THE FRIDAY INTERVIEW:JOSEPH STIGLITZ, Nobel Prize economist by Paul Tansey
JOE STIGLITZ is an iconoclast. Most economists believe that markets work most of the time, with occasional lapses into market failure. Stiglitz has spent much of his professional career arguing that properly functioning markets are the exception rather than the rule. His academic work has been rewarded by a share in the Nobel Prize in economics in 2001.
As chief economist at the World Bank in the late 1990s, he stood out against the "new policy consensus" that informed the market-driven approach to economic development advocated by the International Monetary Fund (IMF).
On leaving the bank in a flurry of controversy in 2000, he wrote Globalisation and its Discontents. An acerbic, but theoretically well-grounded, attack on the IMF and a model of globalisation based on free market values, the book has sold more than a million copies since its publication in 2002.
Despite having collected the most glittering prizes in economics, Joe Stiglitz is no political ingenue. He has traversed the corridors of power in Washington both as chairman of the Council of Economic Advisers under President Bill Clinton and as a member of Clinton's cabinet. For an academic economist, he plays political hardball.
As a highly political economist, he has now turned his fire on the Bush administration for mounting the invasion of Iraq. An opponent of the war from the outset, Stiglitz labels the invasion "a terrible mistake" in his new book The Three Trillion Dollar Warand castigates the Bush administration both for grossly underestimating the costs of the war and for the postwar maladministration of Iraq.
In Stiglitz's view, the invasion of Iraq has diminished the moral standing of the United States in the eyes of the world. Perversely, for a war that was ostensibly undertaken to make the world safe from terrorism, he argues that global security has been impaired by the invasion.
Speaking to The Irish Timesin London last week, Stiglitz said: "We went to war to show our power. In fact, we showed the limits of military power. We showed that, for success, you also need moral power and we eroded that moral power.
"We gave democracy a bad name. We became the upholder of torture. It is shocking that [ John] McCain is viewed as independent because he has spoken out against torture. That is seen as a radical view amongst Republicans."
The invasion was based on a set of false assumptions, Stiglitz says. "It was known with a high probability that there were no weapons of mass destruction (WMDs) in Iraq. While we were focusing on the weapons of mass destruction that were not in Iraq, weapons of mass destruction came to be acquired by North Korea. So while we were trying to promote a world that was less nuclear-threatened, we wound up with a world that was more nuclear-threatened by focusing on the wrong enemy.
"In the wake of 9/11, it was alleged that there was some connection between Saddam and al-Qaeda. In fact, being a strong secularist, Saddam had no sympathy for al-Qaeda. However, through the invasion, we have created a hotbed of terrorism in Iraq. And, while we were fighting the war in Iraq, opening up space for terrorists, we failed to accomplish the mission in Afghanistan."
Stiglitz argues that the objectives set for the war - a quick military victory followed by the creation of a stable, democratic state that would allow a swift US withdrawal - were unattainable from the outset. This highly optimistic set of war aims discounted the need for an army of occupation and the costs it would exact in both blood and financial resources.
"President Bush was stupendously uninformed. There was a studious non-understanding of what was going on. They [the Bush administration] wanted to believe they would be greeted with garlands. They ignored everybody who said 'you're walking into a quagmire' and therefore they thought that you wouldn't need an occupation army, you didn't have to spend any money. Once the military campaign was over, it was all over," Stiglitz continues, adding, "they wanted a war for free. It was self-deception."
Almost five years after the invasion, there are close on 160,000 US troops still in Iraq. Since the war commenced, some 1.6 million US troops have been deployed in the country. Already, almost 4,000 US servicemen and women have been killed in Iraq and a further 58,000 have been wounded, injured or fallen seriously ill. One hundred thousand US soldiers have returned from Iraq suffering from serious mental health problems.
The number of Iraqi deaths is more difficult to estimate. Estimates of Iraqis suffering violent deaths range from 100,000 to over 150,000. Using statistical inference techniques, the estimated number of "excess" Iraqi deaths from all causes has been put as high as 700,000.
While the initial military victory was quickly and easily achieved, Stiglitz is deeply critical of the postwar management of Iraq.
"No one could have conceived that they [the US authorities] would have made mistakes of the magnitude that they have made. What I want to make clear is that, even if they hadn't made those mistakes, they would have failed, but with those mistakes, it became not just a disaster but a catastrophe," he says.
"They spent their time protecting the oilfields but not the caches of arms or the antiquities, reinforcing the belief that the invasion was about oil, reinforcing the belief of the Iraqis that it was not about freedom. They dismissed the army - with their arms. You had 60 per cent unemployment rates, yet private contractors were hired to bring in Nepalese and Filipinos to take jobs away from Iraqis. You could not have designed better a system to engender resentment.
"But besides the resentment, young men, unemployed, with arms historically have been an explosive mixture - and it exploded. There were no surprises here."
STIGLITZ SAYS that the combined effects of duration of the occupation, the rising costs of service personnel and contractors, higher fuel prices and the large flow of casualties are the principal factors for the extraordinary escalation in the cost of the war.
On the eve of the war, initial White House estimates put the cost of the war at $50 billion to $60 billion. When President Bush's economic adviser, Larry Lindsey, suggested that the costs could reach $200 billion, his estimate was dismissed as "baloney" by the then US defence secretary Donald Rumsfeld.
Now, in his new book, co-authored with Linda Bilmes, Stiglitz writes "we estimate that the total budgetary and economic cost to the United States will turn out to be around $3 trillion, with the cost to the rest of the world perhaps doubling that again".
Stiglitz breaks down the costs. "The total military costs are very large, at around $1.2 trillion and the second big chunk is veterans' costs - medical, disability and social security - at some $700 billion," he says. But annual US gross domestic product is in the region of $14 trillion, so, when set in context, the cost of the war in pure financial terms does not appear that onerous.
"That's an important point," Stiglitz responds. "It's not a lot of money for the United States. What's the big deal? Yes, we can afford it, but it's a very large sum in terms of opportunity costs," the goods and services that could otherwise be purchased by the allocations to the war.
"We should be able to afford body armour for our soldiers, healthcare insurance for our children, more aid for developing countries. We say that those are outside the budgetary envelope. If you say that these are not affordable, then you're saying we are paying a price for the war.
"It has also been very expensive in two other ways. The legacy of debt will hang like a millstone around the neck of the US. By 2017, the war will account for $2 trillion of increased US debt. Interest on that is $140 billion a year. Year after year, that will crowd out lots of other programmes. The US wanted a meaningful healthcare reform that would help people to move from welfare to work. It would have required about $9 billion a year. We couldn't afford it. We will be spending $140 billion a year on interest on the war debt. Inevitably, the debt will be crowding out social spending and investment in the years ahead," Stiglitz says.
"The second point is that the war has contributed greatly to our current economic problems. Higher oil prices, spending in Iraq that didn't stimulate the US economy - both of these dampened the economy at home. Then the question is: why didn't the economy seem weaker? Our analysis said that the economy should be looking quite bad. The answer is pretty obvious. The Fed was doing what it thought it had to do - which was to flood the economy with liquidity to keep it going. So loose monetary policy fed a housing bubble and fed a consumption boom. Equity withdrawals by home owners amounted to $900 billion, most of which went into consumer spending. Savings fell to zero. The day of reckoning had to come. President Bush just hoped that it would come after November 2008."
Tracking the performance of the US economy at present is like "watching a slow-motion train wreck", Stiglitz says. "Clearly, the economy is into a severe downturn and probably a recession. The economy will perform poorly for some time to come," he adds.
He anticipates that two million Americans will lose their homes through mortgage foreclosures this year and that US real estate prices ultimately will fall by one-quarter in real terms. In turn, declining house prices will both reduce household wealth and the ability of households to withdraw equity from their homes. Consumers will be forced to rein in their spending on both counts. The balance sheets of the banks will be undermined by a rising incidence of bad debts and this will inhibit credit growth.
Stiglitz's academic reputation rests principally on his pioneering work in developing the economics of information. A full professor at Yale at the age of 27, he is now University Professor at the Columbia Business School in New York City. He shared the 2001 Nobel Prize in Economic Sciences with George Akerlof and Michael Spence for their analyses of the impact of asymmetric information on the functioning of markets. In essence, this work shows that where information is unequally distributed among market participants - and it usually is - markets are likely to malfunction. Information asymmetries explain much actual market behaviour, most famously providing an explanation why people who want to buy a good used car purchase it through a dealer rather than from a private seller.
In the past, Stiglitz has written that markets produce desirable outcomes where "people have full information, can trade in complete and efficient markets and can depend on satisfactory legal and other institutions".
However, "recent advances in economic theory have shown that, whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the 'invisible hand' works most imperfectly".
Stiglitz now explains that the current US subprime lending crisis and its translation into a global credit crunch neatly illustrates the manner in which information asymmetries can destabilise markets.
"Information asymmetries played a very big role in the US subprime lending crisis. Traditionally, banks made loans, held them on their books and if the lending decisions were bad, they suffered the consequences. In these cases, they put in place mechanisms to protect themselves against bad debts," he said. But securitisation, the process where banks make loans, bundle them up and then sell them on as assets to other financial institutions, absolved the initial lenders of responsibility for loan quality. Securitisation effectively allowed US banks to engage in riskless lending and since banks make money by expanding their loan books, they took on riskier customers with poor credit histories.
"Bankers were giving away high-value assets to poor people. Securitisation was a money-making machine for the banks - a form of financial alchemy - that took lousy products and converted them into triple A products. But securitisation also produced a new asymmetry of information in financial markets.
"The buyers of securitised products didn't understand them. They depended on the credit rating agencies. It's still extraordinary that buyers were as imprudent as they were. They should have smelled that something was wrong earlier. The question is 'where were the regulators?' And the answer is that the regulators were in the business of keeping the economy going, of offsetting the downdraft of the war," Stiglitz says.
Always the political economist, Stiglitz concludes "President Bush is leaving office with a failed war and an economy in disarray. Whoever wins in November will have quite a mess to clean up."
ON THE RECORD
Name:Prof Joseph Stiglitz
Age:65
Position:Professor of Economics, Columbia Business School, Columbia University
Family:married to academic and journalist Anya Schiffrin. He has four adult children from two previous marriages.
Education:Amherst College; Massachusetts Institute of Technology; Cambridge University
Career:He was a professor by the age of 27 and has served on the faculty of Yale, Stanford, Oxford, Princeton and Columbia. Between 1995 and 1997, he was chairman of the Council of Economic Advisers to US president Bill Clinton. He was appointed chief economist of the World Bank in 1997 but resigned in 2000.
In 2001, he was awarded the Nobel Prize for economics with George Akerlof and Michael Spence for their analyses of markets with asymmetric information.
Why is he in the news?Stiglitz and his co-author Linda Bilmes have just published The Three Trillion Dollar War: The True Cost of the Iraq Conflict, an attack on the pursuit by Bush administration of regime change in Iraq.
