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Joseph Stiglitz on the Great Recession

2011-12-15

The great economist Joseph Stiglitz has written an article that addresses the root causes of both the recent recession and the Great Depression, and his insights are remarkable.  He advocates government investment on a large scale in education, research, and even health care.  His conclusions are that the banking system has failed to respond to the bailout with renewed lending, and this has added to our problems.  He says that the recent recession has been caused, in part, by increased productivity and reduced manufacturing in this country.  As a result, the number of jobs in manufacturing has fallen dramatically, and wages in these jobs have fallen as well.

Consumer spending prior to the recent recession was sustained by increases in housing prices.  Most people were actually spending well beyond their means because their house prices kept going up, allowing them to borrow more on their house values.  When housing prices started to drop, the bubble was burst and the banking system was caught in the turmoil.  Banking was vulnerable because the bankers were involved in speculation as well as normal lending.   Government rescued the banking system, but bankers have not returned to their normal business: lending.  Neither has the banking industry effectively dealt with  the huge number of bad mortgages still outstanding.

Stiglitz advocates strong government programs to support changes in the types of jobs available to workers.   He proposes new support of education, research, and health care.  Education is an important service that clearly will help to teach skills that will prepare us for the new jobs.  Research is an equally important service because it will discover new methods and capabilities that will create new jobs.  Health care is another labor intensive service that needs government support and reform.

We will not be able to grow out of this recession unless we recognize that the old types of jobs have disappeared.  We must create and support new types of jobs, in the service sector rather than in manufacturing.  Government must take the risk and spend money on creating and supporting the new types of jobs: in education, research, health care, and other services, even infrastructure.

Economists agree that, in order to deal with recession, it is necessary for government to engage in deficit spending, and on a large scale.  The time for government to balance its budget and even run a surplus is when the economy is running hot and producing surpluses of money and jobs.  Now is the time for government to take a (small) risk and spend more than it is taking in.

At the same time, it is important for government to seek revenues to pay for its programs from people and companies that have sufficient resources to spare.  It is only fair that those who are still doing well should pitch in to help the government support programs that will improve the economy.  The current upside down tax system that punishes the middle class must be reformed.

Read the Stiglitz article at: http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201

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