlers in Orange County, Calif. couldn't have caused such mischief on such a world-wide scale by themselves. They needed Texan Phil Gramm and the Republican Senate to change the laws to make it all possible. Jamie agrees with me that the must-read story on the high point of the credit default swap hijinx is is the May 30 story in the Texas Observer. Send this link to anyone who still talks about the glories of financial innovation with a respectful demeanor (will some people never learn?).
The evening event caps a day-long conference at the New School on the world-wide financial meltdown. Jamie speaks about the origins of the crisis, modestly refraining from promoting his own new book, The Predator State, which these quotes, sans ellipsis marks, summarize:
The judicial coup of December 2000 that installed Bush and Cheney brought back tax cuts for the wealthy, big increases in military spending, aggressive deregulation. Bush and Cheney placed lobbyists in charge of the regulators, representing, in every case, the most extreme anti-regulation perspective. This is the predator state.Jamie in his book argues that what began as a well-intentioned anti-regulatory movement deteriorated into crude anti-tax crony capitalism. He expresses delight that the nation has now elected someone who is mortgaged to nobody. He introduces Joe as someone with a unique record of insight and foresight about the dangers of ideological economic policies and the disasters they cause, and holds up a copy of Joe's new book, The Three Trillion Dollar War.
Joe says his initial public estimate of the cost of the war in Iraq was $1 trillion. When he presented a paper to an EPS panel in 2006, he and his co-author Linda Bilmes raised the estimate to $2 trillion. "Linda and I thought early on it might be $2-$3 trillion," he said, "but the administration was quoting very small numbers." (The original Pentagon estimate was $50 billion. Lawrence Lindsey, Assistant to President G. W. Bush for Economic Policy, got into pink-slip-level trouble after raising the estimate to a more realistic range of 1-2 percent of the then-GDP of $10 trillion, to $100-$200 billion. See here and here.)
Joe notes that a contributor to the high cost of the Iraq war is the high injury rate among returning soldiers - 15 injured soldiers for every one killed. Joe says that the U.S. government sometimes classifies an injury as an accident, as when a mine takes out a Humvee and then another Humvee plows into the first one. The injuries from the second event may be classified as an accident. The injured soldiers are adding $600 billion to the nation's unfunded liability and constitute a significant fraction of the war's cost - both economic and human.
Joe describes the Iraq War as the first war that was financed entirely on a credit card. Oil was $23 a barrel when the war started, soared to above $145 in July, has now fallen to $57 a barrel today. Latin America borrowed money to pay for higher oil prices, resulting in credit starvation in the 1980s and "a lost decade of growth" How many lost years will the United States suffer from our recent credit binge?
The failures of recent economic policies may be summarized, says Joe, under three headings:
1. The stimulus and bailout were both misconceived. Most of the stimulus package was used to pay down debt and didn't do much for consumption. Allen Sinai presented a paper projecting the worst downturn since the Great Depression and 8-12 percent unemployment. The bailout amounted to cash for trash, whereas the Brits did it differently and better, with conditions and sanctions. The bailout money has been spent on bonuses and dividends.
2. Financial regulation has failed. The financial boats have holes, their steering is gone and their pilots are drunk.
3. The budget has been mismanaged. A deficit can be a good idea if it is spent on something useful, like roads and technology, which have high returns. Using taxpayers' money to buy toxic assets is not a good use of money. We can evaluate public spending from a long-term and a short-term perspective. Our military spending has been poor managed on both counts. We have been buying less security for more money instead of the reverse.
The $700 billion commitment of the Troubled Assets Relief Program (TARP aka Bailout) amounts, says Joe, to ten years' worth of global foreign aid. Treasury Secretary Paulson seems to have seen the light and is halting the purchase of the toxic assets, following Gordon Brown's path of buying bank equity [see Telegraph story today].
Summing up, Joe says the United States has been kept going since 1993 by the tech bubble and then the housing bubble and now some improvement in exports. What we have to look forward to is perhaps two years more recession and then a continuing period of slow growth, maybe focused on renewable energy, green jobs.
Note on EPS: CityEconomist is proud that so many good groups owe their existence to New Yorkers. One of them is EPS, which sponsors economic discussions and reports about unnecessary wars and wasteful military contracts. It was founded by the late Bob Schwartz, an economist and investment adviser whose years as a Marine (he never liked being called an ex-Marine - once a Marine, always a Marine, he said proudly) led him to champion the cause of peace. I was Bob's first paid-up member in the late 1980s and followed him as the second EPS Treasurer. Alan Harper is the third. EPS Executive Director Thea Harvey has made a major contribution to bringing EPS to its current thriving condition. Legacies from Bob Eisner and Bob Schwartz have been major factors in the organization's endurance.