Joseph Stiglitz Calls State Budget Cuts 'Very Foolish' And A 'Negative Stimulus For The Economy'

Nobel Prize winning economist Joseph Stiglitz, warned a New York City crowd last night that the rash of state budget cuts could have dire consequences for the economy.

Appearing at an event hosted by Manhattan's Jewish Community Center, Stiglitz said that state cutbacks would amount to "a negative stimulus of half the magnitude of the positive stimulus that is coming out of Washington."

The Columbia University professor and former World Bank economist spoke at "Rescuing The Economy: Two Expert Views", along with Steve Forbes, editor-in-chief of Forbes , and Myron Kandel, the founding financial editor of CNN.

Stiglitz criticized the handling of the crisis by states such as New York, Illinois and California, where Governor Schwarzenegger is aiming to ease a $20 billion shortfall with cuts to public schools, higher education, and social services. According to a recent report, as many as 45 states have announced budget cuts that will hit vulnerable citizens, 29 of which impact K-12 education and 39 hitting higher education.

A vocal supporter of Keynesian economics Stiglitz argued that the Obama administration's stimulus package focused too much on supposedly "shovel-ready projects", and should have given money directly to states.

Forbes, a two-time candidate for the Republican nomination for president and an advocate for a flat tax, made for an unusual ally of Stiglitz on the topic of state budgets. Forbes agreed that California shouldn't have been cutting education budgets, but then argued California had been guilty of "binge spending."

Blasting California's pension management, Forbes said the state's fund managers "assumed that by 2009 the Dow Jones would be at 25,000. It's around 10,000 - a little miscalculation."

Despite their different opinions on the role of government in monetary policy, both Forbes and Stiglitz found some common enemies, including the IMF and, notably, the Federal Reserve.

An audience member asked the pair if the Federal Reserve was private, and, following an uncomfortable murmur in the crowd, Stiglitz replied, "That's a good question", calling the nature of the Fed "a little bit ambiguous" and stating that the functioning of the regional Feds made them somewhat like a "federally chartered club."

"The Fed's a creature of Congress," added Forbes. "The amazing thing is, when you say monetary policy people's eyes glaze over, especially in Congress. As a result, this powerful institution has less oversight in Congress then the CIA."

"I don't want Congress running the Federal Reserve, but that's quite different from accountability," Forbes added.

Stiglitz also had some more harsh words for the Fed: "If we looked at a banana republic with a structure like that, we would say you've got to change or we won't give you any money."

"It's just not consistent with a democratic government," he said.

Comments

[senorlou]

09:09 AM on 03/15/2010

Stiglitz is right. These people - teachers, cops, etc, actually do something for society. Our education system won't be improved by firing 20% of all teachers. Our crime problem will not improve by cutting police pay by 15% and installing a hiring freeze for years.
Why do these people have to pay the price. The bankers and Wall Street crooks ran off with the money. Why punish the innocent?

[gray375]

02:01 PM on 03/14/2010

and now for S.C.: The House overwhelmingly voted to abolish Corporate taxes while trying to find ways to patch up a $500 million dollar shortfall. Cut Medicaid, Special Needs, Education, Mental Health, Public Health

[therealist2000]

06:44 PM on 03/14/2010

Isn't that how things end up in Corporate USA? The most vulnerable pay through the nose while global corporations and the top 10% of elite income earning citizens go tax free and start dancing in the streets. It works in a corporate owned government. Corps & top 10% can hide their money in overseas tax havens and hire the best accountants to hide the rest. Go figure, this is the USA!

[swift goat pet for truth]

07:07 AM on 03/15/2010

At all costs, save the rich.

[MichaelLittleBig]

09:04 PM on 03/12/2010

The destruction of the American economy was preventable.
It is apparent that the plunders who were responsible are known but will never be held accountable.

The question now is when will this complicit Congress acknowledge that its serves their interests before its serves the well being of the American people?

I agree with Stiglitz .

The Bell tolls for thee.

Michael LittleBig
Cleveland Ohio

[SpongeBrad]

01:44 PM on 03/12/2010

Has it ever occured to you the reason state, local and federal workers make more than the private secor is that , that wages and benefits in the private sector have not kept up. States need to get rid of all the corrupt political appointees, which by the way our new governer in NJ does not seem to want to do.

[MrBadExample]

04:06 PM on 03/12/2010

Government is also top-heavy with high-skill people--the science people in the CDC, the folks tracking down e-coli in food, the auditors and accountants in the DOJ and the anti-trust divisions. I kind of like having someone inspecting my food who knows what he's doing.

[NoBlueDogs]

12:03 PM on 03/15/2010

You think science people who work for the GOVERNMENT are highly skilled? Why do you insist upon having the NANNY STATE protect you from e-coli? I'd much rather have private industry tracking down problems in their own products than some goose stepping nazi's doing it for them. Look how it worked out for Peanut Corporation of America -

er, wait, no, that didn't work out so well. Okay, so what! I'd rather have salmonella than the Government protecting me! Freedom or *cough* *choke* death! Purple Kool-Aid for EVERYONE!!!

(Yes, this is a parody of Right Wing mentality.)

[Peter007]

11:12 AM on 03/12/2010

Salaries for state and local workers are out of control and has been for many decades. The purpose of state and local governments is to maintain the large cash flows into the pockets of their employees. There is no checks and balances on the level of wages paid out and government employees don't want the public to know what they make. $250,000/ year is not uncommon for a government worker. They average over $100,000 in total compensation. The skill level required to be an average government employee is minimum. Most only require a high school diploma but restrictive hiring criteria requires many employees to have advanced degrees to justify the high wages. These restrictions prevent many people from competing for any government job.

http://www.nj.com/news/bythenumbers/

Salaries for state workers above.

[madame48]

12:37 PM on 03/12/2010

It cost my kid $94,000 to get her teaching degree,BS + MA. As a 4th year teacher she earns $38,000 a year. Her classmates who went into banking, accounting, management etc. make double or more her wage. She has a $42,000 student loan to pay. She will make less than her friends FOR HER ENTIRE LIFE. She is an inspiration to her students(they have told me often). When job openings are posted there will be some managers, bankers etc who will apply to fill vacancies. And when the economy turns around they will leave for more $$ and status. She will stay and be there for those students. How do I know? For the last 40 years I have been there for thousands of teenagers even though I could make more in another career. That was my choice. But if you think these jobs are so cushy and fine...YOU DO IT...JOIN my cousin as he plows the roads all night long so you can get to the office. Or spend a few weeks in your teenager's Math class. you are truly ignorant.

[3dtrix]

06:16 PM on 03/12/2010

Ignorance is the very LEAST of P's problems. The groundless air of condescending superiority coupled with an utter lack of human compassion suggest defects best described in clinical terms...

[therealist2000]

06:56 PM on 03/14/2010

Peter, it sounds like you live in an alternative universe. It sounds like you imbibed lots of libertarian and conservative and Republican tidbits, strung together in their alternative universe logic, to mouth to average citizens, as to why government sucks and all glory belongs to the private sector. Your minimal government thinking may work for 1% to 5% of the population, but it does not work for the rest of us. So thank you for bring us the good news by Enlightening us in Republican talking points and jargon, but we'll leave it at the curb.

[senorlou]

09:07 AM on 03/15/2010

Nice post!

[sposton]

11:00 AM on 03/12/2010

These are extraordinary times. Our economy has shrunk and I doubt that the existing capital owners can find productive investments in our economy to keep growing their capital. They are more likely to invest in China than in the US. This action of the capital is counter-productive and therefore it makes perfect sense to tax it and convert it into increased demand.

Essentially, if the private capital cannot be put to good use by its private owners then it must be the government which does it. We are well passed any of the usually prescribed "free market" solutions. After we are back to something resembling normal we can go back to lower taxes.

This whole idea that we can get out of this by taxing more everyone is nonsense. We must do what is necessary to increase the aggregate demand in our economy. Taxing more the overstretched middle classes will just reduce the overall demand. Taxing those whose increased taxes will not reduce the economic demand makes perfect sense.

And no, I am not a socialist. ;-) Just thinking in terms of systems, not political ideologies. We have allowed "free market" to bring us to this disaster. How much sense does it makes to rely on it to bring us out?

[Daphydd]

06:28 PM on 03/12/2010

Very well said, sir.

[codycap]

09:53 AM on 03/12/2010

http://en.wikipedia.org/wiki/Corporate_welfare#Corporate_welfare_as_corrupt_subsidies

According to the Cato Institute, the U.S. federal government spent $92 billion on corporate welfare during fiscal year 2006. Recipients included Boeing, Xerox, IBM, Motorola, Dow Chemical, and General Electric.[6]

Alan Peters and Peter Fisher have estimated that state and local governments provide $40-50 billion annually in economic development incentives,[7] which many critics characterize as corporate welfare.

"Take the Rich Off Welfare", Zepezauer and Naiman

"If you cut 26 percent of the welfare now given to the rich you have instantly balanced the budget."

"If you cut out wealthfare, you could pay off the national debt in 11 years."

[Peter007]

11:04 AM on 03/12/2010

I may agree with your conclusions but the definition of Corporate welfare is very nebulous.

[cornflower]

07:52 AM on 03/12/2010

Aren't we glad that Forbes never won an election?

[unrepentant progressive]

06:16 AM on 03/12/2010

The sad fact is that a lot of Americans prefer to get their economic news from Glenn Beck and Sarah Palin, not from nobel winners like Stiglitz and Krugman. They understand "socialism" (or at least, they understand a fear of it), but they don't understand things like a "negative stimulus."

A lot of times Beck's gift for gab trumps economists' years of training and research. Isn't that pathetic? It's like hiring a veternarian to wire up your house, while an electrician watches. I think this collective stupidity is a large reason why our economy is tanking.

[ibsteve2u]

03:22 AM on 03/12/2010

"Forbes agreed that California shouldn't have been cutting education budgets"

Now that...infuriates me. What did Forbes think was going to be the consequence of his and others like him's continual demand tax cuts? Did he think that the states and local communities were going offset the reduced flow of money from the state and federal levels by planting money trees?

You cannot tell me that I could look into the future to see the consequences of the Republican triumvirate of wealth transfer tools ("flood-up/trickle-down" economics, deregulation, and inequitable free trade) at the time those policies were created and see the consequences - but the right could not.

Either greed blinds, or Forbes is unbelievably hypocritical.

[MrBadExample]

04:04 PM on 03/12/2010

Agreed. The 'cut taxes always' mantra (which Forbes has always supported) astounds me. There was a radio interview with Jesse Ventura the other day and he bragged about cutting taxes and returning 'the people's money' when he was governor of Minnesota. While he was returning 'the people's money' the I35 bridge across the Mississippi, which had been rated structurally deficient in the 1990's, continued to rot away. It finally fell into the river, killing 13 and injuring 145. In 2007, it was one of 75,000 bridges nationwide that was so rated.

I walk across the Brooklyn Bridge on a frequent basis, and I don't want to hear about 'lower taxes' and 'giving my money back'. I want to know when the clueless dilettante in the Mayor's office plans to paint the bridge and remove all the built-up rust.

[longtimegone]

03:07 AM on 03/12/2010

I read recently that the amount of money used to bail out AIG would close the budget gaps in all fifty states. If that is so, doesn't it confirm just who holds power in America and who is utterly powerless?

[totaldisbelief]

01:21 AM on 03/12/2010

if the states have no money how can they not cut their budgets ?

[Guscat]

04:54 AM on 03/12/2010

Well said.

[FreedomFreedomFreedom]

04:55 AM on 03/12/2010

They still need to provide for the needs of the people, i.e. teachers, police, fire dept. They can't just CUT. When you fire a teacher you are removing that income from the economy. That teacher no longer spends any money and this has a snowball effect. Additionally, that teacher no longer contributes any taxes to the system, again a snowball effect. This isn't even a solution, it's a lull in the problem. Every state needs to control spending. But the GOP would have us believe that cuts to education, healthcare and children's services is the way to solve these deficits. This is not true and it actually just adds to the problem. The GOP philosophy is skewed against the poor, middle class, elderly and children. Rather than raising money through a small fee on stock trades, the GOP will cut health care for children. Rather than raising money by increasing the top tax rate of the top 1% of the citizens, the GOP will cut education. Rather than raising money by taxing luxury items, the GOP will cut home healthcare for the elderly. The GOP will inflict more pain and suffering on those who are already unfairly burdened. We need those who are reaping all the benefits of our system to contribute more to our system. As long as the GOP treats taxing the wealthy, banks and financial institutions like it's the plague, then America will NEVER recover from the damage that the wealthy, banks and financial institutions caused.

[totaldisbelief]

01:48 PM on 03/12/2010

I totally agree with what you are saying but last time I looked money didn't appear out of thin air(not counting on Wall St.)
I'm not advocating cuts ,I'm merely asking how can the states not cut ?

[Balzac]

01:11 AM on 03/12/2010

Joseph Stiglitz has been making sense. The "austerity measures" are generally badly done and fall on the wrong people. But we can't have both phantom money moving around in addition to a stable, positive economy.

The secret is to push the right amount of "austerity" on the right people. I'm not one of the ones who needs more austerity. I get the idea that some people are thinking that I'm somebody who needs to be humbled by some lesson. This is the wrong attitude.

I can maintain a bourgeois ego in the midst of a very austere time. I could be in Soviet Russia fifty years ago, and my ego would probably be bigger than ever. This is the power of power.

The only thing is that I'd need to become an ambassador to the Caribbean so I could have bourgeois accoutrements of lifestyle while others tormented themselves with austerity. (I'm only kidding.) I would have defected to the USA, of course.

[Balzac]

01:16 AM on 03/12/2010

But, in regards to software, I want to be an autocratic overlord. We already have a "Karl Marx" of software, and we have a "Vladimir Lenin" as well. I'm planning to become the "Joseph Stalin" of software, even though I bear a superficial resemblance to Lenin. Again, I'm only kidding.

[quillsinister]

10:59 PM on 03/14/2010

Hmmm.

Let me guess. Lawrence Lessig is Marx and Richard Stallman is Lenin?

:-)

[disgruntledprogressives]

01:03 AM on 03/12/2010

States can't print their way out of a budget deficit, like Bernanke and Geithner can. They must balance their budgets annually. Would he have States impose draconian tax increases? Many are already doing that but they are so short, up to several billion each, that they are still forced to slash their budget deep into the bone. No choice in the matter.

[EasJoe]

12:51 AM on 03/12/2010

Spoken like a true Nobel winning economist.