I probably don’t know enough to have an intelligent opinion about this, either, but I think the administration’s new version of cash for trash shows improvement. I would prefer to see more funding from the private sector; indeed, I would prefer 100% private funding. But if by hypothesis the government has to take the leading role, perhaps the small amount that will be required from private bidders under this program will work like economic pixie dust and make it all fly.
Paul Krugman hates it, and so does Joe Stiglitz. And by a freakish coincidence, I learned of their disapproval just after reading a section of Niall Ferguson’s The Ascent of Money that mentions them both.
Ferguson is discussing the so-called “Washington Consensus,” a package of ten big-picture economic policies that the International Monetary Fund has historically tended to require of developing economies before committing any resources to an aid package. The idea is that economies that can’t implement these policies are extremely unlikely to make it with or without aid, so why waste it? In case you’re curious about the ten policies, Ferguson summarizes them this way:
1. Impose fiscal discipline; 2. Reform taxation; 3. Liberalize interest rates; 4. Raise spending on health and education; 5. Secure property rights; 6. Privatize state-run industries; 7. Deregulate markets; 8. Adopt a competitive exchange rate; 9. Remove barriers to trade; 10. Remove barriers to foreign direct investment.
A little more detail on each of the policies is available here. It looks to me like we’re doing alright on 4, 8, 9, and 10, but we’re otherwise moving in all the wrong directions. Reasonable minds can draw their own conclusions.
But that’s not why I’m posting this. I’m posting because Ferguson happens to mention in his book (pp. 310-13) that Krugman and Stiglitz both criticized the IMF’s attachment of these conditions in Asia in the late 1990s.
Yet neither Stiglitz nor Krugman offers a convincing account of how the East Asian crisis might have been better managed on standard Keynesian lines, with currencies being allowed to float and government deficits to rise. In the acerbic words of an open letter to Stiglitz by Kenneth Rogoff, who became chief economist at the IMF after the Asian crisis:
Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise . . . fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the — no, make that we on planet Earth — have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably . . . The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.
Let me quickly add that Stiglitz and Krugman are both Nobel laureates, which is impressive, even if it’s not as impressive as it used to be. And when Krugman discusses the current state of affairs with other economists, I’ve been impressed with his balance and fairness; he seems much more candid in that context about the weakness of the case for Keynesian stimulus than when he writes for the New York Times.
Time will tell, of course. But for now, I’m still with the earthlings.