The Most Misunderstood Man in America
Joseph Stiglitz predicted the global financial meltdown.
So why can't he get any respect here at home?
There are plenty of people who contributed to the sad state
of our economy.
But when it comes to bad decision making,
these seven folks arguably deserve bye bye
the bulk of the blame. (
Want to add to this hall of shame?
Follow the e-mail link at the end of this gallery.)
Who Is To Blame?
Source: http://www.newsweek.com/id/207390/page/1Anya Stiglitz was in the middle of a Pilates class in Central Park
on an April morning when her cell phone rang.
Glancing down, she saw "202" pop up—no number attached
—and knew it was the White House.
An aide to Larry Summers was on the line, looking for her husband,
the Nobel Prize–winning economist Joseph Stiglitz. Anya said
she'd pass on the message to Joe—then went back to work
on her abs.
No big deal, she thought. People often call her when
they want to talk to Joe, because even though
he's spent four decades figuring out how the global economy works,
he hasn't quite gotten the hang of voice mail.
"He doesn't listen to his messages, so if you want
to talk to him, keep calling,"
Anya says on his cell-phone recording.
Anya figured Summers, Obama's chief economic adviser,
was probably just calling to gripe about Joe's latest op-ed
in The New York Times.
Joe Stiglitz and Larry Summers, two towering intellects
with egos to match, are not each other's favorite economist.
"They respect each other, but they hate each other like poison,"
says Bruce Greenwald, Stiglitz's friend and academic collaborator
at Columbia.
("I've got huge admiration for Joe as an economic thinker,"
Summers told NEWSWEEK.)
Stiglitz had been hammering at Obama's economic team for
its handling of the financial crisis.
He wrote that the stimulus program was too small to be effective
—a criticism that has since swelled into a chorus, though Obama
says he's not adding more money.
Stiglitz also had called the administration's bailout plan
a giveaway to Wall Street, an
"ersatz capitalism" that would save the banks' investors
and creditors and screw the taxpayers.
"I thought, Larry—he's just going
to yell at Joe," Anya recalls.
But Summers's aide soon called back, and this time
he said it was urgent: could Professor Stiglitz come
to Washington for a dinner hosted by the president
—that same night?
Anya patched him through to Joe's office at Columbia University;
Stiglitz accepted, and jumped on an early train.
He was a little miffed: the other eminent economists
attending the dinner, like Princeton's Alan Blinder and
Harvard's Kenneth Rogoff, had been invited the week before.
Stiglitz, a former chairman of Bill Clinton's Council of
Economic Advisers, had supported Barack Obama as
a candidate as early as 2007.
But until that day, four months into the administration,
he had heard barely a word from the White House.
Even now, when the president was making an effort
to hear a range of economic voices,
Stiglitz seemed to be an afterthought.
(A White House spokesman said only that
the president wished to include Stiglitz.)
Such is the lot of Joe Stiglitz.
Even in the contentious world of economics, he is considered
somewhat prickly.
And while he may be a Nobel laureate, in Washington he's seen
as just another economic critic—and not always
a welcome one.
Few Americans recognize his name, and fewer still would
recognize the man, who is short and stocky and
bears a faint resemblance to Mel Brooks.
Yet Stiglitz's work is cited by more economists than
anyone else's in the world, according to data compiled
by the University of Connecticut.
And when he goes abroad—to Europe, Asia,
and Latin America—he is received like a superstar,
a modern-day oracle. "In Asia they treat him
like a god," says Robert Johnson, a former chief economist
for the Senate banking committee who has traveled
with him. "People walk up to him on the streets."
Stiglitz has won fans in China and other emerging
G20 nations by arguing that the global economic system
is stacked against poor nations, and by standing up to
the World Bank and International Monetary Fund.
He is also the most prominent American economist to propose
a long-term solution to the imbalances in capital flows
that have wreaked havoc, from the Asian contagion of
the late '90s to the subprime-investment craze.
Beijing has more or less endorsed Stiglitz's idea for
a new global reserve system to replace the U.S. dollar a
s the world currency.
Chinese Prime Minister Wen Jiabao has been influenced
by Stiglitz's work, especially when "he talks about
the economics of poor people," says Fang Xinghai, the head
of Shanghai's financial-services office.
But his stature is huge in Europe as well: French President
Nicolas Sarkozy recently featured him at a conference
on rethinking globalization.
And earlier this month, while traveling to Europe and
South Africa, Stiglitz received a call from British Prime Minister
Gordon Brown's office: could he return through London
and help the P.M. get ready for
the G20 meeting in Pittsburgh?
Stiglitz is perhaps best known for his unrelenting assault on an idea that
has dominated the global landscape since
Ronald Reagan: that markets work well on their own
and governments should stay out of the way.
Since the days of Adam Smith, classical economic theory
has held that free markets are always efficient,
with rare exceptions.
Stiglitz is the leader of a school of economics that, for
the past 30 years, has developed complex mathematical models
to disprove that idea.
The subprime-mortgage disaster was almost tailor-made evidence
that financial markets often fail without rigorous
government supervision,
Stiglitz and his allies say.
The work that won Stiglitz the Nobel in 2001 showed
how "imperfect" information that is unequally shared
by participants in a transaction can make markets
go haywire, giving unfair advantage to one party.
The subprime scandal was all about people who
knew a lot—like mortgage lenders and
Wall Street derivatives traders—exploiting people
who had less information, like global investors
who bought up subprime- mortgage-backed securities.
As Stiglitz puts it: "Globalization opened up opportunities
to find new people to exploit their ignorance.
And we found them."
Stiglitz's empathy for the little guy—and economically
backward nations—comes to him naturally.
The son of a schoolteacher and an insurance salesman,
he grew up in one of America's grittiest
industrial cities—Gary, Ind.—and was shaped by
the social inequalities and labor strife he observed there.
Stiglitz remembers realizing as a small boy that something
was wrong with our system.
The Stiglitzes, like many middle-class families,
had an African-American maid.
She was from the South and had little education.
"I remember thinking, why do we still have people
in America who have a sixth-grade education?" he says.
Those early experiences in Gary gave Stiglitz
a social conscience—as a college student,
he attended Martin Luther King's "I Have
a Dream" speech—and led him to probe the reasons
why markets failed.
While studying at MIT, he says he realized that
if Smith's "invisible hand" always guided behavior correctly,
the kind of unemployment and poverty he had
witnessed in Gary shouldn't exist. "I was struck by
the incongruity between the models that I was taught and
the world that I had seen growing up," Stiglitz said in
his Nobel Prize lecture in 2001. In the same speech he declared
that the invisible hand "might not exist at all." The solution,
Stiglitz says, is to move beyond ideology and to develop
a balance between market-driven economies—which
he favors—and government oversight.
Stiglitz has warned for years that pro-market zeal would cause
a global financial meltdown very much like the one
that gripped the world last year.
In the early '90s, as a member of Clinton's Council of Economic Advisers,
Stiglitz argued (unsuccessfully) against opening up
capital flows too rapidly to developing countries,
saying those markets weren't ready to handle "hot money"
from Wall Street. Later in the decade,
he spoke out (without results) against repealing
the Glass-Steagall Act, which regulated financial institutions
and separated commercial from investment banking.
Since at least 1990, Stiglitz has talked about the risks of
securitizing mortgages, questioning whether markets and authorities
would grow careless "about the importance of screening
loan applicants." Malaysian economist Andrew Sheng says,
"I think Stiglitz is the nearest thing there is
to Keynes in this crisis."
That would be John Maynard Keynes, the great 20th-century economist
who rocketed to international renown in late 1919
when he published The Economic Consequences of the Peace.
In his book, Keynes warned that the draconian penalties imposed
on Germany after World War I would lead to political disaster.
No one listened. The disaster he predicted turned out
to be World War II. Like Stiglitz, Keynes was not
a favorite at the White House. Keynes also believed
that markets were imperfect: he invented
modern macroeconomics—which calls for
major government intervention to help ailing economies—in response
to the Great Depression.
But after meeting Keynes for the first time in 1934, FDR dismissed
him as too abstract and intellectual, according
to Robert Skidelsky, Keynes's biographer.
Keynes himself fretted that Roosevelt
was not spending enough.
To his critics—and there are many—Stiglitz is
a self-aggrandizing rock-thrower.
Even some of his intellectual allies note that while Stiglitz
is often right on the substance of issues, he tends
to leap to the conclusion that government c
an make things better.
Harvard economist Rogoff has called him
intolerably arrogant—though he added that Stiglitz
is a "towering genius." In a letter to -Stiglitz
published in 2002, Rogoff recalled a moment when
the two of them were teaching at Princeton and
former Fed chairman Paul Volcker's name came up
for tenure. "You turned to me and said, 'Ken, you used
to work for Volcker at the Fed. Tell me, is he really smart?'
I responded something to the effect of 'Well, he was arguably
the greatest Federal Reserve chairman of the 20th century.'
To which you replied, 'But is he smart like us?'"
(Stiglitz says he can't remember the comment, but adds that
he might have been referring to whether
Volcker was an abstract thinker.)
Stiglitz's defenders say one possible explanation for
his outsider status in Washington is his ongoing
rivalry with Summers.
While they are both devotees of Keynes, Summers often
has supported deregulation of financial markets—or
at least he did before last year—while Stiglitz has
made a career of mistrusting markets.
Since the early '90s, when Summers was
a senior Treasury official and Stiglitz was on
the Council of Economic Advisers, the two have engaged
in fierce policy debates.
The first fight was over the Clinton admin-is-tration's efforts
to pry open emerging financial markets,
such as South Korea's. Stiglitz argued there
wasn't good evidence that liberalizing poorly regulated
Third World markets would make
any one more prosperous;
Summers wanted them open to U.S. firms.
--
J-L K.
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