The title notwithstanding, this post isn’t about a classic Tom Petty song.
According to the progress bar on my Kindle, I am about 19% of the way through Freefall: American, Free Markets, and the Sinking of the World Economy by Joseph E. Stiglitz. I started reading this just a few days ago after learning that Stiglitz would be giving a talk to the Columbia alumni community in NYC on October 12th. (I’m planning to attend.)
I’ll reserve final judgement until I finish the book. If you have been following news accounts related to the financial crash and the ensuing Great Recession, a lot of the ground Stiglitz covers won’t be new to you. However, he lays out in a way is clear, compelling and sure to get your blood boiling at least just a little bit. His narrative reinforces the conclusions that (a) the mess we are in wasn’t inevitable and (b) the sub-optimal policy repsonses of the Bush and Obama administrations took a bad situation and made it worse.
As I noted above, I am only about one-fifth of the way through the book. Thus far I have found most interesting Stiglitz’ seven principles for a well-designed stimulus program:
- It should be fast. Economic policies take months to be fully effective. It is therefore imperative to get money into the economy quickly.
- It should be effective. Effectiveness means a big bang for the buck—every dollar spent should give rise to a large increase in employment and output. In other words, focus on spending with the biggest multiplier effect.
- It should address the country’s long-term problems. Low national savings, huge trade deficits, long-term financial problems for Social Security and other programs for the elderly, decaying infrastructure, and global warming all cloud the country’s long-term outlook. An effective stimulus would target them, or at the very least not make them worse.
- It should focus on investment. If stimulus money is invested in assets that increase the country’s long-run productivity, the country will be in a better shape in the long run as a result of the stimulus—even as short-run output and employment are increased.
- It should be fair. Middle-class Americans have fared far worse in recent years compared to those at the top.3 Any stimulus should be designed with that in mind.
- It should deal with the short-run exigencies created by the crisis. In a downturn, states often run out of money and have to start cutting jobs. The jobless are left without healthcare insurance. People struggling to make mortgage payments may default on their mortgage if they lose their jobs. A well-designed stimulus should deal with as many of these issues as possible.
- The stimulus should be targeted at areas of job loss. If the job losses are likely to be permanent, the stimulus should be directed at retraining workers with the skills they will need for their future jobs.
Stiglitz acknowledges that sometimes these objectives are in conflict. Nevertheless, I find this framework helpful in thinking about what has been done already and discussions about what needs to be done moving forward.
I am interested to read/hear Stiglitz’ take, but my three-cents going in is as follows:
- Probably could have been faster. My recollection is that the Bush administration spent a long time trying to reassure us that all was well when educated observers knew that we were in trouble.
- Given the size of the relief given to the banks, this probably small in comparison. But the investments made under ARRA will likely have positive impacts down the road. For instance, spending to encourage physicians to adopt EHR (Electronic Health Record) systems.
- Extensions to unemployment insurance and subsidies for COBRA payments likely helped to mitigate the severity of the downturns impact on millions of families. In so doing, it likely also had a significant multiplier effect, thereby helping the broader economy.
Oh, and back to Tom Petty. He sings “I’m a bad boy for breakin’ her heart” and this apparently leads to his Free Fallin’. Well, we’ve got more than our share of “bad boys” responsible for sending our economy into a Freefall, don’t you think?