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

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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.

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