What do you get when you put two of the most well known and most widely cited economists in the world, both Nobel laureates, on stage together? A healthy dose of economic reality.
That’s what happened Tuesday night at the Fashion Institute of Technology’s Haft Auditorium in New York City at an INET-sponsored event featuring Paul Krugman and Joseph Stiglitz in a “Conversation on the State of the Economy,” moderated by INET Executive Director Rob Johnson.
Both Krugman and Stiglitz took aim at the troubled condition of the economy and the economics profession as a whole. Krugman pointed to the most prominent historical parallel to the current crises, saying that “what we’re seeing is something that is recognizably like the Great Depression.” And he showed little patience with economists and policymakers who said there were no solutions at hand. “If you go back to the 1930’s, you’ll find a lot of people saying there were no easy answers and that it was absurd to think you could get out of [the Depression] quickly,” he said, laying out the argument he makes in his book End This Depression Now!
Krugman continued by stating that the same arguments about the need for “structural reform” were being made back then as they are now, but that what really got the U.S. economy out of the Depression was the infusion of government spending that World War II brought. “We need a strong economy to pay down the debt,” he said, adding that stimulus was “not a sugar high – it’s more like a diet with essential nutrients.”
Stiglitz agreed with the Krugman’s historical parallel, but disagreed with the interpretation, citing the structural changes that occurred during the Depression and leading up to World War II, such as the movement of workers from agricultural to industrial employment. He agreed that government investment, like the G.I. bill and large investments in improving productivity, played an essential role in pulling the U.S. out of the Depression. But he emphasized that what was needed was not simply more spending – but effective spending.
Stiglitz also argued that structural changes in inequality played a significant role in our present crises, a case he makes compellingly in his recent book, The Price of Inequality.
He cited the “vicious cycle” where more inequality leads to lower aggregate demand, which then leads to even more inequality. Stiglitz said that this dynamic is the result of the wealthiest 1% having a much higher savings rate than the middle class, which tends to spend most of what it earns. The drop in aggregate demand this dynamic causes then hits the middle class even harder, leading to a further drop in demand that harms the middle class more than the top 1%.
Stiglitz further emphasized that much of the growth in the share of income controlled by the wealthiest 1% has come from inefficient and predatory activity that takes slices of the economic pie rather than creating more for everyone. Economists call this behavior “rent seeking.” He suggested that stamping out this type of economic activity would benefit the rest of society greatly, while also improving the crisis in inequality.
The two Nobel laureates also touched on many hot-button issues like the euro crisis, China, deficit problems, and student loans. They also addressed health care costs, where both agreed that the free market doesn’t work. Krugman attributed this to asymmetries of information in the health-care market. “A used car salesman who misleads you is not going to kill you,” he said.
Meanwhile, Stiglitz pointed out that free market principles don’t apply to the health care system and the market for health services. “The reason the invisible hand seems invisible is that it’s not there,” Stiglitz said.
Moderator Rob Johnson also pointed out that if the U.S. spent as much per capita on health care as Canada or European countries, any long-term projected U.S. deficits would practically disappear, a point with which both Nobel laureates agreed vehemently.
The conversation wrapped up with a discussion of New Economic Thinking, with Krugman and Stiglitz offering their take on the future of economics.
Krugman pointed to a focus on empirics and railed against economists who believe too much in their own models.
“Any economist who believes that [their model] is a literal description of how people behave should find another profession,” he said, adding that an economic model is “a metaphor that’s helpful for organizing how decisions are made,” not a literally true description of the world. He also argued that economics is “not just about abstract principles. You have to look at what works in practice.”
Stiglitz, however, disagreed with Krugman.
“I’m not sure whether the focus ought to be on empirics,” he said. “A lot of the problem is that the theory brought to bear in seeing the world led economists to look at the world through the wrong empirical lens.” Much of the empirical work in the last 30 years has been driven by the rational-expectations view of economics, he continued, “and anything outside that lens somehow they couldn’t see. They shaped all the empirics into that frame.”
“We should try to inoculate people from only seeing what they believe and believe that which they see,” Johnson summed up.
“A little bit of humility here is a very powerful thing,” Krugman said, before humorously acknowledging the irony of making this point in the name of two Nobel laureates.
And maybe that’s the real lesson from watching these two economic giants on stage – the kind of curiosity and self- and societal-awareness that economists and economics could use more of.