A makeup artist, applying just enough concealer to “cover the wrinkles,” works around Joe Stiglitz’s cell phone, beard, and spectacles as the Nobel-laureate economist fields another media call. It’s Halloween night, and in the greenroom of Lou Dobbs Tonight, Stiglitz is preparing for his fifth broadcast appearance of the day.
“We’ve been living off a consumer spending spree financed by a housing bubble that was supported by loose monetary policy and lax regulation,” Stiglitz, PhD ‘67, tells the latest reporter seeking comment. “That particular game is over, and what will shore up aggregate demand now is not clear.”
What he tells Lou Dobbs and his viewers is no more comforting. “The Federal Reserve is taking some crappy assets, really bad assets, as collateral for the money that we’re giving,” he says, referring to the government’s $700 billion bailout of the nation’s financial industry. “It’s very disappointing that we spent so much money and got so little for it.”
Stiglitz, 65, who teaches at Columbia University, says he’s lost count of the interviews he’s given since the economic maelstrom intensified in September: as a pioneering scholar in information economics, an expert on globalization, and an advisor to presidents and parliaments, he’s found himself in high demand. In the tightly scheduled weeks leading up to November’s U.S. presidential election, he was called on to advise Barack Obama’s economic team, testify before Congress, and counsel heads of state in Argentina, France, and Botswana. He wrote articles on the worldwide financial crisis for the New York Times, Time, Vanity Fair, and Harper’s. And he promoted the paperback edition of The Three Trillion Dollar War: The True Cost of the Iraq Conflict, which he wrote with Linda Bilmes.
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In the face of the latest bleak economic news, Stiglitz has few kind words for the policies of the Bush administration. “The same champions of small government and low taxes who said we could not afford health care for children,” he says, “are now shelling out hundreds of billions to bail out corporations.” Wall Street investment bankers fare no better: “The financial innovations of the last several years have been largely destructive innovations–created to avoid regulation,” he says. “We had people who were wizards at pocketing other people’s money designing instruments and gambling schemes that didn’t assess risk properly or meet the real needs of Americans. They made themselves vastly wealthy and left taxpayers to pay the bailout bill.”
He saw the crisis coming and tried to sound the alarm, but he’s not necessarily pleased to be vindicated.
“It’s always better to be right than wrong,” says Stiglitz, who for years has ardently criticized deregulation and free-market fundamentalism. “But it’s also easier to forecast a problem than it is to solve it.”
What happens to markets when buyers and sellers, lenders and creditors, employers and employees, know different things–about, say, the value of an asset or the risks of a loan–and don’t share that information? Few bothered to ask before Stiglitz and other theorists began pursuing that line of inquiry in the late 1960s. But the study of information asymmetries, as these imbalances are known, has helped explain phenomena as diverse as sharecropping in Africa and insider trading in New York.
Stiglitz’s ideas about how economic actors screen for risk found their most recent illustration in the subprime-mortgage mess.”Banks are very important institutions for screening creditworthiness. But the system of securitization of mortgages distorted their incentives,” he explains. “The lender who originated a mortgage had no intention of holding it, so the risk of default was neither accurately calculated nor adequately protected against.”
These circumstances constituted what economists call a moral hazard, another idea on which Stiglitz did important work–and one that’s been much discussed since the government’s bank bailout. “If people don’t bear the full consequences of their risks, they have a tendency to take excessive risks,” he says. “The big banks knew that if they took big risks and lost, the government would pick up the pieces. Classic moral hazard: they knew they were too big to fail.”
Stiglitz established a reputation early in his career, winning Fulbright and Guggenheim fellowships in his 20s and teaching economics at MIT, Yale, Stanford, and Oxford before he turned 40. After nearly a decade as a tenured professor at Princeton in the 1980s, he served as a policy advisor in Washington before being appointed a University Professor at Columbia. Stiglitz has written, cowritten, or edited nearly 40 books, in addition to scores of articles on an array of economic subjects, and his work has been translated into 35 languages.
His interest in economics took root early, he says, during his childhood in postwar Gary, IN. “There must have been something in the air,” Stiglitz says, for in addition to its countless tons of steel, Gary produced more than its share of economists. (Gary native Paul Samuelson, Stiglitz’s MIT mentor, won the Nobel in 1970.) The son of a New Deal Democrat mother and a small businessman who believed in the virtue of self-reliance, Stiglitz grew up immersed in political debates in a family with high ideals and even higher expectations. And the social and economic anomalies he observed in his own backyard provided plenty of fodder for discussion. What accounted for the poverty, unemployment, and racial discrimination that persisted in Gary through booms and busts? It defied the prevailing economic theory that declared labor markets efficient.
Stiglitz studied physics as an undergraduate at Amherst College but was enthralled by the challenge of understanding and modeling the imperfection of markets. Before even completing his bachelor’s degree, he left to do graduate work in economics at MIT, where he would study with such giants as Samuelson and Robert Solow.
“In the 1960s, MIT had become the center of a revolution in economics,” Stiglitz recalls. The department placed mathematics–not philosophy or ideology–at the heart of policy analysis. But it aspired to “an interface of careful mathematical models and the practical problems of the economic world,” he says.
Rigorous, quantitative, yet hardly abstract, that hybrid approach suited Stiglitz, who had marched on Washington with Martin Luther King and journeyed to Kenya in the late 1960s to study economic development.
Confronted in Africa with widespread deprivation as well as what he calls “massive discrepancies between the models I had been taught and what I saw,” the young Stiglitz strove not just for practical solutions but for theoretical understanding. Conventional wisdom offered little explanation for Kenya’s mass unemployment or the persistence of dysfunctional institutions such as sharecropping. What he saw reinforced his desire to build better, richer, more accurate economic models that could bring mathematical precision to the task of eliminating poverty.
Since then, his contributions to economic theory have spanned the discipline. His ideas have advanced or influenced macroeconomics and monetary theory, development economics and trade theory, public and corporate finance, and income and wealth distribution; in 2001, they earned him a Nobel Prize. But Stiglitz, a political progressive in the mold of Keynes and Galbraith, sought more than the accolades of the academy. He wanted influence.
“As an individual,” he confessed in his Nobel Prize lecture, “I have not been content just to let others translate these ideas into practice.” And that ambition propelled him into the fray of making, not merely studying, economic policy.
Through much of the 1990s, Stiglitz held some of the highest-level government appointments to which an economist might aspire. Four years on the Council of Economic Advisers under President Bill Clinton (including two as its chair) were followed by three years at the World Bank, where Stiglitz was chief economist and senior vice president. He also served on the Nobel-winning Intergovernmental Panel on Climate Change, helping quantify the economic costs of global warming.
Those years in public service proved both exciting and tumultuous. “Even among relatively like-minded people, with a shared sense of vision and a great deal of camaraderie, there can be difficult relationships and honest differences,” he says. His social scientist’s preference for “evidence-based” analysis met with regular opposition in Washington. “Most people I worked with in the White House would not approach a problem scientifically,” he says. “They were lawyers or investment bankers, often very ideologically driven and not necessarily data driven.”
Hardly battle shy (he was the captain of his college debate team), Stiglitz squared off against his intellectual rivals–especially those within the Treasury. He argued against capital-gains tax cuts and deregulation, particularly the repeal of the Glass-Steagall Act, a decision (signed into law by Clinton) that some critics today blame for the rise of risky mortgage-backed securities.
At the World Bank, Stiglitz opposed rapid free-market liberalization and monetary shock therapy for developing countries. Markets require modest government intervention and reasonable regulation, he argued, because their inefficiencies are stubborn, and unseen corrective forces such as Adam Smith’s “invisible hand” are rarely in evidence. “The reason that the hand may be invisible,” he posited in his Nobel Prize lecture, “is that it is simply not there.”
Stiglitz did not give up the fight after resigning from his post at the World Bank at the end of 1999. He turned, instead, to writing popular books on topics such as globalization, fair trade, and the Iraq War, taking his case directly to the citizens. Globalization and Its Discontents, considered a kiss-and-tell by its critics, delivered blistering criticisms of how the International Monetary Fund handled economic crises in Asia, Russia, and Latin America in the 1990s.
“It was important to make people aware that in important cases, the institutions that were making the rules of the game and influencing the lives of millions around the world were getting their economics wrong,” Stiglitz says. “There were reasons to question their technical legitimacy and their political legitimacy.”
In his most recent book, which examines the devastating human and economic toll of the Iraq War, Stiglitz estimates that the total cost of the conflict will reach about $10,000 per American. “We’re a rich country. We can waste a trillion dollars without ending up in the poorhouse,” he contends. “But even a rich country that squanders that much suffers negative effects.” The war deserves its share of blame for the current recession, he says. “Money spent on Iraq is money we do not spend to stimulate the economy.”
Norway. Paraguay. Ghana. Botswana. England. Ethiopia. Switzerland. Spain. All in a space of weeks. “My passport is so thick that sometimes I’m questioned about whether it’s real,” says Stiglitz, who travels weekly to consult with economic leaders worldwide.
Colleagues half his age claim they struggle to keep up. But when you are trying, as Stiglitz is, to “weigh in on battles for global social justice” and “shape and rebalance the political debate”–in this country as well as abroad–well, you write eight books in eight years. Turn out half a dozen articles in a month. Travel 200 days a year. Work 18-hour days. Employ a staff of schedulers. Eat meals during phone interviews that you conduct while boarding airplanes.
Even with a Democrat in the White House, Stiglitz plans no letup in his public critiques of the wars in Iraq and Afghanistan or the policies that fostered the current economic crisis. He isn’t seeking a return to Washington, though. “I will take the president’s calls,” he says. “But I’ve been through the Washington struggle to get things done, and it’s not easy. I’d rather talk about the principles of sound economic policy than engage in the important infighting that is inevitable to get them enacted.”
His priority is to win a more equitable share in the benefits of globalization for the billion people who live on less than $1 a day. The travel gets exhausting, he admits, and his goal will undoubtedly outlive him. But the peripatetic Professor Stiglitz doesn’t tire of the work. Before he boards a flight from LaGuardia to L.A., he shares a bit of advice he often gives his students: “Don’t settle for solving a small problem when you may be able to solve a larger one.”
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