In The Roaring Nineties, Stiglitz turns his sights back home with a revisionist look at the U.S. economy’s boom years. Not surprisingly, he finds plenty to fault.
The author seeks to debunk several myths about the economic performance of the U.S. during that period and to draw lessons for policymakers. But Stiglitz, who served as chairman of the president’s Council of Economic Advisers during the first Clinton administration, is more effective railing against the excesses of the past than offering prescriptions for the future.
Take executive pay. Stiglitz -- who won the Nobel Prize in economics in 2001 for revealing how asymmetric information distorts markets -- explains how creative accounting, stock options and the bull market provided incentives for executives to inflate reported profits and their pay. Shareholders, he says, were too pleased by the overall rise in equity values to demand relative outperformance from CEOs.
As a longtime proponent of expensing options, Stiglitz doesn’t mince words on their abuse: “Theft -- taking something from someone without consent -- is exactly what it was. The victims were in no position to give their consent because, for the most part, they didn’t realize that anything had been taken from them.”
Strong words indeed, but as recent events at the New York Stock Exchange have shown, even the experts can fail to grasp the actual level of executive pay.
Stiglitz challenges two totems of 1990s economic policymaking with less than convincing results. The first is the idea that President Clinton’s 1993 deficit-reduction bill set the stage for big increases in growth and productivity by reducing long-term interest rates and spurring investment. Stiglitz contends that the process actually followed a more circuitous and unexpected path: Lower rates recapitalized banks by increasing the value of their Treasury bond portfolios, thereby ending a long credit squeeze and spurring a surge in bank lending.
It’s a pretty fine distinction he makes, given that the net effect on the economy is the same. Stiglitz argues that by championing deficit reduction, the Democrats effectively bought into the smaller- government ideology of their conservative opponents. Now, of course, the Bush administration is once again running up massive deficits.
Stiglitz also attacks the sacred cow of central bank independence, asserting that monetary policy is too important to be left to a technocratic Federal Reserve Board. He asserts that chairman Alan Greenspan is less politically sensitive than his predecessor, Paul Volcker, was and that Greenspan’s excessive focus on inflation kept interest rates high and restrained growth during the mid-'90s.
It’s hard to know which claim is more laughable. Volcker was notoriously immune to political pressure from presidents Jimmy Carter and Ronald Reagan, whereas Greenspan’s eagerness to curry favor with Clinton on deficit reduction in 1993 and with George W. Bush on tax cuts in 2001 hardly constitutes apolitical behavior. And although Greenspan may have been quick to raise rates in 1994, the chairman really made his mark later when he kept rates low and praised the productivity gains of the New Economy.
At his best, Stiglitz makes a strong case for a new “democratic idealism,” as he calls it, to replace today’s prevailing market fundamentalism. His idealism embraces an active government role in reducing inequality, achieving the right balance of regulation and working for multilateral solutions to the problems created by globalization.
But a self-serving tone undermines his message. The Roaring Nineties is a mea culpa without the mea. Stiglitz writes that “we” in the Clinton administration put too much faith in the wisdom of financial markets. But as Stiglitz tells the tale, he was always on the side of the angels, usually fighting his nemesis, Robert Rubin.
It was thenTreasury secretary Rubin who persuaded Clinton to make fiscal policy a hostage to the bond market and Rubin who pushed for the repeal of the Glass-Steagall Act, exacerbating conflicts of interest on Wall Street. But the author gives short shrift to Rubin’s arguments and fails to provide any personal insight into the divisions within the Clinton administration. The resulting impression is that of a gifted economist out of his depth in dealing with a smooth Wall Street operator. Of course, given Rubin’s successes, that may be an accurate account.
