Joseph Stiglitz: The Economy Was Already In Trouble In 2007

Vanity Fair:

It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.

Read the whole story: Vanity Fair

Comments

[TheTightwireGuy]

07:01 PM on 12/15/2011

A great article! But a word of caution when considering this statement (which, for the record, I agree with):

"Education is a crucial one—a highly educated population is a fundamental driver of economic growth."

If our leaders in the US heed the related advice in this article--that we need to invest more money in education--they must be careful to minimize the likelihood that funds invested are...

A) not rapaciously wasted by self-serving parties that game our educational system, and
B) carelessly doled out in a way that induces people to excessively consume educational services of dubious "investment" value.

Two glaring examples of these (with either or both of these problems) are discussed in these articles:

http://en.wikipedia.org/wiki/The_Cartel
http://en.wikipedia.org/wiki/For-profit_education#2010_Pell_Grant_fraud_controversy

Don't get me wrong -- I want our country to invest more in developing our nation's human "capital", but we must be careful not to fritter away our collective and valuable time and resources by carelessly subsidizing or partisanly protecting marginally efficient ways of doing so.

Thank you for listening.

[DXM]

06:16 PM on 12/15/2011

This theory make a lot of sense but the lessons it presents will be largely ignored by most of our "leaders". First of all, it does not support the Republican's view of "reality" (i.e. the way to solve our problems is by cutting taxes, more deregulation, less government intervention, cutting government spending and investment) so, at best it will be ignored by them. Secondly, the recommendation for fixing the financial system (i.e. get out of the business of speculation and back to lending to small and mid-size businesses) will be opposed by politicians of all stripes (Republican and Democrats) who are beholden to big moneyed interests who want to keep the game as is. So, nothing will happen and the economy will continue to flounder for years.

[dukeitout]

06:03 PM on 12/15/2011

Enough banter about why the crisis occurred; how do we get the economy moving again professor? We know giving bankers money won't do it. They just enrich themselves with the money if it's given to them (TARP.) I have a feeling the solution rests in figuring how to fix the housing depression we're in. A house in normal times is an income producer---building it, stuffing it with goodies, paying taxes on it, maintaining it, etc. Today we are loaded with vacant houses. How do we get paying occupants into those houses. How can one convert a vacant house into an income producing and occupied house? One suggestion-----entice renters with very affordable rent. Next 9 suggestions should be provided by you professor. You fix the housing problem and you've fixed the economy. Then run for president.

[Skeetshooter]

12:48 PM on 12/15/2011

The real underlying cause of the depression, was and now is income inequality. People can't spend money they can't earn beg borrow or steal. Building tanks and ships didn't pull us out of the depression. It was the wage supports for workers and the severe cap on corporate profits (NO war profiteering in those days, Halliburton!) which 'recirculated' the money supply throughout the engine of the economy. Call it socialism, call it common sense, call it redistribution of wealth, but that was successful enough to revitalize and sustain America for generations. My mom was 8 when the depression hit and her father paid one dollar a month to keep them in their house. Today she's seeing her kids thrown out of their homes by banks who let those homes lie vacant and derelict. What's the difference? In those days the banks didn't want your house. Now they want everything.

[All Heart]

12:13 PM on 12/15/2011

While I agree overall with Professor Stiglitz, the fact is that economic trends, if not severely regulated, always look for equilibrium. On the micro economic level: price is determined by supply and demand. It's the same on the macro economic level. Given that the supply of 'human resources' is cheaper in developing countries than here, jobs will inevitable go overseas until the difference levels off. In other words: no matter what we try, wages will go down in this country until wages in other countries have come up to the our level for comparable tasks. This was not a great deal in the past, but with the introduction of the internet, global transportation and infrastructures around the world, it becomes more and more inevitable. We can either reduce our workforce to low paying service jobs or reinvent our society with improved education, thereby providing a temporary market edge. Our government spending has to be placed purposely and very wisely from now on (infrastructure, education, research and development) to ensure we won't spiral downward even further. And yes, taxes have to go back to sustainable levels.

[frank day]

06:04 PM on 12/15/2011

There is no such thing as "free trade". It is an ideal not a reality.

Free trade should benefit everyone involved, not drag down one of the participants.

American workers have been cheated by trade agreements that deliberately favored capital

over labor.

None of this is an inevitable economic fact. It is a matter of bad policy.

Normative decisions have and are being made which create inequality.

We have the most educated workforce on the planet, the best R&D, and the most productive

workforce.

None of it matters if we allow our IP to be stolen. Or if we actually encourage it's export.

Taxes at sustainable levels??? Taxes are at an all time low.

We need tough new regulations and higher taxes on corporations doing business here.

None of this will occur until we have campaign finance reform and then real financial reform.

[All Heart]

11:35 AM on 12/17/2011

Thank you so much for your reply. I totally agree with every point you made. Trade agreements have to be reevaluated, we need taxes to go back at least to the Clinton years and we need finance reform, especially when it comes to campaign financing (Citizens United sucks) and, if you ask me, election reform.

[patswanson]

09:51 AM on 12/15/2011

I have an idea for the unemployed and the working poor. Pool resources, get federal grants, buy acreage, form communes, and produce our own food and fibre. Develop processing plants for food and manufacturing of clothing and domestics. Form cooperatives to trade goods.

[frank day]

06:05 PM on 12/15/2011

Go for it.

[Andy49]

09:48 AM on 12/15/2011

We as a nation have to decide if we are going to support our own or allow just a few to prosper. We need to take back our manufacturing and do it right. I am see very little Made in USA now that I am out of the USA. What I do see is priced out of the reach of a majority of the population and is crap and made in china. We a a nation made the decisions to toss millions out of work and destroy a entire sector of the economy so that a very few at the top could prosper. Start with our infrastructure and move on to returning manufacturing and production to US soil and watch the nation prosper. I pray that a war is not how we achieve that.

[Kache]

03:13 AM on 12/15/2011

Stiglitz makes the point that war manufacturing had two effects - it pulled people off the farms reducing the number of people high productive farming had to support, and trained those people for manufacturing giving rise to a manufacturing based economy. That is all true.

But, where I find the article short is in his solutions, based upon that earlier analysis. Mechanization eliminated millions of jobs producing the Great Depression. Manufacturing then absorbed those millions producing prosperity. Then automation eliminated millions of jobs producing the Great Recession. Now, can service jobs absorb those millions? No. Automation is rapidly coming to a Burger King window near you (Press 1 if "Yes, Press 2 if "No", Press # to talk to a human). We've been told for 30 years that a service economy would replace manufacturing. It hasn't, it isn't, and it wont.

Yes, the infrastructure needs rebuilding (even re-inventing). But have you watched a 10 mile section of road get rebuilt lately. Machines do that work, not people. Want to lay fiber optics to every household? Machines do that work, not people. What ended the depression was a new way for millions to make their living. Stiglitz is not proposing a new way for make a living. Or a crash program comparable to how munitions manufacturing transformed that workforce. He's proposing two things, a crash program to put more machines to work, and more education (in hopes that some kid will discover what comes next after the manufacturing-service economy).

[libertymen]

07:35 AM on 12/15/2011

The service economy if it does replace MFg.does not produce quality jobs with high pay.
It produces jobs with sub par pay and no benies.No unions in these areas either.
All tending to a two tier society of haves and have nots.
Nobody in between.

[halfpricefaustian]

11:24 AM on 12/15/2011

An agricultural economy can produce wealth because it creates things people want. A manufacturing economy can produce wealth because it creates things people want. I do not understand how a service economy can create wealth as it doesn't seem to produce anything truly tangible.

[Kache]

01:23 PM on 12/15/2011

I disagree (weakly). As you point out, agriculture and manufacturing produce "things people want". So does service. The definition of "things" is the difference. "Things" do not have to be tangible.

Look at the iPad. Although it a tangible thing, no one has figured out a use for it, like food or clothing has a "use". In an conference call with investors last summer Jobs stated, "What's more incredible than the sales figures is the fact no one has any idea what to use it for". An iPad's usefulness is the "service" it provides. Consider how it is used by doctors. It provides convenience access to data - a service, as opposed to a scalpel which has an intrinsic use.

"Service" usually means providing convenience, and convenience is a real value that increases productivity, the same way a tractor is more productive than a team of horses. The problem I see with service, is that convenience can be provided by automation the same way automation has replaced assembly line workers. Also, the very definition of convenience means "less labor". Increasing service actually reduces the labor force. Indeed, one of the sources of manufacturing job loss is the productivity increase from "services".

[halfpricefaustian]

10:39 AM on 12/16/2011

An interesting post, but I'm unpersuaded. I think wealth must be based on something tangible. The industrial revolution created lots of machines and people to design and build those machines, which created wealth for those who design and build and for those to use them to increase their own productivity producing things. The semiconductor revolution did the same thing, lots of jobs for the designers and builders who had the specialized skills to create high-tech products and for those who used the high-tech products to increase their own productivity. Service in the simple sense doesn't produce anything new, it is just moving an activity from someone who doesn't want to do a task to someone who does. It seems to be a zero-sum game where wealth is redistributed but not created. Anyway, that's my probably too simplistic thinking. Thanks for an interesting reply.

[GetRealSoon]

10:12 PM on 12/14/2011

1920 to 1929, stocks more than quadrupled in value – not because of fundamentals such as corporate production and profits, but fueled by rampant speculation. They were told to take out cheap loans and plant as much wheat as possible as a patriotic act. In the same way that people in the cities were speculating, in the stock market, these farmers took a gamble that the price of wheat would only go up. Hmm?

2000-2006 fueled by rampant real-estate speculation. Borrowers were encouraged to take out questionable loose lending loans, they were told that real-estate always goes up.

Farmers went out borrowing more than they can afford? How did they qualify?

The Dust Bowl years spanned 1930-1936, when a million acres of farmland across the Plains became worthless due to severe drought and over-farming.

Yes, the Occupy Wall Street movement, already knows. They just can't kick up enough dust.

[muck-raker]

06:49 PM on 12/14/2011

STIGLITZ: It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided.
... While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.
more: http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105

[fortressfountain]

04:33 PM on 12/14/2011

Look at what has been happening since 2001. Wages are flat, more jobs shipped overseas, dollar devaluations.
They should have raised wages, increased the value of the dollar and make us into a strong economy.
You cannot have an economy based on debt to buy 3rd world shoddy merchandise.

[muck-raker]

06:56 PM on 12/14/2011

the powers to be want a cheap dollar so our exports will thrive. but the fact is today no one makes very much money and are content to buy Chinese junk from Walmart; Today GE now has more foreign workers in India than in USA...they have unmarked acct in the Cayman Islands where they hoard their ill gotten gains...they have now sent in their high priced lobbyist to bribe our congressman for a TAX HOLIDAY so that they can bring in these billions to either buy back some stock or give their elites bonuses. Today the American worker looks on in dismay...while the big Corporations look to the day when the voting public will once again vote in legislators to give these mega Corporations more loop holes, tax breaks...and oh yes did I mention that GE paid no taxes last year..in fact we GAVE them a 4 billion subsidy...can't beat that.

[Matt12]

03:14 PM on 12/14/2011

The US economy was in trouble since Goldman Sachs took possession of it. Just think 1994 when the Bob Rubins and Larry Summers and Tim Geithners eliminated the Glass Stiegel Act,

[gomezrules]

02:57 PM on 12/14/2011

Anyone bother to read this article? First, we're told that govt policy caused the problems, then govt policy exacerbated them. But, when it's all said and done, we're then told that ONLY govt policy can save us! Geezz..

[Enliberate]

03:04 PM on 12/14/2011

I'm sorry, but can you tell the difference between good and bad govt. policy?

[BevfromNYC]

03:29 PM on 12/14/2011

Yes, but sadly no one in Congress or the WH can tell the difference.

[gomezrules]

04:18 PM on 12/14/2011

Increasingly, no, I can't! Real achievements that can be laid at the feet of the Fed govt seems to be a thing of the past! And those 'positives' always seem to have a down side that manifests itself as time goes by.

[All Heart]

11:56 AM on 12/15/2011

Well, looks to me that you should read the article again. If you know anything about economics you know that it is government policies that determine macro economic trends. So there!

[Enliberate]

02:46 PM on 12/14/2011

Stiglitz' thesis provides a likely background to those pounding the drums of war vs. Iran. Makes one think that a Long Slump and Endless War have been the working assumptions of many in government, but, most notably, the Republican'ts.

[spinotter11]

09:39 PM on 12/14/2011

That isn't how I read his recommendations. Invest in an infrastructure that will make us into the nation of the future. How does war in Iran do that?

[econ1]

01:31 PM on 12/14/2011

I actually think that borrowing money to build things that last and aren't money pits is fine. Future generations will use them so let them help pay for them. The problem is that government has no inherent need for efficiency or sustainable investment. Programs such as cash for clunkers or the newer credits for buying certain electrified cars only moves demand in time at significant cost. Sending more money to state governments to continue to support munificent pensions and duplicate commissions will only add to the debt with no commensurate gain. Research funding will have slow results but is better than trying to prop up current technologies that aren't competitive as Washington has done with batteries and solar panels. So, if done correctly, we will come out of this but slowly. Unfortunately according to the CBO the first stimulus package of $831 billion “saved or created” 1.4 million jobs…..that's only $586,000 per job. So unless Washington invests more than it spends, perhaps it will take a bit longer.

[frank day]

06:13 PM on 12/15/2011

Very little of that money went into infrastructure.

Check it out.

http://www.propublica.org/special/the-stimulus-plan-a-detailed-list-of-spending