Stiglitz and our Economic Prospects

On Wednesday, September 16, I went to a lecture by Joseph Stiglitz, who teaches at Columbia University. I hope readers have heard of him. He won the Nobel Prize in Economics not long ago, and what he did really deserves the Prize, unlike some of the other winners. He studied the fact that information is often asymmetrical. A can take advantage of B because A knows things that B does not. The economic explication of the advantages of perfect competition begins with the assumption of perfect knowledge (or it used to be so—I’m not always up to date.) By not only showing this is not true—not too difficult an assignment, he explores its implications, the principal one being we need government to intervene to obtain appropriate and beneficial solutions. Check it all out in Wikipedia.

Stiglitz is an Amherst graduate but the talk was held in the Williams Club, since there is no Amherst Club in NYC. However, the audience was limited to Amherst graduates (or current students).

[Amherst aside.] I sat near the front and the person next to me started to introduce himself—I was wearing a name tag, with year of graduation (’55), when I noticed next to him was someone from the class of 1955 I hadn’t seen since graduation (and someone I was not particularly close to even then). His name was Walt Marks and he has made his fame as a Broadway writer and lyricist. We had a very enjoyable talk, one in which I urged him to attend the reunion which is coming up next spring. He said he would consider it. I think I flattered him by referring to a song from our Freshman show, the words and lyrics he had written (“With an “A” Letter on My Black Sweater”) and the dramatic entrance of Bob Eckardt onto the stage, doing some kind of leg split, yelling out “tennis anyone?” Googling, his most recent show was Langston (Hughes) in Harlem and his wife’s most recent show was “Larry Flint: the Right to be Left Alone,” which she also wrote a column on, in the Huffington Post (Joan Brooker Marks).]

Stiglitz had just finished a project for President Nicolas Sarkozy, of France, as chairman of a project evaluating the value of GDP as a measure of well-being. Also appointed to the Committee was Economic Nobelist, Amartya Sen, who teaches at Harvard (as well as in the United Kingdom). [Actually, as I write, there is nearby today’s Business Section, Wednesday, September 23, and on the first page there is an article entitled “Emphasis on Growth Is Called Misguided,” which is about the Sarcozy-Stiglitz-Sen project, with Stiglitz’s picture on page 5.]

Given this reality—this major unfolding story about Sarcozy and the GDP—Stiglitz felt he should devote about a third of his talk to what this was all about. Simplifying, GDP, and its similar predecessor (GNP), measures output, but is it of much value measuring well-being? For example, there is no subtraction from GDP for the harm done to the environment. Or, using my own examples, if you smash your car while texting, the cost of fixing the car (not to speak of dealing with injury and death) should not be considered additions to our well-being. Nor, if an arson wave breaks out, should we count as improvements the extra fire trucks we make or the greater numbers of fire personnel we hire. One could go on and on.

When asked, Stiglitz did not believe that there was a single measure of well-being, but when pushed, he suggested as a possibility, median income—half above, half below. (By this measure, GDP shows little improvement in the economy from 2001 to 2007, since median income was more or less flat, but GDP had risen, the lion’s share taken by the upper income groups.

By how much is truly astonishing. Recently, I saw newly calculated figures on inequality. 1929 was considered to be a peak year for inequality. A recent study, by a Professor at Berkeley, Emmanuel Saez (winner of the prestigious John Bates Clark award, given every other year to that economist under 40 who has made a distinguished theoretical contribution, often (or perhaps usually) a prelude to a Nobel) showed that the top 1/100th of 1%, received 5 % of total income in 1929. In the 1970’s, income was not as unequal and the figures were just over 1%, but by 2007, the top one hundredth of one percent garnered 6% of total income. To me, this is simply astounding. (It will play a role in my discussion of consumption and the future of the economy.) Clearly, if such vast amounts of GDP is going to 15,000 families, the relation of GDP to well-being is clearly undermined, even if you could stop the texting and the arson.

On the general economy, Stiglitz was anything but upbeat, although he speaks well and without any condescension whatever. One commentator remarked that his range was from “negative to hopeless.” Unlike a few, he feels we are not yet out of the recession. He did not indicate when the end would come—but I suspect he might say, like so many others, later in the year (or possibly early in 2010), but whenever, he obviously expects a slow recovery. (More on this shortly.)

Almost everyone in the know understands that the official unemployment rate—currently 9.7% as I write—is a bad measure, not because it is inaccurate, but because it doesn’t include “discouraged workers,” those who have given up looking for a job because they think there aren’t any out there. (Often, these are older workers in their 50’s or perhaps 60’s.) In addition, uncounted in the 9.7% are workers who are working part time—tending bar one night, say—but who would like to be working full time or maybe they call themselves “consultants,” but basically are without clients. If unemployment were measured this way (and it is, but not publicized)—it is undoubtedly a better measure than the 9.7% measure, which simply asks if you are looking for a job and eliminates you if you are not or if you have a 5 hour job but would like to work full time. By this measure, the unemployment rate would be about 16 or 17%.

What Stiglitz also mentioned is that the 9.7% figure is understated because of the seasonal adjustment. Every year, in May and June, there are high school and college graduates (as well as non-graduates) who enter the labor force, but most only find jobs after a few months. Rather than having the U rate go up every May and June and then down every August and September, a seasonal adjustment is made, based on history. History might show that on average the 50% unemployment of these newcomers every June drops to 20% every September, so it seasonally adjusts (i.e., lowers the unemployment rate for June. But if history is not working the same, as surely it isn’t, and the drop in September is only to 30%, then the seasonal adjustment leads to an understatement of unemployment. While the amounts might not be staggering, Stiglitz’s argument might mean that the real unemployment is already over 10%, simply because the seasonal adjustment has led to an understatement.

So on to our prospects. Back when I took economics in 1953 with Paul Samuelson’s third edition, the GDP (then it was the GNP) was the sum of C (Consumption expenditures) + I (Investment) + G (Government expenditures) plus adding in what we produce but export and subtracting what we consume but is produced elsewhere and is imported. (Or after G, you add [+X (exports) –M (imports)].

The most important of these, at least numerically, is C, Consumption. Most are pessimistic about our consumption prospects. First, there are more unemployed than usual, whether by the lower measure or by the higher measure. More important, people can’t overspend their incomes as easily as they could in the past, by borrowing on the value of their houses or the value of their stock holdings—in both cases the values are down and in the case of housing the loaners are more reluctant. Even credit card use is more difficult—higher rates and more careful management by the credit card companies.

But even more important is the Great Depression effect. It hit so hard it made people cautious for decades. The Great Recession has had a similar effect, although clearly not as strong an effect. People are anxious and are cautious. One measure of this is the savings rate. This is calculated by taking total personal income after income taxes and looking to see how much of this is spent. Over most of the years since WWII, the savings rate was about 8%. (This is a complex mix. Many saved not at all. Others, especially, the very well-to-do, saved large parts of their multi-million dollar income. While there may be a few who made 5 million dollars who saved not a penny, most probably saved a million or two or even more.)

As we went forth in the ’90’s and 00’s, the saving rate dropped to zero. People were able to do this since they could borrow against the soaring value of their homes (the bubble). But now the savings rate is about 6%, reflecting in part, the Great Recession caution. And while this will in time fade, it will not likely fade within the next few years. Caution is in. Extravagance is out. Moreover, the inequality factor, alluded to previously, tends to reduce consumption. If 15,000 families make $12 million each, we’re going to end up with more saving than if incomes were more equally distributed. Whatever the value of saving, during recessionary times it is something we need less of.

Finally, there are uninformed pundits who pleadingly ask that those who save the 6% simply spend the money, for its positive economic impact. What they don’t realize is that the 6% is not lying under the mattress or sitting in some low-interest savings account. Most of it is simply not there! That’s because the money was used to pay off debts. You may ask: and you call that saving? Well, yes. You owed money and now you owe less. You are dis-saving less, as you pay off your debts. This is another way of saying you are saving more, even if the money is not in your wallet or under the bedspread.

Exports are harder to evaluate. It depends on the state of the world economy and the state of particular countries and our ability to export to them. China seems to be doing better, but in the end we don’t export that much to them. In fact, exports, in the end, could double and it’s doubtful their impact on our economy would be that great. It would help some, but I wouldn’t push it. Meanwhile, the two major exporters among the advanced capitalist economies are having up and down rough periods—Germany and Japan. In short, I simply don’t expect exports to pull us out of the recessionary quagmire.

Investment is a different kettle of fish. First, no one ever knows in advance when it will be the pacemaker. But the continued weakness in the banking area makes it unlikely that investment can be the source of significant future strength. (More on this in a moment.)

Government could be the key. To some extent, in its bail-outs of the banks and its stimulus (along with the money created by the Federal Reserve) government—Republican bitching not withstanding—is what has kept us from falling even further into the depressionary morass. Had Obama not played the bipartisan game, but gone to the public with a $1.4 billion stimulus, we probably would have ended up with about $1.2 billion in stimulus, 50% more than we actually ended up with, with a much stronger economy, especially as most of this would have been appropriate for countering a recession—tax cuts for the poor, more aid to the unemployed, more directed aid (or loans)to states to hire teachers, librarians, police, and health and fire workers. Admittedly, water over the dam, but pressure must be exerted on Obama to mend his bipartisan ways or suffer a horrendous defeat.

Virtually, no one believes that a second stimulus—a booster—is possible at this point—neither Stiglitz nor Krugman do (the liberal alternatives to Summers and Geithner, both of whom were invited to dine at the White House, to what benefit it’s hard to evaluate, since both were sworn to secrecy). Perhaps, if the economy continues to slug along in 2010, a second stimulus might be possible. I think the consensus is that slug along is what we are going to get, with a second stumulus doubtful and therefore we may be in for disastrous political results.

Stiglitz was asked about manufacturing, which year by year is declining as a percentage of the GDP. To me, he was surprisingly optimistic. At some point—2012? (who knows when?)—he thought it might pick up. But why? To the extent, education is needed, it seems we’re in the soup, since every indicator on education is a bummer. But perhaps education is not needed, just smarts. Then we have another problem. What is to keep the manufacturer from moving the production to a site where labor costs are 10% of what he is paying here? Or a variant: what is to prevent Chinese entrepreneurs from copying what we do, maybe making a cosmetic change or two, then exporting to us what we had invented? I actually asked Stiglitz this but he deflected the question.

In short, therefore, I expect a long, slow recovery, perhaps one that will never reduce unemployment to the levels that existed in the late 1990’s. I also expect dangerous political reactions. We have them now and the fan has not really been hit yet. But there is still one more reason for pessimism.

There is yet another difficulty on the horizon and that is the money that debtors have collected, including the Chinese. It certainly is not in the interest of the Chinese to express their misgivings over tires or whatever new products the US decides to challenge them on by selling their dollars. Their losses would be astronomical. But things happen and panics occur. The dollar has fallen enormously since spring against the Euro. And it’s not doing well against the Yen.

At some point, the declining value of the dollar is going to be a big part of the deteriorating picture. The dollar might simply continue to fall slowly or panic might send it plummeting, like the 1987 crash of the stock market—about 23% in a single session. But one thing for sure, the dollar problem will not disappear. What it may do, however, is put Ben Bernanke,, chairman of the Federal Reserve, between a rock and a hard place. Rising prices because of a weakened dollar and, simultaneously, high levels of unemployment. This is a no win situation. Price controls could be an answer, but Nixon's needless and inappropriate use of them, make them currently unusuable.

Looking at the present as history, the last two or three centuries the first world dominated the third world. It did so by force and conquest. Imperialism was not just a Communist slogan—it was a capitalist reality. But in the late decades of the last century, things began to change, especially in China, its “Communist” dictatorship notwithstanding—the caps because the dictatorship is real but its Communist nature is not.

What I think we are experiencing is a reversal of history, so to speak. The 3rd World, or parts of it, is rising and this rise is at the expense of the 1st world. Just to get a small handle on it, look at the trade balance between the US and China—they export and we import (and they get our dollars)] To me, this suggests, that we are heading south (or downward). It will not be an overnight process, but it has already begun. Just look at our manufacturing. Our best chance to weather the storm is a slim one: We accept that our day in the sun is over and we adjust. We share the reduced production (and reduced goods that we will be able to buy) by having a shorter workweek.

We then have to make the seismic leap implicit in what Stiglitz has been writing about, and find a happiness in increased leisure that outweighs the loss of the value of the goods we are about to go without (or have a little less of). In an utterly sane world, this could happen, since more time to spend with friends and family is an obvious plus. But it will require changes we are not used to and worse, think we should not be obliged to adopt. If only we were less arrogant and more humble—if only!