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Tuesday, January 4, 2011

Transcript: 418 Stiglitz on banks, Galbraith on jobs

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Today on the podcast, Joseph Stiglitz on banks, James K. Galbraith on jobs, and an extended Idiot of the Week, featuring everybody's favorite newspaper, the Economist magazine.

First, Joseph Stiglitz,



"Idiot of the Week"

Today's idiot of the week is a duo. Tweedle Dee and Tweedle Dum, Laurel and Hardy, Lockwood and Ip. If there is a reason the Economist newspaper is always behind the curve, it probably has to do with selling magazines. Peddling conventional wisdom and the standard neoclassical stuff does not offend one's customers. Market fundamentalism may not do very well in practice, but with the right tone of insiderism (th?), it can be convincing at least this week. And consumers of economics media have demostrated their short memories. If we lived backward in time, they wouldn't do so well.

Here we have Chris Lockwood, U.S. Editor, and Greg Ip, U.S. Economics Editor, in a colloquy of dunces. (Idiot of the Week is not kind.) The conversation took place in November 2010.


Whoops. We forgot anti-tax. And we would have added anti fiscal responsibility. It remains to be seen how anti-spending they are. The last two anti-spending Republican Administrations, Reagan and Bush II, ended up spending enormously on national defense. The second of these floating two wars on credit, and in fact, cutting taxes mostly for the rich at the same time -- perhaps the apex of fiscal profligacy in our nation's history.


We are not aware of a concerted effort on the Right against the Fed. There may be some noise, but it is well-muted by the Wall Street financiers who rightly recognize that their bread is being buttered by the Fed's actions. As Ip notes, you could hardly argue there is inflation in the economic data, because there is not. But this is another hallmark of the Right. Stick with the theory long after the facts have disproven it. And then jump on any data point that seems to support you as if it is absolute proof. This selective vision is what we are about to witness with the rise in commodity prices fueling some cost-push inflation. It will be seen as a result of too much money being printed.

Unfortunately, they will be right. Fed pushing money into the financial sector is bidding up commodity prices and fueling bubbles in developing economies that will put definite upward pressure on prices. Not the price of labor, nor the price of manufactures or servcies, but the price of basic commodities. This will at the same time seem to ratify the Right's concern over inflation and reduce effective demand. The combination will push the economy downward -- a point we'll argue in more detail in our upcoming 2011 Forecast edition of Demand Side.


Well, unfortunately, six weeks have passed and the dollar is not declining as this gentleman is predicting, largely on the weakness in Europe. But the more telling point, is that Brazil and Korea are not worked up for fear of competition, but because the QE is flowing out, as we heard Professor Stiglitz describe earlier, and creating pressure where it is not wanted.


"The same thing by another mechanism," demonstrates a fully inadequate level of understanding. Stimulus by way of spending on infrastructure, unemployment -- or even pushing forward the Social Security retirement age as Professor Galbraith suggested -- produces jobs and demand. QE or lower interest rates has only produced large cash balances for banks and other corporations, not the lending which it is supposed to and which the theory says will produce hiring by the private sector. The phrase "A bit more stimulus" dots the 'I' and crosses the 'T' in 'idiot.' What is needed is not "a bit more" government action, but a great deal more action, and not of the poorly designed tax cut variety.


First of all, a correction in the facts of the matter. George W. Bush would not have passed his TARP, nor his early 2008 stimulus, without Democratic support. In fact, as you will remember, it was the Republicans in the House who broke ranks and scuttled TARP on the first vote. Whether or not they were good ideas, they did not get through without Democrats cooperating with the President. Parenthetically, they were not good ideas. TARP did not extract the restructuring of banks that is necessary for recovery, and the Bush 2008 stimulus, primarily a tax cut bill, proved wholly ineffective. Which is one of the reasons Demand Side is confident the latest stimulus, poorly designed for the same reasons, will prove ineffective as well. At the end of the day, however, the American people held W responsible because he WAS responsible. Eight years in office produced the fewest jobs of any president in modern history by far. And those few million jobs were gone within a few months.


If by "irony," you mean contradiction, I suppose. The promises and expectations of monetary policy have been sinced the beginning contradicted by subsequent experience. The question of whether the Fed was going to back down is idle chatter. As to whether the Fed needs independence to do what is necessary in spite of its unpopularity, well, it is not effective, so whether it is necessary is an open question. And it is highly popular with the Fed's true constituency, the big banks and Wall Street. The object, as we will now hear, is to assuage the sensitivities of the what Paul Krugman has called the Confidence Fairy.


So there you have it, Chris Lockwood and Greg Ip and the Economist, Idiots of the Week.


As you saw there, economic indicators were turning up in November, mildly and certainly not enough to help Democrats in the election. It grates me to hear unemployment insurance called a "dole check," irrespective of whether I think Mr. Ip has contributed anything of value in exchange for his check. The economy crashed because of private sector excesses, a housing bubble, and financial sector mismanagement. The discussion of the current condition absent that perspective is like blaming the ground for your hard landing rather than the jump off the cliff.

But the economy is turning up. The recovery of 2010 features prominently next week in our annual list of events that were widely reported in the economics media, but didn't really happen. For now, this is Alan Harvey, from the Demand Side.

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