The Seven Deadly Deficits

[one...two...tree 2,762]

By Joseph E. Stiglitz

When president George W. Bush assumed office, most of those disgruntled about the stolen election contented themselves with this thought: Given our system of checks and balances, given the gridlock in Washington, how much damage could be done? Now we know: far more than the worst pessimists could have imagined. From the war in Iraq to the collapse of the credit markets, the financial losses are difficult to fathom. And behind those losses lie even greater missed opportunities.

Put it all together—the money squandered on the war, the money wasted on a housing pyramid scheme that impoverished the nation and enriched a few, and the money lost because of the recession—and the gap between what we could have produced and what we did produce will easily exceed $1.5 trillion. Think what that kind of money could have done to provide health care for the uninsured, to improve our education system, to build green technology...The list is endless.

And the true cost of our missed opportunities is likely even greater. Consider the war: First there are the funds directly allocated to it by the government (an estimated $12 billion a month even according to the misleading accounting of the Bush administration). Much larger, as the Kennedy School's Linda Bilmes and I documented in The Three Trillion Dollar War, are the indirect costs: the salaries not earned by those wounded or killed, the economic activity displaced (from, say, spending on American hospitals to spending on Nepalese security contractors). Such social and macroeconomic factors may account for more than $2 trillion of the war's overall cost.

There is a silver lining in these clouds. If we can pull ourselves out of the malaise, if we can think more carefully and less ideologically about how to make our economy stronger and our society better, perhaps we can make progress in addressing some of our long-festering problems. As a road map for where to begin, consider the seven major shortfalls the Bush administration leaves behind.

the values deficit: One of the strengths of America is its diversity, and there has always been a diversity of views even on our fundamental principles—innocent until proven guilty, the writ of habeas corpus, the rule of law. But (so we thought) those who disagreed with these principles were a fringe, easily ignored. We have now learned that the fringe is not so small and includes among its numbers the president and leaders of his party. And this division of values could not have come at a worse time. The realization that we may have less in common than we thought may make it difficult to solve the problems we must address together.

the climate deficit: With the help of corporate accomplices such as ExxonMobil, Bush tried to persuade Americans that global warming was fiction. It is not, and even the administration has finally admitted as much. But for eight years we did nothing, and America pollutes more than ever—a delay that will cost us dearly.

the equality deficit: In the past, even if those at the bottom saw little or any of the gains from economic expansion, life was viewed as a fair lottery. Up-by-your-bootstraps stories are part of America's sense of identity. But today, the promise of the Horatio Alger legend rings false. Upward mobility is becoming increasingly difficult. Growing divisions in income and wealth are reinforced by a tax code that rewards those who have lucked out in the globalization sweepstakes. As that realization sinks in, it will be even harder to find common cause.

the accountability deficit: The moguls of American finance justified their astronomical compensation by their ingenuity and the great benefits it supposedly bestowed upon the country. Now the emperors have been shown to have no clothes. They did not know how to manage risk; rather, their actions exacerbated risk. Capital was not well allocated; hundreds of billions were misspent, a level of inefficiency much greater than what people typically attribute to government. Yet the moguls walked away with hundreds of millions of dollars while taxpayers, workers, and the economy as a whole were stuck with the tab.

the trade deficit: Over the past decade, the nation has been borrowing massively abroad—some $739 billion in 2007 alone. And it is easy to see why: With the government running up huge debts, and with Americans' household savings close to zero, there was nowhere else to turn. America has been living on borrowed money and borrowed time, and the day of reckoning had to come. We used to lecture others about what good economic policy meant. Now they are laughing behind our backs, and even occasionally lecturing us. We've had to go begging to the sovereign wealth funds—the excess wealth that other governments have accumulated and can invest outside their borders. We recoil at the idea of our government running a bank. But we seem to accept the notion of foreign governments owning a major share in some of our iconic American banks, institutions that are critical to our economy. (So critical, in fact, we have given the Treasury a blank check to bail them out.)

the budget deficit: Thanks in part to runaway military spending, in just eight short years our national debt has increased by two-thirds, from $5.7 trillion to more than $9.5 trillion. But as dramatic as they are, these numbers vastly understate the problem. Many of the Iraq War bills, including the cost of benefits for injured veterans, have not yet come due, and they could amount to more than $600 billion. The federal deficit this year is likely to add up to another half-trillion to the nation's debt. And all this is before the Social Security and Medicare bills for the baby boomers.

the investment deficit: Government accounting is different from that in the private sector. A firm that borrows to make a good investment will see its balance sheet improved, and its leaders will be applauded. But in the public sector there is no balance sheet, and as a result, too many of us focus too narrowly on the deficit. In reality, wise government investments yield returns far higher than the interest rate the government pays on its debt; in the long run, investments help reduce deficits. To cut them is penny-wise but pound-foolish, as New Orleans' levees and Minneapolis' bridge attest.

There are two hypotheses (besides simple incompetence) about why Republicans paid so little attention to the growing budget shortfall. The first is that they simply trusted in supply-side economics—believing that, somehow, the economy would grow so much better with lower taxes that deficits would be ephemeral. That notion has been shown for the fantasy that it is.

The second theory is that by letting the budget deficit balloon, Bush and his allies hoped to force a reduction in the size of government. Indeed, the fiscal situation has grown so scary that many responsible Democrats are now playing into the hands of these "starve the beast" Republicans and calling for drastic cuts in expenditures. But with Democrats worrying about appearing soft on security—and therefore treating the military budget as sacrosanct—it is hard to cut spending without slashing the investments most important to solving the crisis.

The most urgent task for the new president will be to restore the economy's strength. Given our national debt, it is especially important to do that in ways that maximize the bang for our buck and help address at least one of the major deficits. Tax cuts work—if they work—by increasing consumption, but America's problem is that we have been on a consumption binge; prolonging that binge just postpones dealing with the deeper problems. States and localities are about to face real budget constraints as tax revenues plummet, and unless something is done, they will be forced to cut spending, deepening the downturn. At the federal level, we need to spend more, not less. The economy must be reconfigured to reflect new realities—including global warming. We will need fast trains and more efficient power plants. Such expenditures stimulate the economy while providing the foundation for long-term sustainable growth.

There are only two ways to pay for these investments: raise taxes or cut other expenditures. Upper-income Americans can well afford to pay higher taxes, and many countries in Europe have succeeded because of, not despite, high tax rates—rates that have enabled them to invest and compete in a globalized world.

But needless to say, there will be resistance to tax increases, and so the focus will shift to cuts. But our social expenditures are already so bare-bones that there is little to spare. Indeed, we stand out among the advanced industrial countries in the inadequacy of social protection. The problems with America's health care system, for example, are well recognized; fixing them means not only greater social justice, but greater economic efficiency. (Healthier workers are more productive workers.) That leaves but one major area in which to cut—defense. We account for half of all the world's military expenditures, with 42 percent of tax dollars spent directly or indirectly on defense. Even nonwar military expenditures have soared. With so much money spent on weapons that don't work against enemies that don't exist, there is ample room to increase security at the same time that we cut defense expenditures.

The good news about today's bad economic news is that we're being forced to curb our material consumption. If we do it in the right way, it will help limit global warming and may even force the realization that a truly high standard of living might entail more leisure, not just more material goods.

The laws of nature and the laws of economics are unforgiving. We can abuse our environment, but only for a while. We can spend beyond our means, but only for a while. We can free ride on the investments made in the past, but only for a while. Even the richest country in the world ignores the laws of nature and the laws of economics at its peril.

Nobel Prize-winning economist Joseph E. Stiglitz is the coauthor of The Three Trillion Dollar War.

http://www.motherjones.com/news/feature/2008/11/the-seven-deadly-deficits.html

Edited December 15, 2008 by Mister Fancypants

[NickD 203]

I agree with just about everything that Joseph E. Stiglitz states with perhaps his statement on the climate deficit. But if they want to blame the burning of HC's to causing global warming, so be it, the end results will be the same, to limit the amount of HC's used in combustion. Whether it will be global warming or really the major harm that HC's are doing to us that is kept well under the lid.

The burning of HC's is highly carcinogenic and causes other respiretory damage to human beans, especially in areas of high concentration like being stuck in long traffic jams. Other nasty side effects, to reduce the amounts of HC production is to add emission control devices to vehicle to increase the CO2 output that not only caused oxygen depravation, but tends to numb the brain of the drivers leading to so called accidents. CO also present, but very dangerous even in very small quanities leads to irritability and headaches affecting driver judgement. Deaths on the highways still remains at above 40,000 per year with a over a million injured, some severely.

Adding MBTE's to automotive fuels to reduce HC production is adding carcinogenic substances to our drinking water, concenstrations of these harmful byproducts is especially strong at our over crowded airports.

If they want to blame global warming on HC's fine, but these amounts have to be reduced for the very sake of our health.

[mawilson 2,133]

#8 the brain deficit

[Niels Bohr 72]

NICKD said, "human beans." ROFLMAO.

[mRx 16]

I disagree with alot of this.

I thought it was interesting how he suggests we transfer government spending from one thing (war) to another (federal healthcare and education). Instead of the transfer from one federal program to another, why not just use that revenue wisely, and slowly try to bring our country out of this burdening debt? That is assuming that this 1.5T even came from tax revenue, and not out of money creation. This Nobel prize winner Stiglitz is a Keynesian at heart.

The problem with supply-side econs is that while tax cuts will generate more productivity and wealth; a coinciding reduction in government spending must occur, something the GOP is not willing to do. Plus supply side econs only sees the benefit as a greater possible revenue to the government; not to the people.

Also we are told that we need to Spend! Spend! Spend! during this depression. While in reality, we didn't cause this bust. The expansion of the money supply did. That's all a boom is; a wasteful storm of artificially sound investments, that turn out not to be. The bad investments need to be done away with.

The price of labor must go down, because the price of products will go down, because we are being cautious with our money and not spending freely on consumer goods. Supply/Demand. But the government will not allow the labor wage to drop, so that's how we get spiraling unemployment. But then they roll out the social programs, which of course, we pick up the tab for that through inflation/taxation. This ensures the longest most painful recession possible, all thanks to economy intervention.

But of course, Keynesian economics is considered fact. What a fallacy it really is.

[one...two...tree 2,762]

I disagree with alot of this.

I thought it was interesting how he suggests we transfer government spending from one thing (war) to another (federal healthcare and education). Instead of the transfer from one federal program to another, why not just use that revenue wisely, and slowly try to bring our country out of this burdening debt? That is assuming that this 1.5T even came from tax revenue, and not out of money creation. This Nobel prize winner Stiglitz is a Keynesian at heart.

The problem with supply-side econs is that while tax cuts will generate more productivity and wealth; a coinciding reduction in government spending must occur, something the GOP is not willing to do. Plus supply side econs only sees the benefit as a greater possible revenue to the government; not to the people.

Also we are told that we need to Spend! Spend! Spend! during this depression. While in reality, we didn't cause this bust. The expansion of the money supply did. That's all a boom is; a wasteful storm of artificially sound investments, that turn out not to be. The bad investments need to be done away with.

The price of labor must go down, because the price of products will go down, because we are being cautious with our money and not spending freely on consumer goods. Supply/Demand. But the government will not allow the labor wage to drop, so that's how we get spiraling unemployment. But then they roll out the social programs, which of course, we pick up the tab for that through inflation/taxation. This ensures the longest most painful recession possible, all thanks to economy intervention.

But of course, Keynesian economics is considered fact. What a fallacy it really is.

That's at the heart of the argument. Many prominent economists like Stiglitz and Krugman have made strong arguments that Keynesian economics are much more stable and reliable than Laissez-faire economics.

[mRx 16]

I disagree with alot of this.

I thought it was interesting how he suggests we transfer government spending from one thing (war) to another (federal healthcare and education). Instead of the transfer from one federal program to another, why not just use that revenue wisely, and slowly try to bring our country out of this burdening debt? That is assuming that this 1.5T even came from tax revenue, and not out of money creation. This Nobel prize winner Stiglitz is a Keynesian at heart.

The problem with supply-side econs is that while tax cuts will generate more productivity and wealth; a coinciding reduction in government spending must occur, something the GOP is not willing to do. Plus supply side econs only sees the benefit as a greater possible revenue to the government; not to the people.

Also we are told that we need to Spend! Spend! Spend! during this depression. While in reality, we didn't cause this bust. The expansion of the money supply did. That's all a boom is; a wasteful storm of artificially sound investments, that turn out not to be. The bad investments need to be done away with.

The price of labor must go down, because the price of products will go down, because we are being cautious with our money and not spending freely on consumer goods. Supply/Demand. But the government will not allow the labor wage to drop, so that's how we get spiraling unemployment. But then they roll out the social programs, which of course, we pick up the tab for that through inflation/taxation. This ensures the longest most painful recession possible, all thanks to economy intervention.

But of course, Keynesian economics is considered fact. What a fallacy it really is.

That's at the heart of the argument. Many prominent economists like Stiglitz and Krugman have made strong arguments that Keynesian economics are much more stable and reliable than Laissez-faire economics.

We've not had laissez-faire economics, only Keynesian. And it is not more stable nor is it more reliable. Recessions and high unemployment rates are made possible by Keynesians.

[NickD 203]

NICKD said, "human beans." ROFLMAO.

Noted, from now on will use the word, "** sapiens" since I apparently do not know the difference between a bean and a being. And to think I had beans for supper last night, hopefully, they were not human. LOL.

[one...two...tree 2,762]

We've not had laissez-faire economics, only Keynesian. And it is not more stable nor is it more reliable. Recessions and high unemployment rates are made possible by Keynesians.

By the same token we have never had a specific methodology (Keynesian) regarding our economic policies. If you're saying that Laissez-faire economics can only work in an absolute setting, then I would argue that its premise is a fallacy. Even Milton Friedman, the prophet economist for Laissez-faire would not and did not fully embrace it as an absolute. In fact, Friedman, I believe was the man who came up with the Earned Income Tax Credit. I could be wrong, but I don't think most Laissez-faire proponents have argued that the only way such policies can work is if it is absolute. What I hope is that we've come to realize that viable economic policies require embracing not a specific methodology, but an openness to trying different ideas until we find which ones are the most successful.

Edited December 15, 2008 by Mister Fancypants

[mRx 16]

We've not had laissez-faire economics, only Keynesian. And it is not more stable nor is it more reliable. Recessions and high unemployment rates are made possible by Keynesians.

By the same token we have never had a specific methodology (Keynesian) regarding our economic policies. If you're saying that Laissez-faire economics can only work in an absolute setting, then I would argue that its premise is a fallacy. Even Milton Friedman, the prophet economist for Laissez-faire would not and did not fully embrace it as an absolute. In fact, Friedman, I believe was the man who came up with the Earned Income Tax Credit. I could be wrong, but I don't think most Laissez-faire proponents have argued that the only way such policies can work is if it is absolute. What I hope is that we've come to realize that viable economic policies require embracing not a specific methodology, but an openness to trying different ideas until we find which ones are the most successful.

We have never had a methodology that has been free-market since well before the establishment of the central banks, and fiat currency. While I will agree that we may have not followed Keynesian doctrines to a tee since it's inception, we have always had a interventionist policy with regards to our economy. Even Friedman, the so-called lassez-faire prophet, was in reality, not as free market and non-intervention as he is acreditted to be. He was a supporter of price and wage controls, and also sought to limit inflation to a certain percent, instead of just doing away with these damning controls that are the soul reason for our economic woes.

The only methodology different from the rest is free-market economics. Every other doctrine or theory, be it Friedman's monetarist policies, Keynesian, Chicagoan, etc, have all followed the basic underlying ideology that government should and must intervene. Therefore the "free-market" is a fleeting hope, as more and more pro-interventionist egalitarian keynesians receive nobel prizes and accolades for introducing nothing more than the same old intervention policies, but polished with word candy. Intervention is the fallacy.

[NickD 203]

Friedman's monetarist policies, Keynesian, Chicagoan, etc, is way beyond my comprehension, every ** sapien has needs, some can be provided by ones self, but mostly depends on others to produce those needs. In a farm community, we traded our skills, repaired the digital in a neighbors tractor, he paid me with half a steer. But far more convenient to value these goods with a media called money and far easier for the government to claim a big chunk of it.

As a general manage of a Fortune 500 company, had a very simple comprehensive rule to follow, we had a door, and more money had to come in that door than leave. It worked, always made a profit and stayed in business. Watched a History Channel program a couple of days ago comparing the current crisis with the great depression. 25% of the working population was laid off with yet another 25% working for far reduced wages, 50% of the US population was hurting. What about their needs, or are these people just parasites living off those that do have something useful to offer.

Certainly the greatest group of parasites we have in this country today are those that make money with money, exactly what good are these people doing for this country besides screwing the hell out of people who have something useful and practical to offer?

Regulation after the great depression stipulated that those making with money had to have the money, not credit as before that caused that depression. This created another harmful charteristic of our economic system, supply and demand, where that demand was falsely created by credit and not real money. Seems like in the last twenty years the very basics of common sense was tossed out the window, and by who else, our government.

Seems like just two basic policies have to be adopted, only goods and services can be purchased with real money, not credit, if our government would only set the example. And second, those that steal it should suffer the same fate as a robber on the street, when dealing with real money, if they steal it, have to give it back plus punishment. Our real money was stolen from us in our 401K plan, we left that alone hoping it will recover, but not putting anymore into it, each and every dollar required skill and hard work to earn.

We should also divide this nation into two groups, those that have skills and work hard, and the parasites that are leading this country, just isolate those bastards so they can screw each other to death, but that won't last long, the bastards will starve to death, unless they learn how to work as hard as the rest of us have to.

[Niels Bohr 72]

Joseph E. Stiglitz have contributed indirectly to the discovery of DNA by Watson and Crick. His economic theory helped Watson and Crick to further narrow their research in the DNA structure. I remember now. He's famous alright.

[mRx 16]

Friedman's monetarist policies, Keynesian, Chicagoan, etc, is way beyond my comprehension, every ** sapien has needs, some can be provided by ones self, but mostly depends on others to produce those needs. In a farm community, we traded our skills, repaired the digital in a neighbors tractor, he paid me with half a steer. But far more convenient to value these goods with a media called money and far easier for the government to claim a big chunk of it.

As a general manage of a Fortune 500 company, had a very simple comprehensive rule to follow, we had a door, and more money had to come in that door than leave. It worked, always made a profit and stayed in business. Watched a History Channel program a couple of days ago comparing the current crisis with the great depression. 25% of the working population was laid off with yet another 25% working for far reduced wages, 50% of the US population was hurting. What about their needs, or are these people just parasites living off those that do have something useful to offer.

Certainly the greatest group of parasites we have in this country today are those that make money with money, exactly what good are these people doing for this country besides screwing the hell out of people who have something useful and practical to offer?

Regulation after the great depression stipulated that those making with money had to have the money, not credit as before that caused that depression. This created another harmful charteristic of our economic system, supply and demand, where that demand was falsely created by credit and not real money. Seems like in the last twenty years the very basics of common sense was tossed out the window, and by who else, our government.

Seems like just two basic policies have to be adopted, only goods and services can be purchased with real money, not credit, if our government would only set the example. And second, those that steal it should suffer the same fate as a robber on the street, when dealing with real money, if they steal it, have to give it back plus punishment. Our real money was stolen from us in our 401K plan, we left that alone hoping it will recover, but not putting anymore into it, each and every dollar required skill and hard work to earn.

We should also divide this nation into two groups, those that have skills and work hard, and the parasites that are leading this country, just isolate those bastards so they can screw each other to death, but that won't last long, the bastards will starve to death, unless they learn how to work as hard as the rest of us have to.

Our real money was stolen from us a long time ago, and that money was gold. Our dollar used to only be a redeemable receipt for gold. But gold is not something that can be controlled or inflated, so it was replaced by fiat money, or worthless papers. Much easier to create, and can be created in mass on a printing press. And you're correct, it's the government's fault.

Depressions are a result of the business cycle. Inflation creates the business cycle. When the Fed slows inflation (to avoid hyperinflation), this causes banks to contract. Then, the recession sets in. If left unregulated, wage rates would drop, people would lose jobs, the market would readjust itself to normal levels, people would start spending again, and then more jobs, and more employment and the recession would end. BUT, the government doesn't allow the quick recovery of the economy (which in reality, all a recession is, is a recovery). Propping up wage rates forces unemployment, because frankly since the money supply isn't expanding as it was during the boom, businesses cannot afford such high wage rates. This leads to the 25% unemployment.

[one...two...tree 2,762]

We've not had laissez-faire economics, only Keynesian. And it is not more stable nor is it more reliable. Recessions and high unemployment rates are made possible by Keynesians.

By the same token we have never had a specific methodology (Keynesian) regarding our economic policies. If you're saying that Laissez-faire economics can only work in an absolute setting, then I would argue that its premise is a fallacy. Even Milton Friedman, the prophet economist for Laissez-faire would not and did not fully embrace it as an absolute. In fact, Friedman, I believe was the man who came up with the Earned Income Tax Credit. I could be wrong, but I don't think most Laissez-faire proponents have argued that the only way such policies can work is if it is absolute. What I hope is that we've come to realize that viable economic policies require embracing not a specific methodology, but an openness to trying different ideas until we find which ones are the most successful.

We have never had a methodology that has been free-market since well before the establishment of the central banks, and fiat currency. While I will agree that we may have not followed Keynesian doctrines to a tee since it's inception, we have always had a interventionist policy with regards to our economy. Even Friedman, the so-called lassez-faire prophet, was in reality, not as free market and non-intervention as he is acreditted to be. He was a supporter of price and wage controls, and also sought to limit inflation to a certain percent, instead of just doing away with these damning controls that are the soul reason for our economic woes.

The only methodology different from the rest is free-market economics. Every other doctrine or theory, be it Friedman's monetarist policies, Keynesian, Chicagoan, etc, have all followed the basic underlying ideology that government should and must intervene. Therefore the "free-market" is a fleeting hope, as more and more pro-interventionist egalitarian keynesians receive nobel prizes and accolades for introducing nothing more than the same old intervention policies, but polished with word candy. Intervention is the fallacy.

Matt, I've had similar discussions with others who embraced Libertarian ideology and you're very bright and open to being challenged in thought. I hope you'll continue to really explore why economists like Krugman or even Milton have reasoned for some form of government intervention and that you'll be open to allow your views to continually evolve.

[Niels Bohr 72]

Joseph E. Stiglitz is another guy with an instinct in economics. Some of his ideas got rejected, but, most became a part of other discipline unrelated to finance.

No. He's not my role model as my name suggests. MUWHAHAHA. CARRY ON.

I still heed his advice on the subject.