August 11, 2011

‘Depressed’ Stiglitz: Optimistic Scenario Is Japanese-Style Malaise

Fed can do no more at present, politics a stumbling block

Joseph Stiglitz (left) receiving his Nobel Prize in 2001. (Photo: AP) Joseph Stiglitz (left) receiving his Nobel Prize in 2001. (Photo: AP)

According to Nobel Prize-winning Prof. Joseph Stiglitz of Columbia University, an unwillingness to admit just how bad things were and an economic stimulus package that was inadequate got the U.S. into its present state, and the Fed can’t do anything more to help. For that matter, getting any effective program through the current Congress is not likely.

On Breakout on Wednesday, Stiglitz spoke about the unwillingness of the Obama administration to acknowledge how severe the economic situation was. The stimulus package put in place was "too small, too short, and not as well designed as it could have been." It also contained too many tax cuts, he said, while not offering "enough other things that would lead to more economic growth."

While the stimulus did work—according to Stiglitz, without it unemployment would have peaked at 12-13%, while with it it peaked at 10%, it was not enough, and another stimulus is necessary now. "We have to be more careful about designing it, but we need another round," he said.

The failed economic policy, he added, played an important role in creating the crisis – the Fed "really did a terrible job." And with interest rates already at an effective negative rate, thanks to inflation, monetary stimulus is not what is needed to get the country out of its hole.

If economics and policy could be separated, it would be easy, said Stiglitz, to design a stimulus that would promote growth in the short run and lead to more in the long run. However, professing a "very depressed state of mind" over the present state of the economy, Stiglitz said, "We aren’t going to get anything that’s going to make a significant difference through this Congress."

QE2 did not do much, although he said it contributed to turmoil abroad—but it failed to stimulate lending. More market turmoil is "not exactly what we need right now," he added, pointing out that some debt restructuring could help, but added that the country’s hands are tied because of politics.

He cited his "optimistic scenario" as a "Japanese-style malaise," with a growth rate of 1%, possibly 2%, with perhaps an occasional quarter of 3%—but not fast enough to "make a dent in the job deficit for the 25 million Americans who want a full-time job and can’t get one." Unemployment, he predicted, would probably be part of the economic situation for years to come.

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