A $1 trillion answer

By
Joseph E. Stiglitz                                                             Read Spanish Version  

From
The New York Times

What
President-elect Barack Obama will need to do is horribly complicated
but also very clear.

First,
he must stop the economy from going deeper into recession. Then he
needs to bring about a robust recovery, preferably in ways that
support the long-term needs of the United States: by repairing our
neglected public works, invigorating our technological leadership,
making our society greener, fixing our health care problems, healing
our social and economic divide, and restoring our social compact.

It
will not be easy. President Bush’s legacy of debt
and the
opposition of those who benefit from the status quo present major
obstacles.

There
is an emerging consensus among economists that a big — very big —
stimulus is needed, at least $600 billion to $1 trillion over two
years. Mr. Obama’s announced goal of 2.5 million new jobs by 2011
is too modest. In the next two years, almost four million workers
will enter the labor force — or would if there were jobs. Combined
with the loss of employment this year, that means we should be
striving to create more than five million jobs.

A
large stimulus package can always be trimmed later if it’s not
needed because the economy returns to health faster than most
economists think. But we need to plan for what looks to be a deep and
long downturn. By relying heavily on automatic stabilizers —
expenditures like increased unemployment benefits and revenue sharing
with states — we can dose out the medicine as needed. The deeper and
longer the downturn, the greater the spending.

Faint
measures would be foolhardy. A weaker economy will suffer lower tax
revenues, more foreclosures and more bankruptcies. Once a firm is
bankrupt, you can’t unbankrupt it by providing a stronger stimulus
later on.

There
are other elementary principles that help guide the design of a good
stimulus. The government could, for instance, temporarily pay
(through a tax credit) part of the cost of new private investment for
companies that are spending more than, say, 80 percent of what they
have spent annually in recent years on equipment like computers and
machinery. This would be a high-powered, low-cost stimulus.

Latter-day
Hooverites will say the soaring deficit and national debt mean we
cannot afford a large stimulus package. Although today they are
receiving billions of dollars in aid, once they have their money some
from the financial sector will argue that the economy won’t recover
unless confidence is restored, and that confidence won’t be
restored until the deficit narrows.

But
it’s impossible to restore confidence when the economy is in
shambles. When millions of Americans are out of work and hundreds of
thousands of businesses are going into bankruptcy, there will be no
“confidence.” This is the reality. To avoid this, we need a big
stimulus.

But
what you do with the money counts, too. The money needs to be spent
carefully to ensure that every dollar provides as much stimulus now
as possible while also contributing to long-term growth. That is why
it is imperative to restructure the Troubled Asset Relief Program.
Treasury Secretary Henry Paulson has already given away close to half
of the $700 billion on very generous terms and without adequate
restrictions on the use of the money.

The
intent of the program was not just to give money to banks but to get
them to increase lending. It has not worked, so it needs to be
changed. If taxpayers pour our hard-earned money into banks, then the
banks should not be allowed to pour out the money as dividends to
their shareholders or bonuses to their executives. Nor should they be
allowed to use the cash to purchase healthy banks, in further efforts
to become “too big to fail.”

The
Obama administration should not treat Mr. Paulson’s plan as
immutable simply because “a deal is a deal.” The banks knew there
was a quid pro quo. Besides, the terms of the relationship between
the banks and the government (including the Federal Reserve) have
repeatedly been adjusted, though almost always in favor of financial
companies. The Fed used to accept only Treasury bills as collateral
when it lent to banks. Now it accepts risky assets — junk.

Americans
are rightly afraid of losing their jobs, and with that, their health
insurance and their homes. We need to provide health insurance to the
unemployed and to the uninsured, and we need to do it quickly,
possibly through an expanded and more efficient Medicare.

We
also need to stem the flood of foreclosures. If we help poorer
homeowners, banks will benefit, too, as foreclosures are reduced.
Through tax deductions, the federal government pays as much as 50
percent of the mortgage costs of upper-income Americans. If we
treated the poor just as well as we treated the rich, more would find
housing affordable.

And
we need to change the bankruptcy laws to help homeowners. We have
expedited bankruptcy for businesses, to keep them going when they run
into financial problems. We should do the same for homeowners. It
does no one any good to force poor and middle-income Americans out of
their homes. Vacant houses blight neighborhoods. An expedited
bankruptcy law would allow the restructuring of the mortgages of
millions of Americans who owe more than their houses are worth.

Deregulation
and the failure to adopt regulations to cover risky new financial
products have contributed much to the current mess. So far, we have
merely given banks more money to spend recklessly. We have done
little to change the banks’ incentives or constraints.

Confidence
is important, but it will not be restored if the economy is weak, or
if Americans think the system is stacked against them. If the asset
program is not changed and if regulations are not imposed to change
the behavior of those who got us into this situation — who enriched
themselves at the expense of their shareholders — then confidence
will not return. Those who got us into this crisis cannot have undue
influence in shaping the response.

America
has great assets, including a productive labor force and the best
universities in the world. None of these assets so far has been
impaired by Wall Street’s follies. These strengths, coupled with a
sensible and fair economic stimulus package and judicious regulation,
will help our economy recover.

Joseph
E. Stiglitz, a professor of economics at Columbia who was chairman of
the Council of Economic Advisers from 1995 to 1997 and was awarded
the Nobel prize in economics in 2001, is the author, with Linda J.
Bilmes, of “The Three Trillion Dollar War.”

http://www.nytimes.com/2008/11/30/opinion/30stiglitz.html?_r=1&scp=1&sq=Stiglitz&st=cse