It has become commonplace for politicians now to say that
history changed its course on September 11, 2001 with the collapse
of the Twin Towers in New York. Meanwhile, economists do not find
anything symbolic about the date of March 11, 2000, although it was
on that day that the S&P500 reached its record high and then
began its continuous decline. From the point of view of the
politicians, we all are living in a world that differs dramatically
from the world of the 1990s.
Economists argue that the present realities were brought about
by the economic revolution of the 1990s. This is why the latest
book by Joseph Stiglitz, subtitled A New History of the World’s
Most Prosperous Decade, may be perceived as reminiscences of the
present.
This work was published less than one year after the author’s
previous book hit the bookstands (Stiglitz, J.E. Globalization and
Its Discontents. New York, London: W.W. Norton & Co., 2002). In
it, Stiglitz, who was senior vice president of the World Bank from
1997 to 2000, analyzed the impact which the crises in emerging
markets had had on the course of globalization. Now the author (who
served as Chairman of President Bill Clinton’s Council of Economic
Advisers from 1993 to 1997) has made an attempt to analyze the
processes that have led the New Economy to a crisis. This crisis
has brought about numerous problems, which continue to threaten
economic stability in the United States.
Joseph Stiglitz is known for his deep insight into economic
problems and for his categorical statements about those who he
thinks created those problems. This approach made his previous book
one of the most scandalous publications of the year. In his latest
work, Stiglitz attacks prominent figures of the Clinton era – and
not only because of his methodological differences with them. Upon
reading The Roaring Nineties, the reader will most certainly find
that those years were not only the most prosperous but also the
most deceptive. Indeed, the author is confident that the objectives
set by the Clinton administration were the right ones, but so many
mistakes were made on the way to implement them that it brings to
mind the famous saying about where a road paved with good
intentions leads. “I believe that had we had our goals – and how
they might best be achieved in today’s economy – better in focus,
we might have been able to avoid some of the excesses of the 1990s,
and we would have been better able to manage the problems that
followed,” Stiglitz writes (p. 281).
The economic history of the 1990s is represented by the author
as the history of a unique period when the U.S. economy benefited
from a unique combination of factors, each being both accidental
and natural, yet none of them permanent or even long-term. The
author believes that the technological boom arose not because of,
but rather in spite of, the sound pragmatism of Americans who
failed to assimilate the knowledge that was the basis of the New
Economy. Stiglitz writes that although “the success of the nineties
was based on science and technology… [but] Americans themselves did
not value science and technology… To a large extent, America was
borrowing ideas and people from abroad, just as it was borrowing
from abroad to finance its boom” (p. 311). The boom nevertheless
opened up vast opportunities for the American economy. However, the
revenues were re-invested either in speculative operations in the
stock market, which brought the total market capitalization of U.S.
companies to $17 trillion (p. 138), or in new industries, whose
growth potential had not been adequately estimated (for example, in
1995-1999 alone over $60 billion was spent only to lay fiber optic
cables for state-of-the art communications systems – p. 114). Or
money was simply embezzled, as was the case with the notorious
Enron Corp. (pp. 241-268). The rapid economic growth in conditions
of deficit reduction seems to the author like a miracle: “Normally,
deficit reduction will not lead to an economic recovery” (p.
54).
One must give Stiglitz credit for his realistic analysis of the
U.S. position in the world. This analysis is very topical,
considering Washington’s present policy. Apart from widespread
practices, such as manipulating currency rates or taking avail of
the dollar’s advantages as the world reserve currency (pp. 215;
224), the author highlights phenomena that usually remain beyond
the experts’ vision. For example, in the 1990s, the U.S. was
increasing subsidies to the agricultural sector faster than all the
other industrialized countries (p. 114); America arm-twisted the
developing countries during negotiations on intellectual property
protection (p. 22); it did not stop at direct political pressure on
India, Indonesia and other countries, forcing them to agree to
contracts on terms stipulated by U.S. companies, Enron among them
(pp. 258-260). Simultaneously, the Americans demagogically defended
the freedom of trade while violating the World Trade Organization’s
rules more often than any other country (p. 312). “Somehow [italics
added], collectively, as a nation, we were so often acting in ways
that seemed so different from what we stood for as individuals,”
Stiglitz writes (p. XIX). This resulted in a situation where “the
ideas America pushes abroad are markedly different from what it
practices at home” (p. XX).
According to Stiglitz, the economic growth of the 1990s was due
to the expansion of the New Economy, for which the U.S. had
conditions rather than prerequisites; due to a unique, and
unrepeatable, combination of macroeconomic factors; and, to put it
rather bluntly, to the unprincipled U.S. policy toward the rest of
the world. Of the three factors, there has remained only the
third.
This is what makes the author regret that the opportunities
opened in the 1990s were not duly tapped. Naturally, he points to
the achievements of the Clinton administration, above all, deficit
reduction (pp. 46-53); the decrease of unemployment from 7.3 to 3.8
percent, while curbing inflation (pp. 40; 71-74); as well as growth
in wealth spending and the reform of the social security system (p.
172). But there were setbacks, too. Manufacturing shrunk to 14.1
percent of GDP, and even smaller proportion of total employment (p.
5); savings rates decreased, and the imbalance in the economy
increased (pp. 171; 200); the state failed to adequately finance
education and culture (pp. 17-18) and displayed inexcusable neglect
for the need to improve infrastructure. “For two decades, the
United States has underinvested in infrastructure, to the point
where problems in our air traffic control systems, our bridges, and
our roads are beginning to turn up… which has led America to be a
world leader (for a country of our income) in so many dimensions
about which we should not be proud,” Stiglitz writes. If more money
had been invested in these sectors, the author concludes, “GDP in
the year 2000 would have been higher, and the economy’s growth
potential would have been stronger” (pp. 52-53).
Stiglitz explains that those mistakes were caused by the blind
faith of the economists and politicians in the self-regulating
nature of the economy and by neglect of the self-regulating role of
the state. Arguments such as these, seemingly convincing, on second
thought give rise to many questions. Stiglitz says: “What happened
in the Roaring Nineties was that a set of longstanding checks and
balances… was upset, in some essential ways, by the new ascendancy
of Finance… “Longstanding wisdom, that there were alternative
policies, that different policies affected different groups
differently, that there were trade-offs, that politics provided the
arena through which the trade-offs were evaluated and choices were
made, was shunted aside” (p. XIV).
Speaking about the negative consequences of overestimating the
role of finance, Stiglitz directs his criticism at the Federal
Reserve Board and its chief Alan Greenspan (pp. 56-59; 67-70), as
well as at businessmen who created “from nothing” the illusion of
their businesses’ prosperity (pp. 140-169). His criticism prompts
the conclusion that an economy cannot be considered sound when
people holding key economic positions think they can “tame the
bubble – and save the nation from a bubble-bursting – by words
alone” (p. 58). Put otherwise, the U.S. economy of the 1990s was
largely an economy of words, not of deeds.
However, the depth of Stiglitz’s scientific conclusions begins
to decrease as he begins to hint, first gently and then more and
more obviously, at ties between the people in Clinton’s team, in
particular Robert Rubin, his main rival inside the administration,
with businessmen and companies that found themselves in the focus
of the most sensational scandals of those times (pp. 260-261; 171).
The reader cannot get rid of the impression that this economic
analysis is giving way to a banal showdown.
The misconduct and incompetence of the executives and the
officials, which he mentions in the book, raise doubts that the
excessive autonomy of the financial sphere was the main source of
the economic difficulties that emerged by the late 1990s. The
problem was not the domination of finance over economy but rather
unprecedented violations of the law and rules, which are now being
investigated by the Republican administration (incumbent Attorney
General John Ashcroft did not become any poorer from Enron’s
activities, either, according to the author – p. 261). At the same
time, speaking of his own role in the administration that was
responsible for the situation, Stiglitz argues that he opposed many
dubious decisions.
For example, he writes that taming the stock market bubble in
the second half of the 1990s did not require raising interest
rates. It would have been enough to raise margin requirements (set
at 50 percent in 1974) to, say, 80 percent. The move might have
helped remove the bubble and avoid high interest rates that impeded
economic growth (pp. 64-65). Stiglitz also presents convincing
arguments against the massive reorganization of investment banks
from partnerships into public companies in the late 1990s. The move
permitted investment banks to participate in the stock market and
thus dodge responsibility for any damage they might inflict on
their customers (pp. 146-147).
But could the author have prevented such moves by the
administration? The margin requirements issue was within
Greenspan’s competence, while the reorganization of investment
banks was lobbied for by Rubin. Who else in the Clinton
administration had the capabilities comparable to this couple?
Therefore, it remains somewhat unclear why Stiglitz expresses so
many thanks in his book to President Clinton for the broad powers
given to him in the administration.
Yet, I would not like my criticism of the book to appear too
harsh. The picture the author paints is so exciting in some aspects
that one would like not so much to put the blame on light-fingered
people as to admire their original schemes for personal enrichment.
The banal cooking of financial reports, large-scale purchases of
assets from dummy firms at reduced value and their re-sale to other
fly-by-night companies at exorbitant prices, and the sale of stocks
in yet another dot-com to “preferred customers” – all those tricks
pale compared to the opportunities opened by the boom of the
1990s.
Xerox, for example, when it leased its machines in Latin
America, booked the entire revenue stream that it expected to
receive, thus overstating its profits by $6.4 billion (p. 129).
However, the traders, who oriented themselves to official reports,
“justified” those actions, increasing the company’s value to $38
billion by the year 2000. WorldCom included in its official reports
intangible assets that it estimated to be worth over $50 billion –
an amount equal to the GDP of the Czech Republic (pp. 164-167).
Large corporations granted huge stock options to their managers,
but, since stock options could be exercised only in the future,
this increase of personnel expenditures did not reduce fiscal year
profits and helped maintain the illusion of a prosperous
company.
According to figures for 2001, provided by Stiglitz, Microsoft’s
actual profits were less by a third, Intel’s profits by
four-fifths, and Yahoo!’s losses were understated by ten (!) times
(pp. 115-117). Even the merger mania of the 1990s is explained by
CEOs’ wish to exercise their options at low prices and sell them
profitably after the merger boosts their value (pp. 162-163).
Unfortunately, Stiglitz does not give any recommendations on how
to improve the economic situation in the U.S. – one can hardly
regard as recommendations the debunking of “myths” which prevent an
adequate perception of the economic reality: the “myth of the
invisible hand” in markets, the “myth of finance,” the “big, bad
government myth ,” the “myth of global capitalism” and the “myth of
triumphant capitalism, American style” (pp. 272-279). This
discourse is followed by a section that carries an eloquent title,
What We Were Against (pp. 283-287), which sets forth the author’s
“constructive” position.
Of course, “achieving the right balance between government and
the market is the best way to achieve sustained growth and
long-term efficiency” (p. 293). Yet, the entire book attests not so
much to the importance of regulation as to the need for competent,
consistent and, more importantly, incorruptible “regulators.” And
if, as the author admits, reforms involuntarily deviated from their
goals; if the reformers were unable to abide by their ideals; and
if the government was guided in its foreign policy by principles it
would have never dared declare at home – one can only wonder where
the administration can find people who could be really trusted to
implement advanced economic theories.
And finally, the bottom line. In his “reminiscences” about a
period which is not yet a thing of the past, professor Stiglitz
proceeds from an idea – rather strange to hear from an expert like
him – that the 1990s were “the world’s most prosperous decade.”
Where did he discover that prosperity? In the 1960s, there were
more Americans living above the poverty line than during the 1990s.
And in the early 1970s, the U.S. was much closer to the ideals of
equality, eulogized by the author. And were the 1990s not a “lost
decade” for Japan? Were the 1990s not the years of the most
destructive depression in the post-Soviet states and financial
crises in Mexico, East Asia, Russia and South America? Was it not
in the 1990s that social problems in Africa seemed to be as far
away from a solution as never before?
Stiglitz’s latest book is a blend of genres – economic analysis
smoothly converts into reminiscences, and vice versa. Yet this has
not necessarily made the analysis any better.
Vladislav Inozemtsev
