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Nobel Prize-winning economist Joseph Stiglitz calls for second federal stimulus

Joseph Stiglitz Columbia University professor Nobel Prize winner in economics

Nobel Prize-winning economist Joseph Stiglitz called for a second round of federal stimulus spending in a New York speech to the Society of American Business Editors and Writers.

NEW YORK — Nobel Prize-winning economist Joseph Stiglitz called for another round of federal stimulus dollars to spur the economy. He spoke Sept. 30 to the Society of American Business Editors and Writers (SABEW) at its Fall Workshop.

“We will see in the next two years the real cost of there not being a second round of stimulus,” he said. “We will see the economy slow down at a very high economic cost.”

The Columbia University professor also said that the “new normal” as far as the unemployment rate is concerned may not be the 4 to 5 percent that existed before the financial crisis in 2008, but more like 7 to 8 percent.

Unemployment is about 9.5 to 9.6 percent officially, he said, but many people who are working part-time involuntarily or who have stopped looking but want work are not counted in the official rate.

Congress passed the first stimulus on Feb. 11, 2009, approving a $787 billion bill, the American Recovery and Reinvestment Act.

He said one reason that stimulus has not had more effect is that state and local governments have cut spending, undoing about one-half of the impact of the money that the feds have injected.

He said the stimulus also could have had more effect if more money had been put into making up for the shortfalls of state budgets, stopping layoffs; if less had been put into tax cuts that wary consumers just ended up saving; and if safeguards to prevent waste had not slowed the money from being spent.

Still, he said, “The stimulus absolutely worked.” Without it, unemployment could have peaked at more than 12 percent.

He said that one-fourth of Americans have negative equity in their homes, meaning that they can’t draw on their homes as a piggybank to borrow and live beyond their means. In fact, they are going to have to live below their means to pay off debt accumulated during better times.

“We likely face a marked reduction in standard of living,” he said.

About the Author

Linda Austin is the executive director of the Donald W. Reynolds National Center for Business Journalism. A former business editor at The Philadelphia Inquirer, she spent a decade as a top newsroom leader, serving as the editor of the Lexington Herald-Leader in Kentucky; executive editor of The News-Sentinel in Fort Wayne, Ind.; and managing editor of the News & Record in Greensboro, N.C. She offers business-story ideas and notes good #bizreads @LindaAustin_

Comments (8)

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  1. Frank Warner says:

    I recall that Stiglitz was one of the economists who reported in 2002 that the risk of Fannie Mae and Freddie Mac defaulting at the public’s expense was zero. This was just as Fannie and Freddie were taking on $1 trillion in recklessly risky home loans, guided by hopelessly corrupt political hacks.

    If Stiglitz has an opinion on a new “stimulus,” I’d seek a second opinion.

  2. Paul Ryan says:

    >I recall that Stiglitz was one of the economists who reported in 2002 that the risk of Fannie Mae and Freddie Mac defaulting at the public’s expense was zero.

    Can you post a link?

  3. Tom Betz says:

    Frank Warner is probably talking about this paper:

    http://www.pierrelemieux.org/stiglitzrisk.pdf

    He misremembers, probably intentionally.

    Salient excerpt:

    “Fannie Mae and Freddie Mac would likely require government assistance only in a severe housing market downturn. Such a severe housing
    downturn would, in turn, likely occur only in the presence of a substantial economic shock.”

    Stiglitz was correct in his assessment. What we have suffered, and what Stiglitz did not predict, was the sort of severe economic shock caused by rampant speculation and fraud in the commercial mortgage markets sufficient to cause a problem at Fannie and Freddie. F&F were the victims, not the cause, of that economic shock.

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