Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, is the former chairman of the Council of Economic Advisers -- a three-member panel that provides the president with economic advice -- and former chief economist of the World Bank. He is currently a professor at Columbia University in New York.
MotherJones.com spoke to Stiglitz about his vision for effective economic stimulus and his opinion of the stimulus package being pushed by Republicans in the House of Representatives and supported by the White House.
MotherJones.com: Are you convinced that there is a need for an economic stimulus package of some sort?
Joseph Stiglitz: I think it's fairly clear there's a need, though there's no such thing as a perfect forecast. I think it's clear that we're in a recession. Japan is in a recession. Europe's markets are in trouble.
MJ.com: What should the main characteristics of such a package be?
JS: It's not likely that monetary policy will be effective. What's critical is fiscal policy. The two key criteria are: one, that the provisions are timely, meaning that they spark economic growth quickly. And two, that they contain high-multipliers, meaning for every dollar you spend you get a lot of stimulus.
The Republican bill currently on the table is neither timely, nor are the expenditures high-multipliers. It's unlikely to be very effective in the relevant time frame and a disproportionate amount of the cuts are going to high-income people, who are unlikely to spend money right now.
In terms of investments, the benefits going to firms are based on past investment losses and may serve more as bailouts than new incentives.
MJ.com: What, then, can the Federal Reserve do to jump-start an economy?
JS: I think the Fed is doing the right thing -- lowering interest rates in a conservative manner. But what the Bush administration has done has been to make policies that look like they're merely reducing the surplus, while they're actually increasing the deficit.
What we're seeing is a general sense of anxiety over the quality of the management of our economic policy. The markets are reflecting that.
MJ.com: Is there any meaningful way that an economic stimulus package can calm foreign investors' anxiety?
JS: Much of the strength of the US economy has been based on confidence in the quality of management -- confidence that's been shattered for two reasons.
First, Bush essentially inherited a problem. That is that the American economy was oversold. What was talked up as a boom was a really a bubble. The so-called very good economic management of recent years was, in reality, not that good. The sheen has been taken off of (Federal Reserve Chairman Alan) Greenspan. People are remembering 1991, when we lowered interest rates and still went into a recession. The sheen is gone.
Second, it's true that Bush has brought confidence in American management to a more reasonable level, but with the Bush tax cut confidence shifted from suspicion to skepticism, because in the Bush tax cut he used soft numbers -- unreliable numbers -- based on an amazing amount of growth.
His predictions for growth were reminiscent of the false predictions made under Reagan, when tax revenues actually fell as a result of a package that he said would be stimulus. But what you had was an economic team pushing a political agenda under the guise of a stimulus package.
MJ.com: Is that what we're seeing now in the Republican package?