Joseph Stiglitz, the Nobel laureate and author of several books including his latest "The Price of Inequality," argues that an economic catastrophe in the U.S. can be averted but lawmakers must be willing to open the government's purse strings and make the necessary investments in America's future. The liberal Columbia University professor has been critical of the Obama administration's approach to the economic downturn and was one of the first economists to speak out against the $787 billion stimulus bill as too small.
Stiglitz's views on the nation's fiscal position are not unique; many economists have made similar contentions over the past year. But a deeply divided Congress and a highly competitive presidential race have tied President Obama's hands on garnering support for new economic policies intended to jolt the weak economy. In an interview with The Daily Ticker, Stiglitz said cutting federal funding to lower the nation's $15.7 trillion debt would lead to higher unemployment and would have an adverse effect on reducing the nation's deficit. A Congressional Budget Office report released this week found that the size of U.S. debt could double the size of the U.S. economy in 25 years if policymakers extend current tax rates and do not slash Medicare and Social Security spending. Stiglitz responded to the CBO projections as an "extrapolation based on if things don't change" and noted that fixing just one part of the current system — health care for example — would return the nation to "sound footing" without the need for spending cuts and tax increases.
"There are studies that if we had a health care system that was as sufficient as Europe's health care systems we'd have no deficit," he said.
Lawmakers may be grappling with the looming "fiscal cliff" — i.e. the expiration of the Bush era tax cuts, $1.2 trillion in automatic cuts agreed upon last August and the likelihood that the U.S. will hit its debt ceiling again — but Washington's attention should be focused on getting Americans back to work, Stiglitz said.
"What is the number one problem right now? Unemployment. And inequality. The reason we have a large deficit is largely because of the unemployment. If we put America back to work our deficit will come down enormously. Austerity today would increase unemployment and not solve our deficit problem," he said.
The government reported that the economy added a meager 69,000 jobs in May and the unemployment rate ticked up tenth of a percent to 8.2 from 8.1 percent. Stiglitz's plan to grow the economy -- investing in education, infrastructure (which he says will make the public sector more profitable) and innovation -- may not be palatable to a Congress that wants to slash spending but it's the best prescription for sick economy, Stiglitz maintained.
"The government can borrow at a zero interest rate and 1.5 percent rate long term," he said. "This is the time we should be investing in our future. If you do what I just described, the long-term debt to GDP ratio will go down, not up."