The Pessimist

Foreign Policy: Are you concerned about the Federal Reserve’s moves to grow the U.S. economy?

Joseph Stiglitz: I find it surprising that the Federal Reserve has been so slow to grasp the nature of the problems facing the American economy and that their irrational optimism about the economy has persisted. But perhaps that’s not surprising. Ben Bernanke was at the Fed in the period when Greenspan was there blowing up the bubble, and he was at the Fed when the bubble broke.

I think a critical mistake that Obama made was in retaining so many of the people that were at the core of the economic philosophy that had contributed to building up the bubble and to the associated deregulation movement. And the consequence was that they tried to minimize the extent of the problem.

We’re now almost three years into the recession, and nothing has been done to really repair it.

FP: You’ve been a longtime advisor to Greek Prime Minister George Papandreou and to other European governments over the years. Are the outlooks for European growth as rosy as we’ve been led to believe?

JS: It’s important to remember that it’s a global downturn. What’s happening in Europe is going to have an effect on the United States. Right now, Europe is doing somewhat better than people had expected partly because of the weak euro, which has promoted exports, including exports to China. So it’s not surprising that they’re doing well. But exchange rates are not the solution. It’s like a negative beauty contest. It’s not about which is the best; it’s about which is the least worst. But counting on exports as a way of getting out of the downturn when you have a global crisis seems to me not the best solution.

It really depends on how serious the austerity cuts are. For instance, if there are cuts in education, technology, and science investments, then obviously their economies will be much weaker. It’s true for the United States as well. If public investments are severely cut, it’s going to be a very slow recovery, and when we recover, we won’t have the basis for the kind of rapid growth that we’ve experienced in earlier decades.

FP: Why have the wars in Iraq and Afghanistan not provided a stimulus for the economy?

JS: In 1937, Roosevelt cut government spending over deficit concerns. World War II stimulated the economy because we stopped worrying about deficits. It wasn’t war per se that brought us out of the Great Depression; it was government spending. But today’s wars haven’t had that effect because they have not been all-out wars. And because they are so contained, war spending — and our focus on the deficit — has crowded out other kinds of spending. A Filipino contractor working in Iraq doesn’t stimulate the American economy in the way that doing research in the U.S. would.

FP: You were once a very close advisor to President Bill Clinton and chief economist of the World Bank. But it seems that you’re almost more comfortable these days being an outsider. Is there a part of you that wishes you were more involved?

JS: That’s a hard question. I came from academia and have come back to academia — and this encourages your ability to analyze things, to call things as they really are. When you’re in public office, often you can’t tell the whole truth. When a political official talks and says the economy is about to recover, no one really knows whether he believes that or not, but if he doesn’t say that, it could have very serious adverse effects on the economy itself and his own career. There is this kind of freedom that one has as an academic that one loses being an insider. At least I now have my summer vacations.