‘The American Economy Has a Fondness for Crystal Meth’, says Nobel Winning Economist

Joseph Stiglitz, writing in the November issue of Vanity Fair, suggests that it’s going to take more than a $250 billion part-nationalisation of banks before the American economy recovers from its addiction to ‘self-regulated’ (ha!) free market fundamentalism.

“Let me venture an analogy from biology: a patient arrives at a hospital in serious condition,” writes the winner of the 2001 Nobel Prize for Economics. “Now, it may be that the patient has simply fallen victim to one of those debilitating ailments that go around from time to time and can be cured by a massive dose of antibiotics. In this case we have a macro problem with a macro solution. But it could instead be that the patient is suffering from a decade of serious abuse—smoking, drinking, overeating, lack of exercise, a fondness for crystal meth—and that it has not only taken a catastrophic toll but also left him open to opportunistic infections of every kind. In other words, a buildup of micro problems has led to a macro problem, and no cure is possible without addressing the underlying issues. The American economy today is a patient of the second kind.”

The “underlying causes” here being the dependence on foreign oil, the use of ethanol/corn for biofuels production that drives up grain and food prices, a disincentivised tax system that rewards only the very rich, the unnecessarily rapid foreclosures that create vacant, devalued housing, and the lax approach to regulation that allowed Wall Street to create harmful loans and ‘innovative’ products that were so complex that even their creators couldn’t fully comprehend them.

The solution? Stiglitz says the American government has to invest heavily in infrastructure, technology and education to increase incomes, and stimulate employment and growth. And that means more taxes, with the rich finally paying a fair whack.

Unfortunately though, America remains a nation with a populace who would generally prefer eat raw cactus than tolerate higher income tax, and that’s not going to change anytime soon; while Stiglitz is optimistic the situation can turn itself around in time, the basic assumption underpinning his confidence is that the Republicans will (i) come to understand that their entire economic ideology is based on a trick, or (ii) never achieve any position of governance again. Odds?

Posted by Jack Roberts in Hot Money | October 15, 2008 7:58PM |