Robespierre is all the rage in America

The Roaring Nineties - The Great Unravelling
November 21, 2003

Analysis of past economic policy can be 'so five minutes ago', but Howard Davies finds that we may go there again

Books about very recent history run a high risk of rapid obsolescence. The Great Unravelling is particularly vulnerable: it discusses the events of the past three years. Indeed, Paul Krugman himself recognises that some instant analyses of the economy, in particular, are - as they say in Buffy the Vampire Slayer - "so five minutes ago".

Of the two books discussed here, however, Joseph Stiglitz's The Roaring Nineties suffers worst at the hands of Buffy. Even though some of what he writes is ancient history (going way, way back to the early 1990s) his epilogue notes that "as this book goes to press, the economy is still performing well below its potential". With the most recent published statistics showing a growth rate of just over 7 per cent, admittedly on an annualised quarterly basis, this observation is "so six months ago".

Krugman suffers less, even though the half-life of the brand of weekly journalism paraded here is bound to be short. That is partly because he does not pretend to be writing history and does not hazard much in the way of forecasts, political or economic.

We should not, though, allow the vampire slayer to put us off. If we all lived in fear of descent into the Hellmouth, our newspapers would be empty of comment. Both Krugman and Stiglitz are important witnesses of US policy, especially, but not exclusively, in the economics sphere over the past decade.

Krugman has retained a university base at Princeton, but for more than three years has written a twice-weekly column in The New York Times . He says he initially intended to write principally about business and economics: increasingly, he has found himself dealing with pure politics and diplomacy. He was provoked to do so, he would say, by the Bush administration.

Stiglitz, by contrast, is an academic who has got his hands dirty in a rather different way. He was tempted away from Stanford University to become chairman of President Bill Clinton's Council of Economic Advisors, before joining the World Bank as its chief economist. Since leaving the bank in January 2000, as well as teaching at Columbia University, he has written two major books. The first, Globalisation and its Discontents , was a heavy-gunned attack on the International Monetary Fund in general and its head, Stanley Fischer, in particular. The ad hominem nature of some of his comments upset many old friends of Fischer, and created some new sympathisers. He has now turned his attention to the iniquities of the boom and bust years in the Federal Reserve of the 1990s. He identifies the guilty men, on Wall Street, in government and in the Federal Reserve. Alan Greenspan, the chairman of the Fed, in particular, is criticised for doing nothing to restrain the "irrational exuberance" he perceptively identified in 1996.

So Stiglitz took the political shilling, for a while at least, while Krugman remained an outsider. Yet in these books their respective roles are inverted. Stiglitz attempts to pull away from his Democratic identification and to criticise both brands of administration. He acknowledges that the Clinton administration allowed the markets to overheat dangerously. Krugman is more overtly partisan. His assault on the Bush administration is aggressive. Indeed, it may not go too far to say that he has become the White House's most significant and penetrating domestic critic.

The aims of these two books, published almost simultaneously, are somewhat different. Krugman offers a collection of newspaper columns, capstoned only briefly by a couple of essays that pull together the themes he has developed. Stiglitz, by contrast, offers a follow-up to Globalisation and its Discontents . He aims to analyse the development of financial markets and public policy towards them, through the 1990s, and to offer a set of broad policy prescriptions for the future. To this reviewer at least, Krugman ends up by delivering more than he promises; Stiglitz, rather less.

Yet The Roaring Nineties should be an important document. Stiglitz was an insider through much of Clinton's presidency. Sadly, he does not kiss and tell as much as he might: no royal butler he. There are a few anecdotes about policy debates in the White House, and one or two minor revelations about inter-agency disputes, but he writes largely as a commentator rather than as a former official. And his view is largely driven by his academic work. His shared Nobel prize came as a result of work on information asymmetry, which left him with a healthy suspicion of untrammelled markets, marked scepticism about the efficient market hypothesis and a consequent respect for the importance of robust financial regulation, particularly in the areas of price transparency and accounting standards.

I am, perhaps, by background, bound to share this perspective. And I largely agree with his assessment of the performance of accountants and investment banks during the 1990s bubble, and of the circumstances surrounding the collapse of Enron. These chapters are useful reviews of depressing episodes in the history of US capitalism, and bear some repetition. They are not, however, especially original. More penetrating analyses of Enron and the conflicts of interest in investment banking have already been published.

The non-American reader will find the US-centred nature of the analysis somewhat frustrating. That is not only because Stiglitz assumes that the non-American corporate scandals - Vivendi and Ahold are specifically quoted here - are broadly the same as those in the US. I do not think that is so.

Stiglitz claims that he writes not only as an American, but also "as someone who has been very much engaged in parallel discussions around the world" on the issues at hand. Perhaps these discussions, from his position in the World Bank, were largely in developing countries, because he certainly shows little awareness of what has happened in London and in European capital markets more generally.

Given the dominance of US institutions in global capital markets, we should be suitably 'umble in offering a view from London. In global political circles we have much to be humble about. But London is the second-largest capital market in the world, and perhaps the largest international market, and some of the issues on which Stiglitz stumbles in North America have been addressed here, sometimes more successfully.

So, for example, he talks of his key role in developing indexed bonds, which were first issued by the government in the US, against Treasury opposition, in January 1997. "It was an innovation, the importance of which will no doubt be felt more strongly sometime in the future." It was indeed an innovation in the US. But indexed gilts were first issued in the UK in 1982, (against opposition from the Bank of England in our case), following a fundamental review of investor preferences. They have been a useful part of the government's funding armoury ever since.

Stiglitz also discusses the abolition of the Glass-Steagall Act, which enforced a division between commercial and investment banking in the US for 50 years. He speculates that Glass-Steagall abolition was behind many of the wickednesses of the late 1990s, as investment banks entered new business areas and were exposed to new temptations. In the UK we have never had the equivalent prohibition, yet nor did we face capital market problems on the same scale in the 1990s. Some analysis of why that should be so would have added richness to the text.

Stiglitz also complains about the operation of financial regulation in the US. He explains persuasively how some of Arthur Levitt's initiatives at the Securities and Exchange Commission were thwarted by opposition from the financial services industry and by others in government. He is rightly unimpressed by those who argue for the superiority of self-regulation. Yet he does not seem aware that UK chancellor Gordon Brown instituted a major reform of the London regulatory system, doing away with most of the old self-regulators, and providing in the Financial Services Authority a much more powerful focus for financial market oversight. This model, which has been copied by many other countries including Japan and Germany, and is now widely admired in New York, does not seem to have reached Stiglitz's attention.

All these lacunae serve only to reinforce those who see Washington policy-makers as increasingly "home alone" within the Beltway. Stiglitz is a strong critic of George W. Bush, yet, in that sense, shares his outlook. A more international perspective could have greatly enriched The Roaring Nineties . It would also have been improved by better editing. We are, for example, introduced to Laura Tyson three times in less than a hundred pages, and each time it is helpfully explained that she was Stiglitz's predecessor at the Council of Economic Advisors.

Krugman is similarly tightly focused on US politics. That reflects the readership of The New York Times , and is, therefore, wholly reasonable. He came late to journalism, but has an enormous talent for the 1,000-word essay. He has been wasted in the world of economics. His columns are a "must-read" for those not starry-eyed about the neo-Conservative agenda. He can also be elegantly catty. He tell us that Larry Summers - the former US Treasury secretary and now president of Harvard University - is quite brilliant: "Ask him, he'll tell you."

And The Great Unravelling is significantly more than a compilation of op-eds. In the brief introductory essays Krugman develops a powerful thesis, drawn originally from a book by Henry Kissinger published in the late 1950s. It is that the US should now be seen as a revolutionary power - in the sense that it is a power that does not accept the legitimacy of the global political system in which it operates. Kissinger's analysis was of the France of Robespierre and Napoleon. Krugman sees the new Republicans as similarly revolutionary: they "do not accept the rules that the rest of us have taken for granted", particularly in relation to the welfare state and to foreign policy. Isolation at the United Nations, which might have worried past US presidents, is regarded as a badge of honour. The administration cares little for the views of other countries and, according to Krugman, cares little for the truth, either. He regards the explanations proffered by the Bush White House for its tax-cutting policy as wholly mendacious. The aim was not to kickstart the economy - the delayed timing of the tax breaks gives the lie to that - it was simply to enrich wealthy Republican supporters. This is strong stuff, but it is supported by careful economic analysis.

Like Stiglitz, Krugman is critical of Greenspan, though in this case for appearing to give support to the administration's tax-cutting strategy. He sees this as wrong, and as pitching the Federal Reserve too far into the political arena. (Those who remember pictures of Greenspan with Hillary at the Clinton inauguration may not regard this recent behaviour as a sign of partisanship.) Alongside this robust critique of Bush comes a similarly aggressive assessment of the US media. Why, he asks, are so many commentators comprehensively taken in by the rhetoric and the lies? Partly, he answers, because they live and die by their connections with Washington DC, and are not prepared to put themselves outside the political mainstream. If the administration's "spinmeisters" refuse to talk to them, how would they live? But it is also partly, he thinks, because most journalists are economically illiterate: they lack the intellectual weaponry needed to combat the official sector's assault on reason. So Krugman, alone, can see through the administration's tissue of falsehoods.

This is heady stuff, and can be read as just a little arrogant. Krugman's gibe at Summers' expense could reasonably be turned back on him. But in fact there is a strong case for saying that Krugman has been in a minority in identifying the direction of economic policy taken by the Bush White House. If he is indeed right, we are in for trouble, both in global politics and in the US economy. The most recent growth figures suggest that he may be a little less right than he thinks, but it's not over yet.

The New Yorker cartoon with which he begins shows two White House officials looking at a chart of the falling Dow Jones index and one official asking the other "this stock market situation - what are the military options?".

"So six months ago," you may say, after 2003's strong second-half rally, but we could go there again if the US proves unable to control its budget deficit. There will, I suspect, be no shortage of material for the next three years of Krugman columns. Those of us outside New York can only look forward to the next compilation.

Howard Davies is director, London School of Economics.

The Roaring Nineties: Seeds of Destruction

Author - Joseph Stiglitz
Publisher - Allen Lane The Penguin Press
Pages - 389
Price - £18.99
ISBN - 0 7139 9722 2

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