Freefall - Joseph Stiglitz

Joseph Stiglitz won the Nobel prize in Economics (or the Nobel Memorial Prize for the sticklers among you) in 2001. He is a hard left leaning economist of rock-star credentials. As Freefall's blurb reminds us, Paul Krugman called him 'an insanely great economist in ways you can't really appreciate unless you are deep in the field'. So when this pillar of the left starts criticizing the Obama administration, you have to sit up and take notice.

A few days back, I put together a list of notable books about the Great Recession of 2008-2009. Of all the books on that list, Freefall is probably the most theoretical.

Stiglitz is, I discovered soon, breathtaking amounts of research at his fingertips. There are no casual guesses in Freefall. Only a dizzyingly long and detailed list of notes at the end of the book. Many of these are very interesting tangents away from the main body of the story that Stiglitz is trying to tell. For instance, Stiglitz makes the claim that the current economic travails aren't just a bump in the road of otherwise steady progress in the Unites States. He makes the argument that in fact, there are deeper rooted problems that won't automatically go away even when this recession does. He talks of the US as -

A country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe".

Now, I have always considered America to be the land of opportunity. The land where anything is possible, and everyone has an equal shot. So the assertion that the lethargic economies of Europe provide more of a statistical chance for the poor to get out of their rut was, at first glance, not entirely credible. Flip to the notes though, and there is the link to a London School of Economics paper on economic mobility of different societies, and another one with the provocative title "Is France more mobile than the US?"

In a study of eight North American and European economies (United Kingdom, United States, West Germany, Canada, Norway, Denmark, Sweden and Finland), the United States had the lowest intergenerational income mobility. The intergenerational partial correlation (a measure of immobility) of the US is twice that of the Nordic countries. Only the UK comes close to having similar immobility. The study concludes that the "idea of the US as 'the land of opportunity' persists and clearly seems misplaced."

Wow! Talk about stirring up a potion! You read something like this and your mind wanders in ten different directions for the next few minutes. You move ahead a little, and there is another interesting diversion about how Asian countries were strong-armed during the Asian currency crisis to put in place policies that are the exact opposite of what the US and Europe are themselves following in the current crisis. Or the irony of how, for all the problems the US has been seeing in the Chinese banking system, US banks are the ones collapsing, not the Chinese. It goes on and on. And you are still on the Preface to the book!

Which was my biggest problem with Freefall. For all his immense knowledge of the intricacies of global macro-economics, what Stiglitz hasn't been able to do, is identify what to leave out. The book reads in part like a really long doctoral research, not the kind of thing you would want to read in an airplane, or on a vacation.

The central thesis of Freefall is that there are deep structural issues with the American economy, which have contributed to the meltdown of recent years. These issues are not being addressed adequately in the way the governments of George W Bush and now Barack Obama have responded to the crisis. In fact, the policy prescriptions being followed might be making the underlying problems worse. In Stiglitz's view, the stimulus program was too small (yes, you read that right, and no he is not kidding); it was too focused on federal programs as opposed to state government spending; it did not fill holes in the safety net (e.g. unemployment insurance - those who lose their jobs can't make mortgage payments); did not have adequate long term investment components and had too large a portion of ineffective tax cuts. Whew! And this is a leftist economist talking about Obama? With friends like these, who needs enemies?

Stiglitz's critique of the government response does not stop with the stimulus program either. He tears the Public-Private Investment Program (PPIP) as a 'cash for trash' idea. He assails the TARP deal struck by the government with major banks as a bad deal for taxpayers, by comparing the terms of the deal to the much more favorable terms Warren Buffet was able to sign with Goldman Sachs at the peak of the crisis for his $5 Billion investment. He criticizes the Fed's reactive moves are unguided by any clear set of principles. (This last comment is very similar to the comment Brick and Rope had made after reading In Fed We Trust).

This is some heavy hitting! Unfortunately though, I wasn't there to witness half of it. I was lost, you see, in random tangents that the notes section kept sending me on. Halfway through the book, I decided to skip the annotation and only read the main narrative. Take my word for it, that's the way to read this book. The notes are a great read, but if you go into every one of them, you are never going to get through this book!

By far the best part of Freefall comes right at the end, in a chapter called 'Reforming Economics'. The economics profession, thunders Stiglitz, cannot escape blame for its part in creating this crisis.

Of course, not all economists joined in the jubilation of free market economics; not all were disciples of Milton Friedman. A surprisingly large faction though, leaned in that direction. Not only was their advice flawed; they failed in their basic task of prediction and forecasting. Relatively few saw the coming disaster. It was not an accident that those who advocated the rules that led to the calamity were so blinded by their faith in free markets that they couldn't see the problems it was creating. Economics had moved - more than economists would like to think - from being a scientific discipline into becoming free market capitalism's biggest cheerleader.

In breaking down the question of free market capitalism, Stiglitz lays out all the underlying implicit assumptions that need to be true for free markets to be efficient. Perfect information, no externalities, ability to buy insurance against every conceivable risk, perfect capital markets, and on and on. He takes each of these on, and makes a case for why it is at best an imperfect assumption, and at worst just plain wrong. For instance, he talks about how the Chicago School says stimulus programs can never work because private citizens and companies would reduce their expenditure by the exact equivalent amount as they expect taxes would be raised in the future by that amount. Citing both economic history and common sense, he points to the absurdity of this assumption. And on and on he goes.

This is clearly the best chapter in the book, and the most heartfelt. Unfortunately, it comes late in the book, by which time most the readers have probably checked out given the dense and somewhat incoherent nature of the early part of the book.

Freefall is a worthy addition to the Recession literature that is the only gig in non-fiction town recently. But if you are looking for a book that explains the 'what', 'why' and 'where to now' questions, this is not it.