Award winning economist says America has bankrupted itself with the
Iraq war
Australian Broadcasting Cor****ation
Broadcast: 05/05/2008
Re****ter: Tony Jones
One of America=92s leading economists Joseph Stiglitz joins Lateline to
discuss his predictions on the subprime mortgage crisis which has
burst the US housing bubble and fiercely shaken the debt-ridden
domestic economy.
TONY JONES: Now to our best and Joseph Stiglitz is one of America=92s
leading economists and one of the most pessimistic. He recently
predicted that the subprime mortgage crisis which has burst the US
housing bubble and fiercely shaken the debt ridden domestic economy
would result in the worst downturn since the great depression. On top
of that, he says future administrations will struggle to pay off the
massive burden of debt used to fund the war in Iraq. In his latest
book =91The Three Trillion Dollar War=92 Stiglitz sets out the hidden
costs of George Bush=92s Middle East adventure. Stiglitz won the Noble
Prize in economics in 2001. Before that he was the chief economist at
the World Bank and before that, the chairman of President Clinton=92s
council of economic advisers. He=92s a Professor of economics at the
Columbia School of Business and we caught up with him in Rome earlier
this evening. Joe Stiglitz, thanks for joining us.
JOE STIGLITZ, ECONOMIST AND AUTHOR: Nice to be here.
TONY JONES: I=92ll come to your book on the costs of the Iraq war in a
moment. I was shocked to hear you say recently that the US is in the
worst downturn since the great depression. How did you come to that
conclusion?
JOE STIGLITZ: Well, previous downturns in the United States in the
post war period have primarily been of two sorts. There have been
excess inventory accumulation, firms build excess inventories and take
a little time to de cumulate and the economy goes on as if nothing had
happened. The other kind of downturn is when there=92s been a little bit
of an inflationary bout, the Fed steps on the brakes a little too
hard, the economy stops. The Fed realises it makes a mistake, takes
its foot off the brake and the economy starts again. This is
different. This is a real problem in the financial system. The
financial system is really at the heart of the economy. And so this is
a forecast that, in fact, this going to be a very serious downturn.
Now the nature of how serious will obviously depend on the kinds of
policy responses. Hopefully they=92ll be better than that for instance
in 1981, =9182 where the Fed, still wedded to the notion of monetarism
kept interest rates tight and unemployment went up to 12, 13 per cent.
So one has to see that policy plays a critical role and it could make
things, unemployment get to extraordinary high levels. So far, the
policy responses have been totally inadequate, in my judgment.
TONY JONES: If it is the worst downturn since the great depression,
how can the rest of the world avoid being dragged into the abyss along
with the United States?
JOE STIGLITZ: Oh I don=92t think it can. Right now you are increasingly
hearing stories in Europe that it looks like one business person, the
skid marks are on the road. It does look like Europe will be affected.
One of the things that, one of the reasons that Europe is going to be
effected is that their money authorities, the European Central Bank is
focusing on inflation. America is focusing on the economic downturn.
The result is increasing gap in interest rates. The result of that is
an increasingly strong euro. The result of that is very hard for
Europe to ex****t, hard for it to compete with American ex****ts.
TONY JONES: The Australian Government is in a similar situation to the
Europeans. They=92re having to raise interest rates progressively to
fight inflation, but Australia considers itself to some degree to be
sheltered because of the booming economies in China and India. Can we
shelter from the storm behind those economies inevitably, or will they
be affected, too, by a US downturn of the scale you=92re talking about?
JOE STIGLITZ: Almost surely they will be affected but they=92re
beginning with a much higher base. The general discussion for instance
that China will probably slow down from maybe 11.5, 12 per cent to 9.5
per cent, 9 per cent, 10 per cent, that=92s still robust growth and
those who are in the orbit of China=92s economy may feel the slowdown,
but still will feel that they are doing very well. So I think that
those countries who=92ve diversified their markets and are more
dependent on China are going to probably weather the storm far better.
TONY JONES: Going back to the US economy, the phrase =93 fool=92s
paradise=94 comes to mind when you think of the extent to which American
consumers have borrowed on the paper value of their own houses. Now
you cite one recent year in which that figure reached more than $900
billion.
JOE STIGLITZ: That=92s right, it was quite incredible and it is a real
example of the regulators being asleep at the wheel, the banks, the
ratings agencies. And this is not done with 20 20 hindsight. It was so
clear. I was writing about it, a number of other people were writing
about the impossibility of what was going on. Just take one aspect or
two aspects of this. They were giving mortgages for close to 100 per
cent of the value of the house. There was actually some evidence that
many of the mortgages were given for 100 per cent of the value of the
house. That meant that if the price went down there was an incentive
to walk away. If the price went up the owner of the house got to keep
it. It was a one way bet and people took out as large a mortgage as
possible. What was going on was the banks were in effect giving money
away. You had to ask the question, it=92s not a standard part of
American business practice for American banking practice is to give
away money, especially giving away money to poor people. Giving away
money to CEOs is one thing, but to give away money to these subprime
mortgage borrowers who are among lower income Americans just was a
very peculiar thing and what was going on? Well, what was going on is
pretty clear. They were printing pieces of paper, making pieces of
paper that they were selling on to uninformed people who thought they
had value.
TONY JONES: Joe, on top of that, of course, a massive splurge on
credit card spending, so people getting themselves even further into
debt in the United States and that=92s been mirrored in this country and
many other countries as well. It appears to be that it=92s
unsustainable. I want to know, though, since those things were
fuelling the growth in the domestic American economy what happens when
you turn the tap off?
JOE STIGLITZ: Well, let me just reiterate, in America it was worse
than in most other countries. Our savings rates plummeted to zero and
that clearly wasn=92t sustainable. Now when you turn off those taps, the
economy gets weaker. For the long run, this is good. Americans must
save more. It is a curiosity. It is a peculiarity one might say that
the richest country of the world, the United States, was not able to
live within its means. It had to borrow $850 billion in one year from
poorer countries around the world. Clearly, something was wrong. But
in the short run, with Americans not consuming as much, that means
that there=92s less to fuel the American economy. A normal question at
this point is, can=92t we make up for it through either monetary
official policy? Well, monetary policy has been working by having low
interest rates, encouraging people to take money out of their houses.
That game is over. With housing prices falling and people expect their
housing prices to fall something like 20, 30 per cent in real terms
from the peak to the trough, with housing prices falling, people are
not going to want to take out more mortgages, these mortgage equities
and banks are going to want to lend. That leaves fiscal policy. Fiscal
policy is in a very bad position, room for manoeuvre isn=92t there, and
that goes back to the war. One of the ways that the war is really
going to be hurting us is that in the last recession, 2001, we had a
two per cent GDP surplus and that gave us room to do something to help
the economy grow. Now we have a massive deficit, mainly caused by the
war. We expect, in fact, that the deficit this year will be at a
record level.
TONY JONES: You obviously don=92t think that the $150 billion stimulus
package signed off on by the Congress and President will have much
effect, especially when you set it against the money borrowed against
houses in recent years?
JOE STIGLITZ: That=92s right. Obviously it=92s better than nothing. But
the fact is, there are two flaws with it. First, as I said, it doesn=92t
give as many bang for the buck. Households know it=92s more difficult in
the future to get credit. A lot of them are going to rather than spend
the money, put it in the bank and use it to pay back existing debt. It
just won=92t stimulate the economy. The other problem is, the problem
with the American economy is not too little consumption, it=92s too much
consumption. So to the extent that it works, it works by protracting
the fundamental flaw in the American economy, an excessive level of
consumption.
TONY JONES: You=92ve mentioned this yourself, but one of the great
economic drivers rarely talked about by most financial commentators is
the immense cost to the US economy of the Iraq war. Now your new book
=91The Three Trillion Dollar War=92 makes some controversial calculations
to reach that cost. In the past it=92s been argued that wars actually
cause economies to grow. You seem to have shattered that illusion with
this book?
JOE STIGLITZ: That=92s right. The way that illusion came about was World
War II, where the view was that World War II got the country out of
the great depression, the world out of the great depression. Well
since the time over 75 years ago we know how to stimulate the economy
in ways that increase at the same time long term living standard.
Nobody ever said that wars are really good for living standard. Well,
this war=92s been particularly bad for two reasons. First, money spent
to pay for, say, a Nepalese contractor working in Iraq doesn=92t give
the uplift to the economy, that spending the same dollars in America
on hospital, roads, schools any of those other kind of things. So in
the sense that it=92s diverted money that might have been spent in
America into being spent in Iraq, it=92s actually dampened the economy.
But the more im****tant factor and it was a factor we noticed back in
1991, is that this war has given rise to an increase in oil prices.
Prices were about $25 a barrel five years ago, now they=92re over $115 a
barrel and that means that money that America would have been spending
at home is being spent to buy oil from Saudi Arabia, Kuwait, other oil
ex****ters.
TONY JONES: Can you say for sure it was the war that caused oil prices
to go through the roof? There are other reasons, the peak, the
possibility we=92re running out of oil and, of course, the increasing
demand from the economies of China and India which are growing so fast
that they are soaking up oil at a tremendous rate?
JOE STIGLITZ: In our book we took a very conservative view. We only
attribute 5 to $10 of the $90 or so increase in the price of oil to
the war. So yes, there are other factors and we don=92t claim it is the
only factor or even the most im****tant factor. Although I actually
think that it is far more im****tant than we ascribe in the book
because we didn=92t want to get into a quibble about that. Let me
explain why I think the war was so im****tant. In 2003 when we began
the war, futures market s look to increases in demand and increases in
supply. Futures markets understood that China, India were growing.
That was well known. They were already growing at this unprecedented
rate. They may have gotten it wrong a little bit, but overall most
people expected that China would continue to grow at the rate that it
had grown, which is 10 per cent or so per year. What they thought,
though, was that there would be an increase in supply from the low
cost providers, the low cost providers in the Middle East and that the
war changed that equation. It brought this instability to the Middle
East. And then it let forth a kind of dynamic that we=92ve seen before,
a kind of what economists call a backward bending supply curve. The
countries in the Middle East that control the supply of oil could meet
their budgetary needs without producing more oil. With an oil price
twice, three times, four times what it had been, what was their
incentive to increase the output of oil? It was even worse. Because of
the hostility to many of those from the Middle East, the resistance,
the sovereign wealth funds, the problem with Dubai ****ts, they felt if
they took their wealth below the ground and try to invest it above the
ground in the United States and in other countries they would meet
resistance. So the best place to invest their money was to leave their
money below the ground and that=92s what they=92ve been doing.
TONY JONES: Well, here=92s a fact, we=92ll leave oil aside now, here=92s a
fact that will astonish many. You claim the direct cost of the
military operations in Iraq already exceeds the cost of the 12 year
war in Vietnam and is double the cost of the American involvement in
the Korean War. How can that be so? Those wars were so much bigger?
JOE STIGLITZ: Well, actually this is now the second longest war in
America=92s history and the second most costly. One of the reasons it=92s
so costly is the cost per troops have gone up, soared. Previous wars,
$50,000 per troop, this war is for $400,000. There are a number of
factors. One is this is the first war that has been privatised to the
extent that it has. We use private contractors rather than military.
Private contractors are very costly. All of this stuff about private
sector being more efficient, not true when it comes to war. There=92s a
lot of I suspect profiteering, the stock of Albertson has almost
tripled since the beginning of the war. Whatever you call it, it=92s
very expensive. There=92s some other factors also contributing to the
war. Modern medicine has meant that more people are surviving, but the
cost of keeping them alive is very high. And the ratios are again
unbelievable. Previous wars, the ratio of survivals to fatalities is
2.5 to 1. This war it=92s 15 to 1. So there are a number of distinctive
aspects of the war that have really driven up the cost.
TONY JONES: How much of a poison chalice is this going to be for the
next administration? As you pointed out earlier, this war has not been
funded from American coffers but it=92s been funded by debt. In order to
fund this extraordinarily expensive war, as you say, the most
expensive since World War II, the United States has had to borrow
money.
JOE STIGLITZ: We=92ve borrowed every dime. It=92s the first war in
American history where we=92ve borrowed everything. Usually you ask your
young men and women to go fight for you and there=92s a sense of shared
sacrifice and those who aren=92t fighting say, =93OK, we=92ll have the
shared sacrifice, we=92ll give up something, we=92ll raise our taxes at
least as a symbolic gesture of unity.=94 In this war just months after
we sent our young men and women to fight, Bush asked for and got a tax
cut for rich Americans. It=92s actually the first war since the
revolutionary war where America was created where we=92ve had to turn to
foreigners to help finance, 40 per cent of the money has been borrowed
from abroad. And that means that all the bills will be paid by future
generations.
TONY JONES: And future administrations and that was my point, a poison
chalice if an Obama White House or a Clinton White House comes into
office, how are they going to run the economy with this burren?
JOE STIGLITZ: It=92s a difficult problem. The peace dividend is not
going to be as great as many people had hoped. Let me give you an
example. I was mentioning the injuries and there have been so many
injuries and so many bad injuries. The newest numbers coming out
suggest that the fraction of those returning, that will be disabled in
one way or another is 48 per cent. We actually use 39 per cent but the
numbers coming in look much worse than we had anticipated. So our
numbers are conservative. We had estimated in our more reasonable
estimate that the total unfunded liability to take care of our
returning disabled veterans, health care and disability benefits will
exceed $600 billion. That=92s an amazing amount. It=92s roughly the order
of magnitude the President said three years ago that we had a gap in
our social security system. It threatened our economy, it threatened
our ability to provide old age pensions for our elderly. Well, we=92ve
created just for the disabled in this war in the last five years, a
gap equal to the gap that we created over decades in the social
security system. So there is an enormous set of bills coming to and
it=92s going to tie the hands of a future administration. Let alone the
problem of figuring out how to get out of it.
TONY JONES: What you=92re saying suggests this is without a doubt, the
greatest foreign policy folly and it now is sounding like the greatest
economic folly that an American administration has got itself into?
JOE STIGLITZ: I think that=92s right. It=92s an order of magnitude worse
than the Vietnam War. But here we=92re talking about a region that was
already very volatile in the Middle East. A region with one of the
world=92s most im****tant resources, oil. And what we did is we converted
a region that was, you might say, unstable into a region that was just
highly volatile, where groups that had lived together perhaps not
totally in peace but lived together, the ****=92ites and the Sunnis are
now fighting each other. We=92ve let forth a set of problems the full
nature of which will take I think decades to resolve.
TONY JONES: Joe Stiglitz, we will have to leave you there. It=92s been
fascinating to talk to you, hopefully we=92ll get the chance to do that
again in the future. Thank you very much for taking the time to join
us on Lateline.
JOE STIGLITZ: Thank you.
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