Cashing in the War Dividend (Jo Comerford)

by Dollars and Sense

TomDispatch has a new piece by Jo Comerford, director of the National Priorities Project. See below for Tom's introduction to the piece.

Comerford also appears in one part of a six-part video series from Brave New Films, Rethink Afghanistan. Part Three, which features Comerford and also Linda Bilmes (who co-wrote The Three Trillion Dollar War with Joseph Stiglitz), addresses the costs of the war in Afghanistan.

Both Comerford's article and the video series go well with Tom's own piece Who's Next?: Lessons from the Long War and a Blowback World, which argues that the "Long War" (the term members of the Bush administration wanted to give to the global war on terror) is what the United States has already been fighting in the Middle East for the past 30-odd years. —cs

If you want a picture of how Washington deals with American war-making today, check out a moment from NBC's October 11th "Meet the Press." David Gregory, the show's moderator, is conducting a round-table discussion with former Chairman of the Joint Chiefs of Staff General Richard Myers, Senator Lindsey Graham, Senator Carl Levin, and retired General Barry McCaffrey (one of those generals who now spends his time on television explaining our wars to us). At one point, Gregory asks: "Can we beat the Taliban?" General McCaffrey's reply starts this way: "Well, I, I think in 10 years of $5 billion a month and with a significant front-end security component, we can leave an Afghan national army and police force and a viable government and roads and universities. But it's a time constraint that we can't change things in 18 to 24 months. So I think we got to lower expectations."

Now, if you were a normal citizen, you might begin frantically calculating: $5 billion a month... 12 months in a year... $60 billion a year... times 10 years... $600 billion dollars. If, in fact, the number of U.S. troops or trainers and advisors rises significantly and the U.S. commitment to the war rises as well, this will surely prove a gross underestimate. But leaving that aside, you, the normal, reasonable human being, might at this point say something like: "Hold on, general, $600 billion more dollars? Ten years? And where's that money coming from? And is that really how you want to invest taxpayer dollars -- in another supposedly too-big-to-fail bailout?" Or, of course, you might just jump up and yell, "Have you lost your senses?"

But of course this is Washington where such numbers for American war-fighting are so ho-hum, so run-of-the-mill, that none of the other participants even thinks to comment on or question them or stops for a second in wonder. In fact, when McCaffrey is done, here's how Gregory begins his response: "Just with, with very little time left, I want to get to two other issues. The president spoke last night at the Human Rights Campaign dinner and spoke about 'Don't Ask, Don't Tell'..." And so it goes in "wartime" Washington.

Jo Comerford, a TomDispatch newcomer, runs the National Priorities Project, whose mission is to analyze "complex federal spending data and translate it into easy-to-understand information about how federal tax dollars are spent." Its site even has a "cost of war" counter, constantly twirling as the dollars rise in dizzying fashion. Here, as a numbers cruncher, she makes the most basic point of all: Whoever may be losing in our country, others are cashing in their chips and I'm not just talking about Goldman Sachs. After all, there's also the "war dividend." —Tom

Cashing in the War Dividend
The Joys of Perpetual War
By Jo Comerford

So you thought the Pentagon was already big enough? Well, what do you know, especially with the price of the American military slated to grow by at least 25% over the next decade?

Forget about the butter. It's bad for you anyway. And sheer military power, as well as the money behind it, assures the country of a thick waistline without the cholesterol. So, let's sing the praises of perpetual war. We better, since right now every forecast in sight tells us that it's our future.

The tired peace dividend tug boat left the harbor two decades ago, dragging with it laughable hopes for universal health care and decent public education. Now, the mighty USS War Dividend is preparing to set sail. The economic weather reports may be lousy and the seas choppy, but one thing is guaranteed: that won't stop it.

The United States, of course, long ago captured first prize in the global arms race. It now spends as much as the next 14 countries combined, even as the spending of our rogue enemies and former enemies -- Cuba, Iran, Libya, North Korea, Sudan, and Syria -- much in the headlines for their prospective armaments, makes up a mere 1% of the world military budget. Still, when you're a military superpower focused on big-picture thinking, there's no time to dawdle on the details.

And be reasonable, who could expect the U.S. to fight two wars and maintain more than 700 bases around the world for less than the $704 billion we'll shell out to the Pentagon in 2010? But here's what few Americans grasp and you aren't going to read about in your local paper either: according to Department of Defense projections, the baseline military budget -- just the bare bones, not those billions in war-fighting extras -- is projected to increase by 2.5% each year for the next 10 years. In other words, in the next decade the basic Pentagon budget will grow by at least $133.1 billion, or 25%.

When it comes to the health of the war dividend in economically bad times, if that's not good news, what is? As anyone at the Pentagon will be quick to tell you, it's a real bargain, a steal, at least compared to the two-term presidency of George W. Bush. Then, that same baseline defense budget grew by an astonishing 38%.

If the message isn't already clear enough, let me summarize: it's time for the Departments of Housing and Urban Development, Transportation, Health and Human Services, Labor, Education, and Veterans Affairs to suck it up. After all, Americans, however unemployed, foreclosed, or unmedicated, will only be truly secure if the Pentagon is exceedingly well fed. According to the Office of Management and Budget, what that actually means is this: 55% of next year's discretionary spending -- that is, the spending negotiated by the President and Congress -- will go to the military just to keep it chugging along.

Read the rest of the article.

Read Tom Engelhardt's Who's Next?.

Watch Rethink Afghanistan. (Not for the faint of heart.)

Labels: Afghanistan, Afghanistan war, Jo Comerford, Joseph Stiglitz, Linda Bilmes, militarism, Tom Engelhardt

 

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10/21/2009 03:11:00 PM 0 comments

 

Emphasis on Growth Is Called Misguided

by Dollars and Sense

In today's NYT business section; reports on the study Joseph Stiglitz and Amartya Sen have put out, sponsored by Nicolas Sarkozy. The Times is somewhat more respectful than one might have expected, e.g. in this sentence: "In millions of households still grappling with joblessness and the tyranny of bills, signs of health served up by the traditional economic indicators seem disconnected from daily life." Hat-tip to TM.

Among the possible casualties of the Great Recession are the gauges that economists have traditionally relied upon to assess societal well-being. So many jobs have disappeared so quickly and so much life savings has been surrendered that some argue the economic indicators themselves have been exposed as inadequate.

In a provocative new study, a pair of Nobel prize-winning economists, Joseph E. Stiglitz and Amartya Sen, urge the adoption of new assessment tools that incorporate a broader concern for human welfare than just economic growth. By their reckoning, much of the contemporary economic disaster owes to the misbegotten assumption that policy makers simply had to focus on nurturing growth, trusting that this would maximize prosperity for all.

"What you measure affects what you do," Mr. Stiglitz said Tuesday as he discussed the study before a gathering of journalists in New York. "If you don't measure the right thing, you don't do the right thing."

According to the report, much of the world has long been ruled by an unhealthy fixation on swelling the gross domestic product, or the quantity of goods and services the economy produces. With a singular obsession on making G.D.P. bigger, many societies—not least, the United States—failed to factor in the social costs of joblessness and the public health impacts of environmental degradation. They allowed banks to borrow and bet unfathomable amounts of money, juicing the present by mortgaging the future, thus laying the ground for the worst financial crisis since the 1930s.

The report is more critique than prescription. It elucidates in general terms why leaning exclusively on growth as an economic philosophy may yield unhappiness, and it suggests that the incomes of typical people should be weighed more heavily than the gross production of whole societies. But it sidesteps the thorny details of slapping a cost on a ton of pollution or a waylaid career, leaving a great mass of policy choices for others to resolve.

Some Americans may reflexively reject the report and its recommendations, given its provenance: it was ordered up last year by President Nicolas Sarkozy of France, whose dissatisfaction with the available tools of economic assessment prompted him to create the Commission on the Measurement of Economic Performance and Social Progress. Tuesday's briefing was held in an ornate room at the French consulate. The official French statistics agency is already working to adopt the report's recommendations. Mr. Sarkozy plans to bring it with him to the G-20 summit meeting in Pittsburgh this week, where the leaders of major countries will discuss a range of policy issues.

But whatever one's views on the merits of European economy policy, and wherever one sits on the ideological spectrum, these appear fitting days to re-examine how economists measure vital signs—particularly in the United States.

By most assessments, the American economy is now growing again, perhaps even vigorously. Many experts expect a 3 percent annualized rate of expansion from July through September. As a technical matter, the recession appears to be over. Yet the unemployment rate sits at 9.7 percent and will probably climb higher and remain elevated for many months. In millions of households still grappling with joblessness and the tyranny of bills, signs of health served up by the traditional economic indicators seem disconnected from daily life.

This was precisely the sort of contradiction Mr. Sarkozy sought to unravel when he created the commission, tasking it with pursuing alternate ways of measuring economic health.

To head the panel, he picked Mr. Stiglitz, a former World Bank chief economist whose best-selling books amount to an indictment of the Washington-led model of global economic integration. Mr. Sarkozy also selected Mr. Sen, a Harvard economist and an authority on poverty.

The resulting report amounts to a treatise on the inadequacy of G.D.P. growth as an indication of overall economic health. It cites the example of increased driving, which weighs in as a positive within the framework of economic growth, as it requires greater production of gasoline and cars, yet fails to account for the hours of leisure and work time squandered in traffic jams, and the environmental costs of pollutants unleashed on the atmosphere.

Read the rest of the article.

Labels: Amartya Sen, growth, growth consensus, Joseph Stiglitz, Nicolas Sarkozy

 

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9/23/2009 10:25:00 AM 0 comments

 

Two Good Pieces on Global Finance from FPIF

by Dollars and Sense

Two nice relatively new pieces from the good folks at Foreign Policy in Focus. Hat-tip to LF for alerting me to these. (I like that FPIF lists the editor in charge of an article as well as the author—great idea.)

Overhauling Global Finance

Alex Wilks | May 28, 2009 | Editor: Emily Schwartz Greco

The global financial crisis has discredited the financial institutions that played a part in causing it. Discussions of radical alternatives are beginning to flourish, with the world's governments rushing to consult experts who previously found themselves out in the cold.

If only. In fact many of the same financial experts as a decade ago populate finance ministries, review panels, and talk shows. The commission of experts convened by the president of the United Nations General Assembly represents one rare exception.

This commission includes 18 researchers, politicians, former officials, and activists from all the world's regions. Their mandate is to recommend "needed institutional reforms required to ensure sustained global economic progress and stability which will be of benefit to all countries, developed and less developed." The body is popularly known as the "Stiglitz Commission" because it's led by Nobel laureate and former World Bank chief economist Joseph Stiglitz. But it's most notable for the participation of high-level experts from developing countries.

Read the rest of the article.

Plus this one on the IMF, by Aldo Caliari, who has written for D&S:

The IMF is Back? Think Again

Aldo Caliari | June 1, 2009 | Editor: Emily Schwartz Greco

Last year, as the financial crisis reached global and historic proportions, many commentators identified one institution as the debacle's great winner: the International Monetary Fund. Just two years ago, the IMF seemed to be on an inexorable downward path: its credibility and effectiveness in question, its portfolio of borrowers severely reduced, its legitimacy and governance structure under challenge, and its own finances in disarray. In fact, the Fund had started "downsizing" its staff as the only way to avoid running one of the deficits that it so strongly advises client countries to steer away from.

Against this backdrop, the world's credit drought offered the international financial institution a lifeline. Observers predicted it would propel countries that had closed their programs with the IMF to have to reapply. Big IMF loans were back. The G20 summit in London in early April, with its dizzying figures in new funding for the IMF (The Wall Street Journal and other major outlets reported a $750 billion pledge) only made the feeling a distinct belief.

Since October of last year, the number of IMF non-concessional loans has more than tripled, while the total volume of outstanding loans more than doubled — from nearly $7.5 billion to about $16 billion. This is far from the almost $50 billion in loans that were outstanding in 2003, but does reflect a U-turn.

Still, looking beneath the surface reveals a more nuanced picture. Accounts that herald the IMF's "revival" are premature and superficial. Recent events illustrate nothing more than the fact that the world's largest economies, who happen to be the Fund's largest shareholders, view it as an instrument to manage emergency crisis financing. That was never, however, in question. It was the borrowers who saw the need for substantial reform in the IMF before this emergency financing function could be played effectively and, in fact, the infusion of large amounts of funding, by freeing the IMF's hands and relieving its fears of survival that will act against such reforms. On the other hand, there's little that suggests a sense of renewed faith on the IMF by its main shareholders, let alone by the borrowers.

Read the rest of the article.

Labels: financia crisis, Foreign Policy in Focus, IMF, Joseph Stiglitz, United Nations

 

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6/22/2009 04:14:00 PM 0 comments

 

Stiglitz: Wall Street Lobbying Will Doom Rescue

by Dollars and Sense

From Bloomberg:

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

"All the ingredients they have so far are weak, and there are several missing ingredients," Stiglitz said in an interview yesterday. The people who designed the plans are "either in the pocket of the banks or they’re incompetent."

The Troubled Asset Relief Program, or TARP, isn't large enough to recapitalize the banking system, and the administration hasn't been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama's advisers have close ties to Wall Street.

"We don’t have enough money, they don't want to go back to Congress, and they don't want to do it in an open way and they don’t want to get control" of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. "The bank restructuring has been an absolute mess."

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don't have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database.

Financial shares have rallied in the past month as Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. all reported better-than-expected earnings in the first quarter. The Standard & Poor's 500 Financials Index has soared 91 percent from its low of 78.45 on March 6.

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, "is a really bad program," Stiglitz said. It won't accomplish the administration's goal of establishing a price for illiquid assets clogging banks' balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.

Bailing Out Investors

"You’re really bailing out the shareholders and the bondholders," he said. "Some of the people likely to be involved in this, like Pimco, are big bondholders," he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

"The statement from Sheila Bair that there’s no risk is absurd," he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had "zero expected cost" from the program.

Redistribution

"We're going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks," Stiglitz said. "It's a real redistribution and a tax on all American savers."

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

"America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street," he said. "Even if there is no quid pro quo, that is not the issue. The issue is the mindset."

Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Critical of Stimulus

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but "flawed" because too much spending comes after 2009, and because it devotes too much of the money to tax cuts "which aren't likely to work very effectively."

"It's really a peculiar policy, I think," he said.

The $75 billion mortgage relief program, meanwhile, doesn't do enough to help Americans who can't afford to make their monthly payments, he said. It doesn't reduce principal, doesn't make changes in bankruptcy law that would help people work out debts, and doesn't change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Read the rest of the interview here.

Labels: bad banks proposal, Joseph Stiglitz, TARP program

 

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4/17/2009 03:50:00 PM 0 comments

 

Stiglitz On the Fiscal Crisis Of the State

by Dollars and Sense

From Common Dreams:

Fiscal Plan Fails both Markets and Taxpayers

by Joseph E. Stiglitz

Let's be clear: President Barack Obama inherited an economy in freefall and could not possibly have turned things around in the short time since his election. Unfortunately, what he is doing is not enough.

The real failings in the Obama recovery program lie not in the stimulus package -- though it is too heavily weighted toward tax cuts, and much of it merely offsets cutbacks by states -- but in its efforts to revive financial markets. America's failures provide important lessons to countries around the world that are or will be facing increasing problems with their banks:

* Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
* Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.

* Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored.
* Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
* Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about 67 cents in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting 25 cents, or less, for every dollar. Bad terms mean a large national debt in the future.
* Don't confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
* Trickle-down economics almost never works. Throwing money at the banks hasn't helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important. One of the reasons we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
* Lack of transparency got America's financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks' bad assets. But this will not establish ''market prices,'' as the administration claims. Banks' losses have already occurred, and their gains must now come at taxpayers' expense. Bringing in hedge funds as third parties will simply increase the cost.
* Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity.

There is no "mystique" in finance: The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians -- who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks -- will merely prolong the problem.

An impasse is looming. More money will be needed, but Americans are in no mood to provide it -- certainly not on the terms that we have seen The well of money may be running dry, and so, too, may be America's legendary optimism and hope.

Labels: fiscal policy, fiscal stimulus, Joseph Stiglitz

 

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3/24/2009 07:21:00 PM 0 comments

 

A Couple of Items on the Bank Bailout

by Dollars and Sense

Here are a couple of items on the bank bailout that I've been meaning to post. First is a post from back in late February (seems like years!) on Megan McArdle's blog at the Atlantic (whose spiffy redesign I admire, if not the politics of its columnists). It is a response to this post on Paul Krugman's blog at the New York Times, but it relates to Fred Moseley's cover article in the March/April issue of D&S. Here's McAdle's post in full:

Lost

Paul Krugman channels Adam Posen on Japan's lost decade, and what it means for us:

The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks' top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble's burst in 1992 through to 1998 ...

Why is the government so reluctant to hand losses to the bondholders? The standard explanation on both far left and far right is that Treasury and the Fed are in the pocket of the banking industry, and Geithner et. al. are simply bailing out their corporate masters. I don't entirely discount this theory, though I would (and did) put it more nicely: all the information the regulators has comes from the people they are trying to regulate. This naturally biases them towards the regulated. Every time I am tempted to get outraged about this, I think through the alternative: regulators who don't have much interaction with those they oversee. I'll take Tim Geithner over Maxine Waters any day of the week, and twice on Sunday.

And in this case, I don't think that's the whole, or even the greatest part, of the explanation. Rather, I think their problem is largely political: avoiding the "n" word, yes, but more importantly, avoiding any more crisis injections of capital into the system.

It's easy to blithely say "Why don't they just make the bondholders take a haircut?" Harder when you think about who those bondholders are: insurers. pension funds. the bond component of your 401(k). Financial debt makes up something like a third of the bond market, and the largest holders are pensions and insurers.

The insurers are the biggest problem, because they're just so heavily regulated. They're not allowed to hold risky assets. Convert their bonds to equity and they will be forced to dump that equity at prices that will trend towards zero. Many insurers will see their capital impaired below the regulatory limits, requiring a government bailout.

Pension funds are the next biggest problem. They're already in big trouble because of stock market declines. The bonds are the "safe" portion of their portfolio, the stuff that's supposed ot be akin to ready cash. Convert their bonds to equity--or worse, default--and suddenly they're illiquid and even further underwater.

Nor is the 401(k) problem small. Bond funds are typically held most heavily by the people closest to retirement; they're for income, not capital gains. What is your mother going to do when a third of her mutual fund income gets converted to equity that produces no cash and can't be sold because the insurers have all had to dump their shares on the market at once? Or simply disappears into the land of bankruptcy lawsuits?

There's also the problem of what it does to the ability of banks to raise capital. Bank bonds are sold on the implicit assumption that the taxpayer, not the lender, will eat capital deficiencies. Changing that understanding risks runs on the bank a la Lehman whenever a financial institution looks the least bit shaky. Banks are inherently highly leveraged institutions even in a good regulatory environment; this might make our banking system much more volatile in the future. It's somewhat akin to what would happen if we simply announced that the FDIC would stop tomorrow.

I think what Geithner et. al. fear is that nationalizing or reorganization will put the government on the hook for massive and immediate losses in both the banking system, and the "safe" entities that lent it money. I fear they may be right. But I think the lesson of Japan is that we have to do it anyway. I don't know what form the fix should take. I don't know how painful the fix will be. But I'm pretty sure any fix that makes us recognize the losses, recapitalize the banks, and move on, will be better than two decades of zombie banks and glacial growth.

I asked Fred Moseley (who, again, wrote our current cover article on bank nationalization) how he would respond to McArdle. Here's what he wrote back to me:

My main response to McArdle is this: if it is true that the only way to avoid an economic catastrophe is to bail out the banks and their bondholders with taxpayer money, then I would say that this strengthens the case for the nationalization of systematically significant banks. If taxpayers have to pay for their losses this time, then surely we want to make sure that we never have to pay again, that we are never put in this situation again. And the best way to ensure that it never happens again is to nationalize the systemically significant banks. Then we would never again be forced to decide between bailing out the bondholders or economic armageddon.

I was shocked to read: "Bank bonds are sold on the IMPLICIT ASSUMPTION that the taxpayer, not the lender, will eat capital deficiencies." Really? The bondholders make money on the assumption that taxpayers will eat the losses? What a racket!

In addition, as I argue in my article, there is a third alternative, nationalization with debt-equity swaps (for unsecured senior creditors). And this nationalization should be permanent, pace above, so we never have to face a similar crisis again.

On the difficulties of debt-equity swaps for insurance companies (the "biggest problem"): just declare that insurance companies will be allowed to own THESE equities, and ONLY these equities. The non-equity rule is intended to prohibit insurance companies from making risky investments. Well, it is too late for that; the cows are already out of the barn. The insurance companies have already made these risky investments. The only alternative to allowing the insurance companies to own these equities is for taxpayers to pay for their losses. Allowing the insurance companies to own these equities is clearly the only equitable option.

On pension funds: bank debt is less than 2% of the total assets of pension funds. So a modest loss on bank debt would not be that significant, especially since the values of all the other assets of pension funds are falling too. Plus, the managers of these pension funds made investment decisions for which they, not the taxpayers, should not bear the consequences. Maybe the management of these pension funds should be changed.

So in the end McArdle seems to want pseudo-nationalization, without bondholder haircuts and with large taxpayer losses. She wants to make explicit the "implicit assumption" that taxpayers eat the losses. The only way to avoid this is real nationalization, with haircuts for the bondholders.

When Fred says "the only way to avoid this is real nationalization," he's including under the rubric of "nationalization" the possibility that the gubm't could set up "good banks," and I'm assuming that in that scenario the "too big to fail" banks could be allowed to whither and die (i.e. enter into bankruptcy, and let the good assets be sorted from the bad in court). This is what Joseph Stiglitz seemed to be saying in his presidential address to the Eastern Economics Association meetings a few weeks ago (about which I blogged here; his article in the current issue of The Nation seems to be more of a proposal for pseudo-(i.e., temporary) nationalization, however). Something like a "whither and die" proposal also seems to be Dave Lindorff's position in a recent piece over at Counterpunch:

The futility and stupidity of the Fed's and the Obama administration's policy of pumping ever more money into failing banks and insurance companies in a vain effort to get them lending again was demonstrated—if anyone was paying attention—by the collapse in auto sales this past month, with all the leading companies, Ford, GM and Toyota, reporting sales down by about 40%.

This fall off in car buying was despite record discounting by the auto industry, and offers of 0% financing.

Clearly, obtaining financing is not the reason people are not buying cars.

People are not buying cars because they are worried about having a job to enable them to pay back the loan.

It's the same reason people aren't buying houses. It's not that you cannot get a mortgage. There are plenty of smaller banks that would be happy to lend money to buy a house these days. But who's going to go out and buy a house in this economy? First of all, to buy a house, unless you are a first-time buyer, you have to sell your current house, but that would mean taking a huge loss. Indeed, one in five homes in America today is technically "underwater"—that is, it is worth less than the outstanding mortgage on the property. Probably another one in five are worth little more than the outstanding mortgage. No one would sell a house under either such circumstance.

The point here is that if people aren't willing to spend money, then what good is it to give more money to banks and their shareholders, in hopes that they will start lending it? The lending business has two sides—those offering to make a loan, and those wanting to borrow. If there's no borrower, no amount of money available for lending is going to change the fact that there will be no loans written.

Read the rest of the article.

Labels: bank nationalization, credit crisis, Dave Lindorff, financial crisis, Fred Moseley, Joseph Stiglitz, Megan McArdle, nationalization, Paul Krugman

 

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3/10/2009 01:29:00 PM 0 comments

 

Nation Institute Panel on Crisis Tonight in NYC

by Dollars and Sense

Meltdown: The Economic Collapse and a People's Plan for Recovery
A Free Panel Discussion

Join Joseph Stiglitz, Barbara Ehrenreich, Bill Fletcher, Jr., Christopher Hayes and Jeff Madrick as they discuss the financial collapse. If you can't make the event, watch the live videostream or chime in on Twitter, where you can leave questions or comments.

March 6 at 8 p.m. at the New York Society for Ethical Culture. Doors open at 7.15 p.m. FREE OF CHARGE.

Labels: Barbara Ehrenreich, Bill Fletcher Jr., Christopher Hayes, financial crisis, Jeff Madrick, Joseph Stiglitz, The Nation

 

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3/06/2009 03:08:00 PM 0 comments

 

Report from Eastern Econ. Assoc. Meetings

by Dollars and Sense

I (D&S co-editor Chris Sturr) am in New York City for the annual meetings of the Eastern Economics Association, the sweet kid sister to the Allied Social Sciences Association (which would make the latter the bullying older brother, if we're going to go with the metaphor), from which I blogged a couple of times back in early January (here and here, and here's D&S collective member Arpita Banerjee's ASSA report).

It's hard to say what makes the EEA meetings so much nicer than the ASSA. Part of it is that they are much smaller (I don't have the numbers, but the program is much thinner, as are the crowds, and the book exhibit, where we spend most of our time, is about 1/10th the size), and maybe there is a critical mass of left or left-ish or at least not left-averse economists on the east coast. All in all, there is a more relaxed and less corporate feel to the EEA. Our comrades at the Union for Radical Political Economics (with whom we share an exhibit table) are sponsoring seven panels this year, which is a pretty high number for a relatively small conference.

Back at the ASSA, one of the plenary sessions that drew big crowds was (as I reported in my earlier post) the spectacle of Marty Feldstein rediscovering fiscal policy after years (a career?) of denying that it was necessary. Meanwhile, at the EEA this year, this year's Nobel Prize winner, Paul Krugman was a big draw, as was another leftish Nobel Prize winner, Joseph Stiglitz, who gave the presidential address (since he's the current president of the EEA).

I missed Krugman's talk, but I made it to see Stiglitz, and I'm really glad I did. (Stiglitz was introduced, by the way, by Steve Pressman, secretary of the EEA, who co-authored an article in our July/August 2007 issue on debt poverty in the United States--more evidence of the EEA's left-friendliness.)

Stigliz's topic was the current economic crisis ("What else is there to talk about?" he asked), and he set himself two questions: (1) "What shall we do about our failed banks?" and (2) "What role did the economics profession--or rather *some* members of the profession--play in the crisis?"

His assessment of the inadequacies of the responses to the crisis so far (including the stimulus, efforts to address the foreclosure crisis, and the bank bailout) was great, though his "Plan B" was a bit rushed and hard to follow. His critique of the mainstream economic views that contributed to the crisis was also a bit rushed, but gratifyingly scathing.

One big reservation I had about the talk was that he was nearly as timid on the issue of bank nationalization as he was in the interview he did with Amy Goodman (which we blogged about a couple of days ago).

I have pretty extensive notes from the talk, and there were some great bits (e.g., he quipped, a propos of the way the "experts" denied the crisis for so long, seeing recovery around the corner, until we had turned corner after corner: "The light that was at the end of the tunnel turned out to be a train coming right at us."). I would like to write up more on his talk, but in my hotel room on a Friday night in NYC with the nightlife beckoning, this post is starting to feel like a grotesque combination of a diary entry and a term paper, so I will aim to say more tomorrow with more EEA updates.

Labels: ASSA, bailout, EEA, financial crisis, Joseph Stiglitz, Martin Feldstein

 

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2/27/2009 09:07:00 PM 0 comments

 

Stiglitz Criticizes O.'s Speech, Favors Single-Payer

by Dollars and Sense

This seems pretty explosive to me: Nobel-Prize-winning economist Joseph Stiglitz came put in favor of a single-payer universal health program as "the only alternative" in an interview with Amy Goodman on Democracy Now!. Hat-tip to Dr. Christine Adams of Health Care for All Texas. Very interesting also that he also criticizes Obama as having "confused saving the banks with saving the bankers." (Amy Goodman's phrase, but Stiglitz responded: "Exactly.")

There's also a discussion of nationalization, and from what I can tell Stiglitz calls for a Swedish-style "nationalization," which is really just temporary receivership (or what Krugman usefully calls "preprivatization"—though this is what Krugman favors too). This puts him barely to the left (on this issue at least) of Alan Greenspan, who as we've reported here, has said that "nationalization" will probably be necessary. Wish Amy had asked him about full, permanent nationalization... Click here for Fred Moseley's argument for it in the March/April issue of D&S. We'll have an article about single-payer in that issue too.

Here is the beginning of the DN! transcript:

AMY GOODMAN: Your first assessment of the speech last night?

JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say—give confidence about where we're going, and yet the reality of our economy—country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we're doing the short run, here are three very fundamental long-run problems that we have to deal.

The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn't give a clear view of what he was going to do.

AMY GOODMAN: Let's go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation's banks would be needed, but didn't directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America.

PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy.

Now, I understand that on any given day Wall Street may be more comforted by an approach that gives bank bailouts with no strings attached and that holds nobody accountable for their reckless decisions. But such an approach won't solve the problem. And our goal is to quicken the day when we restart lending to the American people and American business and end this crisis once and for all. And I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer.

AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable?

JOSEPH STIGLITZ: Well, so far, it hasn't happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed—provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn't looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other—the bankers' retirement fund, we would have easily been able to generate the lending that he says we need.

So the question isn't just whether we hold them accountable; the question is: what do we get in return for the money that we're giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don't do things right—and we haven't been doing them right—the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you're spending money well in the bank recapitalization, it's important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we've been spending the money on the bank recovery, has not been giving bang for the buck. We haven't gotten anything out.

What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don't know is that—whether we will continue to get cheated. And that's really at the core of much of what we're talking about. Are we going to continue to get cheated?

Now, why that's so important is, one way of thinking about this—end of the speech, he starts talking about a need of reforms in Social Security, put it—you know, there's a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the—put on sound financial basis our Social Security system. We wouldn't have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That's less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it's that kind of tradeoff that seems to me that we ought to begin to talk about.

AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers.

JOSEPH STIGLITZ: Exactly.

AMY GOODMAN: Should they all have been fired?

JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it's not just the level of pay; it's the form of the pay. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it's a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave.

Read or listen to the rest of the interview.

Labels: Amy Goodman, bailout, bank nationalization, Barack Obama, financial crisis, Joseph Stiglitz, Paul Krugman, single-payer

 

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2/26/2009 01:13:00 PM 0 comments

 

Two Nobel Laureates on the Crisis

by Dollars and Sense

First, 2001 winner and regular Guardian correspondent Joseph Stiiglitz. Note especially the difference between the way the sainted Buffet and the US taxpayer are being treated....

Paulson tries again

Unlike the UK plan, the revamped American bail-out puts banks first and taxpayers second

Joseph Stiglitz
The Guardian

Gordon Brown has won plaudits over recent days for inspiring the turnaround in Hank Paulson's thinking that saw him progress from his "cash for trash" plan - derided by almost every economist, and many respected financiers - to a capital injection approach. The international pressure brought to bear on America may indeed have contributed to Paulson's volte-face. But Paulson figured he could reshape the UK approach in a way that was even better for America's banks than his original cash strategy. The fact that US taxpayers might get trashed in the process is simply part of the collateral damage that has been a hallmark of the Bush administration.

Will this bail-out be enough? We don't know. The banks have engaged in such non-transparency that not even they really know the shape they are in. Every day there are more foreclosures - Paulson's plan did little about that. That means new holes in the balance sheets are being opened up as old holes get filled. There is a consensus that our economic downturn will get worse, much worse; and in every economic downturn, bankruptcies go up. So even if the banks had exercised prudent lending - and we know that many didn't - they would be faced with more losses.

Britain showed at least that it still believed in some sort of system of accountability: heads of banks resigned. Nothing like this in the US. Britain understood that it made no sense to pour money into banks and have them pour out money to shareholders. The US only restricted the banks from increasing their dividends. The Treasury has sought to create a picture for the public of toughness, yet behind the scenes it is busy reassuring the banks not to worry, that it's all part of a show to keep voters and Congress placated. What is clear is that we will not have voting shares. Wall Street will have our money, but we will not have a full say in what should be done with it. A glance at the banks' recent track record of managing risk gives taxpayers every reason to be concerned.

For all the show of toughness, the details suggest the US taxpayer got a raw deal. There is no comparison with the terms that Warren Buffett secured when he provided capital to Goldman Sachs. Buffett got a warrant - the right to buy in the future at a price that was even below the depressed price at the time. Paulson got for the US a warrant to buy in the future - at whatever the prevailing price at the time. The whole point of the warrant is so we participate in some of the upside, as the economy recovers from the crisis, and as the financial system starts to work.

The Paulson plan responded to Congress's demand to have something like a warrant, but as a matter of form, not substance. Buffett got warrants equal to 100% of the value of what he put in. America's taxpayers got just 15%. Moreover, as George Soros has pointed out, in a few years time, when the economy is recovered, the banks shouldn't need to turn to the government for capital. The government should have issued convertible shares that gave the right to the government to automatically share in the gain in share price.

Whether we were cheated or not, the banks now have our money. The next Congress will have two major tasks ahead. The first is to make sure that if the taxpayer loses on the deal, financial markets pay. The second is designing new regulations and a new regulatory system. Many in Wall Street have said that this should be postponed to a later date. We have a leaky boat, some argue, we need to fix that first. True, but we also know that there are really problems in the steering mechanism (and the captains who steer it) - if we don't fix those, we will crash on some other rocks before getting into port. Why should anyone have confidence in a banking system which has failed so badly, when nothing is being done to affect incentives? Many of those who urge postponing dealing with the reform of regulations really hope that, once the crisis is passed, business will return to usual, and nothing will be done. That's what happened after the last global financial crisis.

There is a hope: the last financial crisis happened in distant regions of the world. Then it was the taxpayers in Thailand, Korea and Indonesia who had to pick up the tab for the financial markets' bad lending; this time it is taxpayers in the US and Europe. They are angry, and well they should be. Hopefully, our democracies are strong enough to overcome the power of money and special interests, and we will prove able to build the new regulatory system that the world needs if we are to have a prosperous and stable global economy in the 21st century.

Joseph E Stiglitz is university professor at Columbia University and recipient of the Nobel memorial prize in economic science in 2001. He was chief economist at the World Bank at the time of the last global financial crisis.

Now, also from The Guardian, Kenneth Arrow, the 1972 winner. He's talking about himself in the first part, and of Stiglitz in the second, and touches onthe theoretical issues that were, ahem, exaggerated and manipulated in the creation of the bubbles we've come to know and love...

Risky business

The root of this financial crisis is the tension between wanting to spread risk and not understanding its consequences

Kenneth Arrow
The Guardian

The current financial crisis, the loss of asset values, the refusal to extend normally-given credit and the great increase in defaults on obligations ranging from individual mortgages to the debts of great investment banks presents, of course, a pressing challenge to the fiscal authorities and central banks to take measures to minimise the consequences. But they also present a challenge to standard economic theory, a challenge all the more important since the development of policies to prevent future financial crises will depend on a deeper understanding of the processes at work.

That economic decisions are made without certain knowledge of the consequences is pretty self-evident. But, although many economists were aware of this elementary fact, there was no systematic analysis of economic uncertainty until about 1950. There have been two developments in the economic theory of uncertainty in the last 60 years, which have had opposite implications for the radical changes in the financial system. One has made explicit and understandable a long tradition that spreading risks among many bearers improves the functioning of the economy. The second is that there are large differences of information among market participants and that these differences are not well handled by market forces. The first point of view tends to argue for the expansion of markets, the second for recognising that they may fail to exist and, if they do come into being, may fail to work for the benefit of the general economic situation.

The value of spreading risks has, of course, been recognized as the basis of conventional insurance as well as the issue of company shares that spread corporate risks widely. The central element of standard economic analysis since the 1870s has been the concept of general economic equilibrium, which, under competitive conditions, leads to an optimal allocation of resources. In the 1950s, it was shown how to incorporate uncertainty into general equilibrium, which suggests, at least, that increasing the number and coverage of risk-bearing instruments would improve the running of the economy. Not only would risks be more efficiently borne, but, more importantly, additional socially valuable risky enterprises would be undertaken. Research showed how derivative securities should be priced, how individuals should choose portfolios to minimise their variability, and how individual contracts, such as mortgages, could be bundled so as to distribute the risks for different parts of the market with different risk tolerances.

The second strand of analysis was a growing recognition of the importance of information in governing reactions to uncertainties. If individuals in the market have different degrees of information, the ability to create securities or engage in other forms of contracts becomes limited; the less informed understand that the more informed will take advantage and react accordingly. This situation was long recognized by insurance companies under such terms as, "moral hazard" (when the insurer cannot tell how well the insured is avoiding risks) and "adverse selection" (when the insurer cannot distinguish among differentially risky insured, so that, at any given premium, the more risky insure themselves most extensively). Economists began to realise that "asymmetric" information was the key to understanding the limits of health insurance and the incentive problems of socialism and then that these concepts found their most important application in financial markets, precisely in the complex securities that the first strand of analysis had called for.

There is obviously much more to the full understanding of the current financial crisis, but the root is this conflict between the genuine social value of increased variety and spread of risk-bearing securities and the limits imposed by the growing difficulty of understanding the underlying risks imposed by growing complexity.

Labels: financial crisis, Henry Paulson, Joseph Stiglitz, Kenneth Arrow, Warren Buffet

 

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10/16/2008 04:25:00 PM 0 comments

 

Real World Nobelist

by Dollars and Sense

Looks like the Nobel committee in Stockholm is doing another "Amartya Sen" (Sen, a noted Indian maverick, dismissed by some economists as, well, not even an economist, received the Nobel in the wake of the Asian financial crisis), or even another Stiglitz. And though Krugman is being awarded the prize for work in "New Trade Theory," which he did more than twenty years ago, you can be sure that the committee didn't want to look silly in light of the crisis: a major and welcome reversal of their usual academic superiority-complex.

From Tim Harford, the "Undercover Economist" at the Financial Times

October 13, 2008
Nobel memorial prize in economics goes to Paul Krugman

The Nobel memorial prize in economics has been awarded to Paul Krugman, a professor at Princeton University and a prominent columnist for the New York Times. Mr Krugman is one of the great popularisers of economic ideas and a trenchant critic of the Bush administration, but his prize was awarded for work done almost three decades ago in developing what is known as "new trade theory" and "new economic geography".

Earlier trade theories suggested that a country would trade with trading partners that were very different--rich would trade with poor, and capital-intensive would trade with labour-intensive. In practice, rich countries tend to trade with other rich countries. Mr Krugman's analysis showed why this was to be expected: many products were most efficiently produced by very large companies, but consumers wanted variety and would thus buy products from foreign giants as well as the dominant domestic corporations. Mr Krugman's ideas on the importance of economies of scale could be traced all the way back to Adam Smith, but the new ingredient was a usable mathematical description of what was going on.

Economic geography uses much the same mathematics to explain the location of jobs and businesses. Mr Krugman showed that the forces of globalisation, far from creating a "flat world", could enhance the power of global cities such as New York and London, because those cities could increasingly do business with a global market.

Mr Krugman has long been seen as a future Nobel laureate. He won the John Bates Clark medal for young economists in 1991, an award which is often a precursor to a Nobel. Yet if the choice is not surprising, the timing--just before the US Presidential election--might be. Mr Krugman is an influential and partisan political commentator. His columns, first in Slate and then the New York Times, were at first clever refutations of popular misconceptions about trade protection or the "new economy", but they have become far more notable for their stinging attacks on the Bush administration. He has recently criticised Hank Paulson, the US treasury secretary, for mishandling the credit crisis, while praising the British government for being "willing to think clearly about the financial crisis, and act quickly on its conclusions." He also warned of the US housing bubble in the summer of 2005.

This is, however, not the first time that the Nobel prize committee has recognised an economist with a public profile and an appetite for political debate. Joseph Stiglitz shared the prize in 2001, after a combative stint as chief economist of the World Bank; Milton Friedman was an early laureate in 1976.

Among professional economists, Mr Krugman is admired for his work on currency crises as well as the work on trade that won the prize. A Princeton colleague, Avinash Dixit, once described Krugman's methods: "He spots an important economic issues coming down the pike months or years before anyone else. Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman's model is waiting for other economists to catch up."

Mr Krugman's trade model showed that there were circumstances in which trade protection could be in a nation's economic interest. This idea was joyfully embraced by protectionists, and Mr Krugman spent much of the 1990s vigorously defending free trade and arguing that trade protection in practice was almost always harmful. The experience may have fuelled his enthusiasm for economic popularisation, although even his early writing betrayed a wit and clarity not common amongst economists: he wrote, in 1978, "A theory of interstellar trade", commenting that it was "a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics."

The economics prize was not one of the original Nobel prizes. It was established in 1968 by the Swedish central bank and is officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The prize money is 10 million Swedish Kronor (810,000 pounds; $1.4m; euro 1m)

Labels: Amartya Sen, Joseph Stiglitz, New Trade Theory, Nobel Prize in economics, Paul Krugman, Tim Harford

 

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10/13/2008 09:14:00 AM 0 comments

 

Washington's Double Standard

by Dollars and Sense

An editorial by Eduardo Porter in yesterday's New York Times points out the double standard in the U.S. government's response to the current financial crisis, vs. the remedies it has supported for the rest of the world: "Could this be the same United States that backed the International Monetary Fund’s get-tough strategy during the emerging-market crises in the 1990s—pushing countries from Asia to Latin America to slash government spending and raise interest rates to recover investors’ confidence and regain access to lending from abroad?" The IMF advocated—and indeed coerced—high interest rates and reductions in government spending. But the solution in the United States is lower interest rates and expensive stimulus spending. Porter cites Joseph Stiglitz (who was chief economist at the World Bank at the time that "structural adjustment" was forced on Asia and Latin America) as one economist who sees a double standard here. He cites Larry Summers, who was Treasury Secretary at the time of the 1990s financial crises, as one who denies a double standard.

We agree with Stiglitz and Porter. As D&S collective member and blogger Larry Peterson noted in an earlier posting:

In a shocking display of bad taste at best, and ignorance at worst, a Lehman Brothers economist referred to last week's Fed action as "shock therapy." Most of the readers of this blog will need no reminding that the same phrase was used to describe the structural adjustment programs that caused "lost decades" for much of the poor and developing world. The only difference, of course, is that "shock therapy" for them meant jacking up interest rates to stratospheric levels—and subsequent capital outflows which enriched many Western investors, while for us, it has meant a dramatic drop in interest rates.

The source of this comment from the Lehman Bros. economist? The New York Times, of course.

Labels: economic stimulus, IMF, interest rates, Joseph Stiglitz, Laurence Summers, shock therapy, structural adjustment

 

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2/24/2008 11:35:00 PM 2 comments

 

The Three Trillion Dollar War

by Dollars and Sense

Joseph Stiglitz and Linda Bilmes have updated their estimate of the costs to the United States (direct and indirect) of the wars in Afghanistan and Iraq, in an article in yesterday's Times of London. We reported on an early version of their original findings in our Economy in Numbers column in the July/August 2006 issue of D&S.

Stiglitz and Bilmes's research on this topic have estimated the costs of the wars in three categories: (1) direct costs to the U.S. government (including Department of Defense spending, spending by the Veterans Administration, demobilization costs, and interest on debt incurred because of the wars); (2) economic costs that are not borne by the government (e.g. the lost economic contributions of reservists while they are deployed, or after they are dead or injured); and (3) larger macroeconomic costs to the U.S. economy as a whole (e.g. those resulting from increases in the price of oil, plausibly due to instability in the Middle East resulting from the war).

According to the initial conclusions of their research (released in February of 2006; they didn't publish the study until later that year), the first two categories of costs (direct and indirect--not including the larger macroeconomic costs), could be conservatively estimated at between $937 billion and $1.5 trillion. They estimated the macroeconomic costs to the United States as "are potentially very large; possibly even a multiple of the direct costs," that is, possibly several trillion dollars beyond the costs to the government.

The article in yesterday's London Times estimates the total costs more definitively at $3 trillion:

From the unhealthy brew of emergency funding, multiple sets of books, and chronic underestimates of the resources required to prosecute the war, we have attempted to identify how much we have been spending - and how much we will, in the end, likely have to spend. The figure we arrive at is more than $3 trillion. Our calculations are based on conservative assumptions. They are conceptually simple, even if occasionally technically complicated. A $3 trillion figure for the total cost strikes us as judicious, and probably errs on the low side. Needless to say, this number represents the cost only to the United States. It does not reflect the enormous cost to the rest of the world, or to Iraq.

The article goes on to estimate the costs to the UK:

[T]he budgetary cost to the UK of the wars in Iraq and Afghanistan through 2010 will total more than £18 billion. If we include the social costs, the total impact on the UK will exceed £20 billion.

(The added social costs to the UK are proportionately lower than those in the United States because the UK is a net exporter of oil.)

Stiglitz and Bilmes estimate that the current Iraq war will cost ten times the first Gulf war, and one-third more than the Vietnam War.

The Bush administration's cost estimates in advance of the war were of course drastically lower than the actual costs. Donald Rumsfeld estimated the costs at $50 to $60 billion, and was outraged when Bush's economic advisor Larry Lindsey said it would cost $200 billion. According to Stiglitz and Bilmes, Lindey downplayed his higher estimate by saying that "The successful prosecution of the war would be good for the economy."

And shouldn't defense spending stimulate the economy? Shouldn't we expect, on Keynesian grounds, that all the money the government is lavishing on the war would stimulate the economy? Yet we are sinking into recession. In the upcoming (March/April) issue of D&S, Arthur MacEwan will answer this question in our "Ask Dr. Dollar" column.

Labels: Afghanistan, Iraq, Joseph Stiglitz, Linda Bilmes, war

 

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2/24/2008 09:25:00 PM 0 comments