Economics Nobel Laureate Joseph Stiglitz spoke Friday at a fundraiser for Economists for Peace and Security (EPS), which was created to study the "full costs of war and conflict." Joe Stiglitz is introduced by EPS Chair Jamie Galbraith. The room is full and buzzing. Here's the view of Joe sitting in a window-seat in the back. I'm in the first of three rows of chairs facing our speaker. Jamie, son of much-missed EPS leader John Kenneth Galbraith, is here from the University of Texas at Austin. He acknowledges the grand contributions of some sons of Texas to the current financial fiasco. Certainly, the Big Apple investment bankers and the Orange County (Calif.) mortgage hustlers couldn't have caused mischief on such a world-wide scale by themselves. They needed Texan Phil Gramm and friends to change the laws. Jamie agrees with me that a must-read story on the high point of the credit default swap high jinks is the May 30 story in the Texas Observer. This is a cure for anyone still wistful about "financial innovation". Jamie modestly refrains from promoting his own new book, The Predator State, and expresses delight that the nation has now elected a man who is "mortgaged to nobody".
James limns Joe's unique record of insight and foresight about the dangers of ideological economic policies, and holds up a copy of Joe's new book, The Three Trillion Dollar War.
Cost of the Iraq War
Joe says his initial public estimate of the cost of the war in Iraq was $1 trillion. When he presented a paper to an EPS panel in 2006, he and his co-author Linda Bilmes raised the estimate to $2 trillion. "Linda and I thought early on it might be $2-$3 trillion," he said, but they were reluctant to use such high numbers when "the administration was quoting very small numbers." [The original Pentagon estimate was $50 billion. Lawrence Lindsey, Assistant to President G. W. Bush for Economic Policy, got into pink-slip-level trouble after raising the estimate to a somewhat more realistic range of 1-2 percent of the then-GDP of $10 trillion, to $100-$200 billion. See here and here.]
Joe notes that a contributor to the high cost of the Iraq war is the high injury rate among returning soldiers -- 15 injured soldiers for every one killed. Joe says that the U.S. government sometimes classifies an injury as an accident, as when a mine takes out a Humvee and then another Humvee plows into the first one. The injuries from the second event may be classified as an accident. The injured soldiers are adding $600 billion to the nation's unfunded liability and constitute a significant part of the Iraq war's high cost -- both economic and human.
Joe describes the Iraq War as the first war that was financed entirely on a credit card. Oil was $23 a barrel when the war started, soared to above $145 in July, fell to $57 a barrel on Friday. Latin America borrowed money to pay for higher oil prices, resulting in credit starvation in the 1980s and "a lost decade of growth" How many lost years will the United States suffer from our recent credit binge?
Economic Failures
Broadening his comments, Joe outlines the major failures of recent economic policies under three headings:
1. The stimulus and bailout were both misconceived. Most of the stimulus package was used to pay down debt and didn't do much for consumption. Allen Sinai presented a paper projecting the worst downturn since the Great Depression and 8-12 percent unemployment. The bailout amounted to cash for trash, whereas the Brits did it differently and better, with conditions and sanctions. Bailout money has been spent on bonuses and dividends.
2. Financial regulation has failed. The financial boats have holes, their steering is gone and their pilots are drunk.
3. The budget has been mismanaged. A deficit can be a good idea if it is spent on something useful, like roads and technology, which have high returns. Using taxpayers' money to buy toxic assets is not a good use of money. We can evaluate public spending from a long-term and a short-term perspective. Our military spending has been poor managed on both counts. We have been buying less security for more money instead of the reverse.
The $700 billion commitment of the Troubled Assets Relief Program (TARP, a.k.a. Bailout) amounts, says Joe, to ten years' worth of all global foreign aid. Treasury Secretary Paulson seems to be halting the purchase of the toxic assets and is following Gordon Brown's path of buying bank equity [see Telegraph story].
No-Growth, Slow Growth
Summing up, Joe says the United States has been kept going since 1993 by the tech bubble and then the housing bubble and then some improvement in exports. His best guess now is that we have perhaps two years more of recession and then a continuing period of slow growth, with one avenue to growth being through the opportunities offered by renewable energy, green jobs.