Where’d Stiglitz buy his Nobel Prize?
Joseph Stiglitz says the Iraq war is a central cause of the sub-prime mortgage crisis. From which we can conclude that the Iraq war is not a central cause of the sub-prime mortgage crisis.
The press never tires of describing Stiglitz as a Nobel Prize winner. This is true. He shared a prize in economics in 2001 with George Akerlof and Michael Spence, for work on the asymmetric availability of information in markets. One application, on which Stiglitz in particular focused, involved credit markets, in which lenders know less about the likely repayment of a loan than borrowers.
So one would think he knows something about the credit crunch. And perhaps he does. But if so, he’s not telling. He’s got a war to fight, and a book to flog to the economically illiterate antiwar left. The former economic adviser to US president Bill Clinton teamed up with Linda Bilmes, another Clinton-era economist (not that I’d for a moment suggest partisan bias, you understand), to publish The Three Trillion Dollar War.
Stiglitz’s explanation for the credit crunch? When in doubt, blame Bush. According to him, the Iraq war is a primary cause:
The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.
“The regulators were looking the other way and money was being lent to anybody this side of a life-support system,” he said.
That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.
He’s partly right: inflationary monetary policy was a central cause of the housing bubble. Low interest rates made money cheaper, which not only boosted investment in fixed assets such as houses, but also led to great offers on home loans at rates that could never last, squeezing those who bought houses they couldn’t really afford.
He’s also right to note that expanding the money supply by keeping interest rates low is a favourite technique of governments to “inflate away” debt. In essence, monetary inflation debases a currency, imposing an invisible tax on income earners that has the effect of reducing public debt: your dollar becomes worth less, and you can buy less with it, but the government’s dollar-denominated debt is also worth less as a result.
But here’s the rub: the US debt has not been inflated away. It may be lower as a percentage of GDP than it was during the height of the Clinton years, but despite the economic growth of the Bush years, it isn’t exactly heading down.
That’s not Stiglitz’s biggest error, however. He attributes this inflation in money supply to the Iraq war. So I got some data from the Federal Reserve, and drew a chart of the monthly federal funds rate since 2000, with the Iraq war period highlighted.
You’ll notice that for most of the duration of the war, the fed rate has risen sharply. It hasn’t been kept low, or been lowered, as Stiglitz’s theory would have it. The cause of the credit crunch predates the Iraq war, and contrary to Stiglitz’s claim, the fed’s policy during the war was to make credit more expensive.
I cannot imagine that a Nobel Prize-winning economist didn’t spot this, so I can only conclude that Stiglitz is simply lying when he attributes the Federal Reserve’s low interest rates to the Iraq war. Must be something he learnt from Bill Clinton.
A year ago, when presenting his paper, “The True Costs of the Iraq War,” he estimated that the war would cost between $1 trillion and $2 trillion, depending on how much longer troops stay.
Just a year later, he says the war will cost $3 trillion, and that’s a conservative estimate. Then his margin of error, at a conservative estimate, is between 100% and 200%. This seems rather higher than an economist should be comfortable with. Granted, such an estimate does indeed depend on how long the troops stay. Just like the price of an acid trip depends on how much acid you take.
Another way he arrives at this staggering figure is that Stiglitz uses a terrifically broad definition of war costs, including, for example, welfare costs for veterans. This leads to rather interesting conclusions.
One of the greatest discrepancies is that the official figures do not include the long-term healthcare and social benefits for injured servicemen, who are surviving previously fatal attacks because of improved body armour.
So let me get this straight: It’s a bad thing when soldiers don’t die, because then you have to keep paying them? Nice sentiments, Mr Stiglitz. At least we know now why you didn’t win the Peace Prize.
It’s a bad thing when soldiers don’t die, because then you have to keep paying them?
You’re taking cheap shots and you’re contributing nothing to the discussion when you completely twist his words like this.
You’re being the vindictive journalist that people hate.
It’s clear that your suggested translation of his words is not what he meant, in any reasonable person’s view point.
What the article said was that due to improved body armour, the ratio of injured to killed servicemen is now 15:1, whereas ordinarily it is of the order of 2:1.
A lot more servicemen are being saved by the body armour. They also now have a lot more injured servicemen that need care, which drives up the cost of the Iraqi War.
These are the facts and not anything else. Your rather bitter commentary probably offends a great deal of people, especially those who have suffered the loss of friends and family in the war.
I agree that casting the Iraq war as the chief cause seems rather tenuous (the ailing fundamentals were already in place as you suggest), but I do feel that the timing of the war exacerbated the problem.
At a time when debt to GDP ratios were climbing and people were already pointing to the housing market and shouting “bubble!”, the fed did not act to constrict the money supply and so continued to provide unfettered access to the extraordinary liquidity that markets were feasting on.
Had they acted sooner, the inflationary threat which Bernanke and co now face would be less significant which in turn would provide stronger justification for their recent rate slashing.
Quite apart from the war, the other parallel (and more significant) reason for the imprudence of the past five years were the first suggestions of “decoupling” from the dollar and the influence of the Sino-Indian economic juggernaut.
@ Michael: I’m disputing that the cost of the Iraq war had anything at all to do with the mortgage crisis which is depressing the economy, and arguing that inflationary monetary policy is as old as the Fed itself. Iraq affected the budget deficit, sure, but that’s an entirely different argument, which only becomes scary when you pluck terrifying numbers out of thin air.
@ Richard Catty: You’re quite right, it was a cheap shot, but it was hardly the core of my argument. And I fail to see how anyone other than Stiglitz would be offended by my celebrating the fact that fewer soldier die than in the past, instead of bemoaning the cost of their care. Claiming that survivors of military casualties would be offended is not only baseless, but constitutes a cheap shot on your part.
And yes, while we’re trading cheap shots, I appear to have accidentally written your name wrong. But you appear to be gravely offended already, so no harm done.
I’m not sure that the arguments are separate at all. I think that the fed was pressurised into painting a rosy picture of the economy during wartime, which they did by keeping rates artificially low for far longer than they should have, hoping to offset the cost of war against increased investment and consumer spending. Had they not done this, they would have been able to act to cool off the housing market before it boiled over and did real damage.
On face value I agree with your sentiments; Iraq cannot be blamed for the subprime crisis. I do think though that the advent of war at that particular point in the business cycle served to fatally divert attention from fundamental issues which papers like The Economist were rabbiting on about as early as 2002. Some, but not all, of this could have been avoided.
As you say, the issue was obvious long before the war, but Greenspan reacted far too late. Bernanke has been even worse — he looks to be in a flat-out panic.
I don’t buy that the Fed was distracted by the war, though. That might have been true for the White House, but the Fed is independent, and has little to do with spending by Congress. Conversely, neither Congress nor the White House had much to do with interest rates and credit extension.