Two days after winning the Nobel Prize for economics last week, Joseph Stiglitz was back in Washington doing what he does best: skewering the power elite. His main target was the $100 billion stimulus bill sailing through the Republican House. "Just think about the inequity," Stiglitz said of its key provision, which accelerates tax reductions for middle- and high-income taxpayers from 28 percent to 25 percent. How much will a worker making $50,000 a year, say a New York City firefighter, get from this? "Zero. But a modest person trying to get along on a $5 million income? Over four years they'll save $600,000."
Stiglitz is worth listening to, not only for his prize (which he shared with US economists George Akerloff and Michael Spence) but for his audacity as chief economist of the World Bank during the Clinton Administration. In 1999, he became the bête noire of Treasury Secretary Larry Summers for accusing the IMF of driving Asia and Russia into a depression and bailing out rich investors at the expense of the poor. For that, Stiglitz was fired from the bank and forced back into academia. He's now teaching economics at Columbia.
In his appearances in DC, Stiglitz was most withering about the $70 billion package of tax credits for corporations, the centerpiece of the bill approved on October 11 by the Ways and Means Committee under the hungry eyes of corporate lobbyists representing the home construction, insurance, oil and gas, and finance industries. Key proposals will provide a permanent investment tax credit, eliminate the corporate alternate minimum tax and cut the capital gains rate from 20 percent to 18 percent. (Democrats are almost unanimously opposed to the plan; the White House, which is seeking $60 billion to $75 billion in tax cuts, says the $100 billion sought by the House goes too far.)
Stiglitz won his Nobel for research into the imperfections of markets and their inability to allocate resources fairly, and he knows a rat when he sees one. None of these steps, he said, will create the new investments so badly needed during a recession. With a permanent credit, "why would you invest in today's uncertainty when you get the same credit in three years or when things get straightened out?" he asked. Similarly, the benefits of the other proposals will accrue to "old capital, old investments" made five or even ten years ago.
Congress, Stiglitz said, must recognize that we're in a recession and pass a "low-cost stimulus" that gets "the biggest bang for the buck," with benefits evenly provided. "These attacks have brought us together," he said. "It is not fair if a lot of the tax benefits go to a few rich people."
First and foremost, Stiglitz said, Congress must extend the duration and magnitude of unemployment benefits. "Our safety net is gone," he said. "Our first priority should be full employment." Second, any investment tax incentive must be temporary, designed to "encourage people to make the investment today, when the economy needs it." Third, the package should expand federal revenue sharing with states and local governments, helping them avoid the inevitable cutbacks during a slowdown "that affect every segment of society," particularly in programs like Medicaid and education. Finally, Congress should focus expenditures on "high return areas" in the public sector, which has been starved for investment. The place to start: the air traffic control system and inner-city public schools.
The IMF, Stiglitz said, should end its fixation on inflation and return to its original mission of helping nations through hard times. "It's time for the IMF to worry about the global economic slowdown and provide the liquidity that would allow for global expansion," he said.
In a brief interview, Stiglitz noted the delicious irony of his award, which recognized "the problems of the market fundamentalist model" so favored by Summers and the IMF. The "Washington Consensus" on globalization, he said, was rooted in the Reagan-Thatcher era of privatization and deregulation, yet "lived on as an institutional position" long after it had been repudiated by mainstream economists. "Maybe the things that I said during the Asia crisis were so common sense it was hard to disagree, but people did disagree," he said. "Like if you raise interest rates to firms that have high debt, it's going to cause bankruptcy and that's going to be bad for the economy. I don't think you need the Nobel prize to figure that out. But you have to be either wedded to special interests or to old ideology to think the contrary."