Monday, January 12, 2009

Stiglitz on the crisis

Joseph Stiglitz is one of my favourite economists out there. I find his analyses on most pressing issues much inline with my thinking.

In this essay, written in Vanity Fair Magazine, he talks about the coming V-shaped recession and he chops down the puritanical neoliberal doctrine that calls for little, to no, government regulation in the economy. But it's not like neoliberal economists don't believe in government intervention when market failures strike. They do argue for macroeconomic policy responses to mitigate the negative effects of macro shocks to the economy. So what's the problem?

Stiglitz argues that the mainstream thinking on market failures is incomplete because it applies a theoretically static paradigm (macro exogenous shocks = big fiscal & monetary readjustements) to a very dynamic and complicated problem.

Here's what he has to say regarding the current failures we are witnessing in financial, housing and manufacturing sectors:
Isn’t it more reasonable to assume that these failures are just the tip of the iceberg? That beneath the surface lie a myriad of smaller but harder-to-assess inefficiencies? Let me venture an analogy from biology: A patient arrives at a hospital in serious condition. Now, it may be that the patient has simply fallen victim to one of those debilitating ailments that go around from time to time and can be cured by a massive dose of antibiotics. In this case we have a macro problem with a macro solution. But it could instead be that the patient is suffering from a decade of serious abuse—smoking, drinking, overeating, lack of exercise, a fondness for crystal meth—and that it has not only taken a catastrophic toll but also left him open to opportunistic infections of every kind. In other words, a buildup of micro problems has led to a macro problem, and no cure is possible without addressing the underlying issues. The American economy today is a patient of the second kind.

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