Joe Stiglitz, Political Hack Jude Wanniski September 30, 1996

Memo To: Steve Skully, C-SPAN
From: Jude Wanniski
Re: Dr. Joseph Stiglitz, Political Hack

There has never before been a chairman of the President's Council of Economic Advisors as unprofessional in his partisanship as Joe Stiglitz. On your "Washington Journal" yesterday morning, I had to laugh when a little old lady called in and demanded he resign if he checked out her facts and found that she was right. She is. In doing the political bidding of the White House, Stiglitz routinely lies about economic history. I've thought back on all the CEA chairman to JFK's Walter Heller, and can't think of one who so casually distorts the truth in order to serve his political master. This particular White House cultivates the idea that you can say anything as long as it leads to re-election. When you asked Stiglitz what theoretical framework he used, he almost gagged, afraid to admit on national television that he was trained as a Keynesian. Please understand, there is nothing wrong with that. Almost every economist in the nation was trained as a Keynesian, including every Ph.D. supply-sider that I know of. It is all that has been taught at the basic level of economics in our schools since WWII. Stiglitz was obviously ashamed to admit that he lives in a neo-Keynesian framework, admitting only that he was "mainstream." I say he is neo Keynesian to identify the problem that he and other neo types have with the Keynesianism that was taught in the 1940s through the 1970s.

The original Keynes, John Maynard, correctly identified the problem of the 1930s as a problem of insufficient investment by people of wealth. That is, they were refusing to commit their resources to new enterprise, keeping their wealth in non-productive forms — which he called "stagnant pools of capital." Keynes argued that government should do the job of putting that wealth to productive purpose, by borrowing it from those who were unwilling to take risks with it and by spending it on public works which would produce positive returns for the nation. The state would do the risk-taking. Even digging holes and filling them up would at least get confidence in economic expansion underway, he suggested, by putting cash in people's pockets with which they could increase market demand for goods and services. Keynes was not an advocate of high tax rates. He argued that there was a law of diminishing returns in taxation, and that rates above 25% on income would be counter-productive.

The forces of inertia Keynes encountered in the 1930s were those which placed the government deficit at the heart of the problem of confidence. These ideas were identified with Herbert Hoover and a school of thought associated with a theory of "crowding out." The theory held that if the government ran a deficit and issued bonds to cover it, the money would simply be taken away from people who would have used it for productive purposes. They insisted that if government spending were reduced, interest rates would decline because there would be less competition for available funds, and that these lower rates would spur private initiative. Keynesians properly laughed at the "crowding out" theorists, who held a grip on the Republican Party and Wall Street corporatists until World War II. Of course, the federal deficits of WWII were the greatest in the history of the world and they were financed with interest rates of only 2%.

Now if you get out the transcript of your show yesterday, Steve, you will find that Joe Stiglitz denounces "supply-side economics," which he says he taught in school as a peripheral idea that has proven itself to be demonstrably wrong. He also knows that supply-side economics is another name for classical economics, the economics of production as opposed to consumption. In simplest terms, supply-side economics is about planting trees. Demand-side economics is about cutting them down and selling them (or giving them away).

There was no real expansion in the Reagan years, Stiglitz said, because the expansion followed the Reagan recession of 1981-82, and from that low base, the expansion looked good only in percentage terms. Stiglitz of course knows the economy was one-third larger in real terms at the end of 1988 compared to the beginning of 1981. In eight years, the economy grew by the size of Germany. This is not a quibbling over differences of opinion. Stiglitz must actually tell falsehoods in order to do the political bidding of the White House. The Dole tax plan, he argued, would also be proven a failure because it is based on supply-side economics that rewards rich people, who should have their income taxed at 38%, a rate well above that which Keynes said would produce diminishing returns. Note there is no law of diminishing returns in neo Keynesianism. Stiglitz says he is in the mainstream, which believes that the economy is being held back by high interest rates caused by the high deficits, which are crowding investment out of the economy. I kid you not, Steve, when I say that a neo-Keynesian is what a Hoover Republican used to be, and that Stiglitz serves a party that is dominated by the same Wall Street corporatists that dominated the GOP from the 1930s to the Reagan revolution.

Oh yes. The little old lady who called in yesterday reminded Stiglitz and your C-SPAN audience that the Reagan 30% tax cut of 1981 was phased in, and that in calendar 1981 only 1.25 % of the total took effect. The recession was caused by the Federal Reserve shutting down money creation, she said. She said that if Stiglitz checked and found he was wrong and she was right, he should resign. In fact, under prodding by the Carter administration for a weak dollar to spur exports to help Jimmy get re-elected, the Fed pumped base money into the banking system like mad. From the fall of 1979 to the fall of 1980, the price of gold leaped to $625 from $240 as people fled paper money. Stiglitz would like you to believe the Reagan tax cut of 1981 caused the following recession, when in fact it was the Fed cleaning up the mess that it had made in that last Carter year. Stiglitz knows what happened, but has been trained to lie. He should resign and be replaced by the little old lady.

Better yet, the office of the CEA should be abolished. It has become worthless and corrupt. The House Republicans proposed to do just that at the outset of the 104th Congress, but were talked out of it. Stiglitz should go back to Stanford to teach "crowding out" at the Hoover Institution, located on the Stanford campus, as he has unwittingly mutated to the Hoover school of austerity favored by corporate America.