Krugman and Stiglitz: Crazy Austerity Policies Inflict Untold Damage on Economy

Two Nobel laureates, an election, and a shaky economy. The message? We can do a whole lot better.

Though there wasn’t too much talk of specific politicians last night, the election certainly hungin air as the two most cited economists in the world met on stage in New York City to discuss where the economy is headed.

The event was hosted by the Institute for New Economic Thinking (INET), Shakespeare & Company Booksellers, and the Fashion Institute of Technology, which, as president Joyce F. Brown reminded the audience, is a premier public institution that has suffered from budget cuts in a shaky economy. She stressed that she worries each day about the economic conditions students will face when they graduate.

Robert Johnson, Executive Director of INET, served as moderator, and kicked off the evening praising Krguman and Stiglitz as his nominees should the prize of Most Courageous Economist ever be offerred. Johnson himself is an economist who has not shied away from tough criticism of the field and policies that hurt the 99 percent. (Stiglitz and Johnson were both contributers to the AlterNet book I co-edited,The 99%: How the Occupy Movement is Changing America).

The discussion touched on many themes, but the increasing need for economists — and politicians — to learn the lessons of history was a key point. Both Krugman and Stigtliz appeared troubled that much of our economic misery is not the result of uncontrollable forces, but self-inflicted pain springing from a failure to appreciate the lessons learned in past crises and to understand the role of government in creating and maintaining a strong economy.

Krugman, author, most recently, of End This Depression Now, pointed out that a glance at history provides “overwhelming confirmation that increased government spending would be freeing” in an economic situation like that which America currently faces. He explained that such spending was not merely a “sugar pill” and reminded the audience that a properly stimulated economy —which can come with a little inflation — allows people to pay their debts down. Such debt doesn’t tend come back, which gives people a more firm financial footing. Stiglitz added that government investments in things like road construction have a high rate of return, and they allow businesses to flourish. On the contrary, when you spend on war and dropping bombs, he noted drily, you don’t get much back.

Krugman, referring to spending cuts that have put teachers and other public sector workers on the unemployment rolls, said: “It’s crazy what we’re doing right now.” Stiglitz pointed out that while we don’t refer to current budget-slashing activities as “austerity” in America, that is precisely what it means when you have large scale losses in public sector jobs. He warned that “If Romney gets elected, I’m afraid they might actually do what they say they want to do.” Krugman, exhibiting a flash of dark humor, commented that it we might hope in that case that the politicians are lying.

Stiglitz’s recent book, The Price of Inequality, rips off America’s rose-colored glasses and shows us exactly where we stand in the world of industrailized countries on the gap between rich and poor — which is pretty much at the bottom of the heap. Inequality is not just a matter of fairness, he said, though it is certainly that. It also weakens the whole economy. “If you transfer money from the bottom to the top, it lowers aggregate demand” he noted. Rich people, he pointed out, don’t tend to spend the extra money — they simply sit on it, or worse, use it for harmful activities like speculation.

Krugman observed that conservatives have taken to praising Germany as having a robust economy with austerity. But he quickly pointed out that Germany has many things going for it which conservatives constantly rail against at home — like strong labor and a robust social safety net. Both Krugman and Stigltiz noted that Germany still has not managed to keep up with the Scandinavian countries, whose flourishing economies make it clear that austerity measures are not the basis of economic success.

On taxes, both economists were highly critical of a system in which the income of the wealthy is taxed at a lower rate than that of middle and working class people. Moderator Robert Johnson went so far as to describe the policy on “carried interest” — a loophole which allows money managers like Mitt Romney to pay taxes at a very low rate, as nothing more than “legalized fraud.”

Krugman and Stiglitz also condemned the idea that healthcare can function as a market-based system. Krugman ridiculed the notion that a patient having a heart attack is a “consumer” who can “comparative shop” for services. He pointed out that all the various ways that markets fail — such asymmetrical information between buyer and seller — apply to the healthcare industry. He noted that it was absurd to think that one would expect that same ethical standards to apply to a doctor and a used car salesman. Stiglitz observed that the United States has the most market-based healthcare system in the world — and also the most expensive — with far from the best result. He pointed to the Veteran’s Health Administration as an example of what conservatives call “socialized medicine” which works very efficiently in the U.S., despite the conservative mantra that nothing the government does can possibly function well. Krugman added that if the U.S. had a healthcare system on par in terms of efficiency and cost with a country like France, for example, then the deficit would disappear. He described the Obamacare approach as inelegant, but expressed his optimism that the plan is at least as step forward that gets people used to the idea of universal healthcare and may open the door to more robust reforms down the road. He warned that Paul Ryan’s desire to privatize Medicare managed the amazing feat of “rejecting both theory and evidence.” Not easy to do, he said.

At the end of the evening, the microphone was turned over to the audience. One man asked the economists to say what moral code they lived by. Krugman said that his social vision was one drawn from the philosopher John Rawls, namely that you should think of designing a society as if you didn’t know what place you’d have in it, a sort of variation on the Golden Rule. Rob Johnson told the audience about a series of dicussions hosted by INET that had recently launched at New York’s Union Theological Seminary (see: “Joseph Stiglitz Calls to Abolish the Capitalist Church of Self-Interest”) which explore the intersection of morality and economics. As an English major, I have been very glad to see INET’s creative determination to bring economics into unexpected places. Its tenents and the policies that emerge from them impact our lives at every level, down to the most intimate decisions about our health. Time for a new twist on an old catchphrase? The personal is economic.

Share your perspective