I am currently reading Stiglitz’s book Freefall, a very interesting analysis on the global recession. A lot of criticism is directed at Bush and Obama administrations, which, underestimating the severity of the recession, are accused of having implemented flawed policies in response to the crisis. In particular, according to Stiglitz, Obama’s fiscal stimulus ($800 billion over two years) was too small to substantially reduce unemployment. Second, too little of the stimulus went to help states and local governments, which will be forced to cut their expenditures, especially harming the poorest. Third, the administration did little to improve the safety net, in terms of unemployment benefits, health insurance, and mortgage insurance. Fourth, the investment program could have been more directed to long-term and high-return investments in people and technology, instead of shovel-ready projects. Finally, too much of the stimulus (one third) was devoted to tax cuts. Stiglitz argues that much of this tax reduction will be saved and not spent, making the stimulus ineffective.
In a recent article (here), one of the most famous new classical macroeconomists, Robert Barro, has tried to evaluate the stimulus package, concluding that it was a mistake, since it is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure.
Thus, Obama’s rescue plan is under attack from both the left and the right, for very different reasons. The next months and years will tell us if the stimulus was effective and to what extent, and, above all, they will declare the winner of the nth intellectual battle between Keynesians and neoclassicals.
Personally, I have always preferred Keynesians policies to neoclassical prescriptions. Moreover, Stiglitz’s reasoning seems to be strong and reliable, not only in his last work. For these reasons, I think that government spending is needed during this recession (to what extent, and how, is debatable). However, leaving aside short-term considerations on the stimulus role, I share Stiglitz’s view that a new capitalist order (with a new role for governments) is necessary to prevent dangerous global imbalances and the occurrence of future crises.
M. F.
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I appreciate Stiglitz work and ideas but I think there is a fundamental logical flaw in his reasoning. I haven't read the book yet, so please forgive me if I am commenting based on Matteo's comment and review.
ReplyDeleteAs a Keynesian Stiglitz believes in public stimulus and governments, but then his book demolishes two government's work by saying that it was ineffective and wrong. Note that I perfectly share this analysis. But then, for me this is enough of an argument to claim that there should be less stimulus. Or in other words, because I do not trust governments, if we cannot get a good package of public policies (aimed at alleviating the sufferings of the poorest and unemployed) then better save the money (BTW where the hell is this money (800 billion) gone?). The problem is that Stiglitz's premise is that we should have more stimulus (because, honey, if G increases we know that Y will and U go down). So basically what should become a conclusion is in his reasoning an assumption (we need a stimulus). I guess he is perfectly aware of this logical inconsistency.
So let me argue that the wrong stimulus has even more detrimental macro effects. According to John Taylor the stimulus didn't work and the small rebound at the end of 2009 was mainly due to private (not public!) investments. Well, assuming that monetary policy works as people at the ECB think it should, I trust Scott Sumner when he argues that monetary policy will likely crowd-out or off-set fiscal policy. We now have an extraordinary combination of expansionary fiscal (which will enter now with some lag the economy) and monetary policy, two policies which are both likely to fuel inflation expectations. If so central banks will strongly react and increase interest rates. So much for forecasts.
Be it as it may I am more of a new-keynesian than a new-classical. But as you know, there is new-keynesian (http://gregmankiw.blogspot.com/) and new-keynesian (http://krugman.blogs.nytimes.com/).
A. B.