BACK FROM THE WILDERNESS
By Joseph Stiglitz
[This article published 12/13/2008 is translated from the German on the World Wide Web, http://www.ftd.de. Joseph Stiglitz teaches economics at Columbia University in New York. He was awarded the Nobel Prize for economics in 2001.]
Keynes' these are discussed all over the United States. Politics should be on guard that the theory is not misused.
We are all Keynesians now. Even the rightwing in the United States has joined the Keynesian camp with unbridled enthusiasm.
For those who claim a certain bond to Keynesian tradition, this is a moment of triumph after being left behind and practically shunned in the wilderness for three decades. This is a triumph of intelligence over ideology and interests.
Economic theory has long explained why unhindered markets do not correct themselves, why regulation was necessary and why the government had an important role to play in the economy. However many who worked for the financial markets forced a kind of "market fundamentalism." The erroneous policy that resulted was even pushed by several members from the team of US-President-elect Barack Obama. This first changed when developing countries, the US and other developed industrial states, began to suffer under the costs of this policy.
Keynes argued that the markets are not self-correcting and measures of monetary policy prove ineffective in a serious economic decline. Fiscal policy was necessary. However all fiscal measures are not equally good. Tax cuts will probably have no effect in today's America with its excess in budget debts and massive uncertainty. A large part of US tax cuts last February were converted into savings.
With the huge debt mountain left behind by the Bush administration, the US should make every spent dollar as stimulating as possible.
Both tax- and spending-programs should be restructured. Taxes for the poor should be lowered, unemployment benefits raised and taxes on the rich increased. This combination can stimulate the economy, reduce the deficit and decrease inequality. At the same time, spending for the Iraq war should fall and more should be invested in education.
Keynes worried about a liquidity trap - the incapacity of monetary authorities to enliven awarding credit to raise the level of economic activity. With an historical admonition, the head of the US Federal Reserve, Ben Bernanke, vehemently tried to prevent making the Fed responsible for the abyss of this downswing. In the Great Depression, the Federal Reserve cut down the money supply and allowed the collapse of banks. This should be absolutely prevented today.
One should carefully interpret history and theory. The preservation of financial institutions is a means to an end, not an end-in-itself. It is the credit flow that is important. During the Great Depression, the bankruptcy of the banks had a great effect because they were involved in determining creditworthiness. They supplied the information necessary to maintain the credit flow.
Today little is done to help banks that really do what banks should do - lend money and judge creditworthiness.
The US government has taken over trillions of dollars in obligations and risks. In the bailout of the financial system, we must be concerned that the infused money has the greatest effect. Otherwise the deficit that doubled in eight years will shoot up once again.
In September, it is said; the government will receive the money back with interest. While the bailout plan is inflated again, it is increasingly clear that this was only another example of how the financial markets wrongly assess risks - as they consistently and wrongly assessed them in the last years. The bailout plans of the US government had negative consequences for the taxpayers and despite its enormous volume contributed little to stimulating awarding credit.
The pressure of neoliberals for deregulation prevailed. Today the danger exists that the new Keynesian principles could be misused to serve the same greedy interests. Have those who pressed for deregulation ten years ago learned their lesson? Or will they simply promote superficial reforms - to justify the bailout plans of several trillions?
We must reform the global financial architecture and not only react properly to the current crisis if we want a more stable, more successful and more just world economy.