A prophet, says the Bible, is not without honor save in his own country. As the most prestigious economic dissenters of this era, Joseph Stiglitz and Paul Krugman form a category of two: astonishingly prescient, widely read, and largely ignored by those in power.
Both won Nobel Prizes for their early virtuoso technical economic work. Stiglitz’s research, starting in the late 1960s, showed that markets do not follow the standard economic model of efficient competition, because a buyer or seller often has access to privileged information. Stiglitz enriched the well-established idea that transactions have hidden costs or benefits to the wider society. These “externalities,” he demonstrated, are not exceptional but pervasive. This insight applied particularly to the environment, where transactions are so often free to the polluter and costly to the planet.
Krugman, in the late 1970s, did pioneering research challenging the orthodox conception of international trade. Where most economists dating back to David Ricardo in 1817 had viewed trade patterns as based on the natural comparative advantage of nations, Krugman demonstrated that governments could create competitive advantages through strategic measures to develop export industries. Still, Krugman was more sanguine about markets then, and he distanced himself from those advocating that the U.S. embrace explicit industrial policies to promote manufacturing.
Both Stiglitz and Krugman are, in the somewhat overused term, public intellectuals. Both received their Nobels during the George W. Bush era for work done decades earlier, in part because the Swedish Nobel Committee wanted to empower critics of American conservatism. The Nobels gave them additional luster and made them harder to dismiss. With views on the edge of respectability, both are scrupulously careful to avoid error.
Each still spends substantial time teaching, Krugman at Princeton and Stiglitz at Columbia. Krugman, of course, devotes most of his non-academic efforts to writing a twice-weekly column as well as a blog for The New York Times. Stiglitz’s main extracurricular activity is trying to change the world via globe-trotting meetings with national leaders, conferences and projects at an institute he founded at Columbia and in collaboration with other progressive think tanks, and work taken on for various agencies of the United Nations.
Of the two, Stiglitz has been the more unorthodox throughout his career. His radicalizing experience was working in the Clinton administration, where he regularly crossed swords with economic policy czar and later Treasury Secretary Robert Rubin and Rubin’s protégé Lawrence Summers on everything from environmental issues to banking regulation. He was appointed in 1993 to the Clinton Council of Economic Advisers, where a key patron and ally was Vice President Al Gore, who admired Stiglitz’s environmental work. Elevated to council chair in 1995, Stiglitz in 1997 became chief economist of the World Bank, a position typically filled at the pleasure of the U.S. government. There, he did not hesitate to criticize U.S. policies on Third World debt and development. He had several public disagreements with Summers, and his position became untenable.
By contrast, Krugman’s only work in government was a sabbatical at the Council as a professional staffer in the Reagan years. In the mid-1990s, while still mainly a technical economist at MIT, Krugman concluded that Americans just didn’t understand economics. It annoyed him that non-economist crackpots of the right and left were gaining a hearing as serious thinkers. So he systematically set out to write for a broad audience. He proved to be good at it, contributing to The New York Times, The Washington Post, Harper’s, Slate, and The American Prospect as well as writing popular books.
When the Times offered Krugman a job as a staff columnist in 1999, the editors were expecting an articulate, moderately liberal economist expert at translating economic topics to a general readership. What they got was America’s pre-eminent progressive polemicist. Krugman’s radicalizing experience was George W. Bush. His choice not to pull punches has caused some detractors to criticize him as shrill. In a 2005 farewell column, then–Times Public Editor Daniel Okrent wrote that Krugman has “the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.” Okrent provided no documentation for the assertion. It’s not clear that a more circumspect Krugman would have more direct impact on national policy: He is marginalized for the content, not the tone.
Yet influence can be exerted in more than one way. Krugman is closely read at the White House, and I’d like to believe that his views give ammunition to the administration’s budget doves and regulatory hawks. Both men have prior relationships with several senior officials. Former budget chief Peter Orszag was a student of Stiglitz’s. Ben Bernanke, Federal Reserve chair, and Alan Krueger, chair of the Council of Economic Advisers, are former Krugman colleagues at Princeton. Stiglitz has immense impact on thinking about economic development, though mostly outside the United States; his influence at home operates circuitously, through the actions and diplomatic demands of foreign governments. The two, though not close, respect each other’s work. Both men, with large audiences, influence the broad public’s grasp of economics, though that has yet to translate into policy.
Taken together, Stiglitz and Krugman occupy something like the indispensable role that John Maynard Keynes played in the period between 1919 and his death in 1946. Keynes’s sheer intellect and deftness at translating abstruse economics into wry English won him a wide readership. In a time like our own, when austerity was peddled as the cure for depression, his was the voice in the wilderness whose theoretical insights about the need for public outlays to maintain demand kept being vindicated by events.
Yet except for the accident of massive wartime deficit spending and a burst of practical influence late in life, when Keynes designed a new international monetary system for the postwar era, his ideas were purged of their radicalism by governments and economists alike. In recent decades, mainstream economics has turned his broad theories of the instability of capitalism into a cookbook on the occasional usefulness of deficits, while too many policymakers have reverted to a pre-Keynesian obsession with budget balance.
In this orthodox climate, Stiglitz and Krugman are excluded much as Keynes was. The practical reforms that logically flow from their ideas would include drastically increasing regulation of finance, creating a medley of measures to promote equality, and massively increasing public spending. None of this has been on the table for a Democratic president since Lyndon Johnson.
In their new books, Krugman and Stiglitz both argue that the income distribution in America is outrageous, with economic as well as social consequen-ces. Krugman, in End This Depression Now!, a primer on how Keynesian economics applies to today’s circumstances, offers a smart explanation of why the dynamics of this slump are reminiscent of the 1930s, with a downward spiral of depressed purchasing power reinforced by debt overhangs, especially in housing. In fact, Krugman first warned of the risk of “the return of depression economics” in his 1999 book by that title, which dealt in part with Japan’s deflationary slump. Here he unpacks the central role of deregulated finance and exotic speculation in the current crash, drawing on the late economist Hyman Minsky’s work on the fragility of financial systems. Krugman argues that a moderate dose of inflation would be preferable to prolonged depression, and he’s right.
Stiglitz, delivering on his title, The Price of Inequality, catalogs the economic inefficiencies caused by an extreme income distribution. The mega-rich can’t spend all of their income; depressed aggregate demand causes high unemployment; human potential is wasted; corporations rig competitive markets to reap monopoly profits; the immensely wealthy engage in speculation rather than productive investment. As the political system mirrors the economy’s inequality, financial elites keep their thumbs on the scale of policy. The result, writes Stiglitz, is “our under-investment in the common good.”
Though similar in their basic views, Stiglitz and Krugman are not interchangeable. Stiglitz’s particular interest these days is in global poverty, debt relief, and Third World development. Krugman, as a close student of strategic trade, is more inclined to criticize China as a violator of trade rules, whereas Stiglitz tends to view the Chinese as a largely successful and deserving case of reduced Third World poverty. Stiglitz also has more of an environmental focus than Krugman. There’s little in either of these books that the other author wouldn’t endorse, but each adds his own value.
Curiously, temperate economists of the sort appointed to serve in Democratic administrations agree with most of this critique at the level of economic theory. None would deny that the income distribution is a disgrace with macroeconomic consequences. There is little doubt that unregulated financial markets set off calamitous crashes, or that the economy is filled with Stiglitz’s “asymmetries” of information, leading to inefficient outcomes. As Stiglitz observes, “No large nation has ever used austerity as a strategy of economic recovery.” Most moderately liberal economists accept that truth, too. Even Larry Summers has been writing op-eds on it.
If these eminent thinkers are at the edge of economic orthodoxy, why are they marginalized within the corridors of power? One reason is that politics, not surprisingly, tends to get personal. Both Stiglitz and Krugman have decided to air their views in public rather than operating as discreet outside members of a kitchen cabinet, as former Federal Reserve Chair Paul Volcker has. (Despite Volcker’s greater discretion, his views are mostly honored in the breach, too.) Stiglitz, even more than Krugman, has not been shy about criticizing Summers and Treasury Secretary Timothy Geithner by name, and the disfavor has been richly returned. Though Krugman’s column praises the Obama administration when the president gives Krugman half a reason to do so, the White House accurately perceives him and Stiglitz as off-message and part of the opposition.
More fundamental to their marginalization is the relative radicalism of what Krugman and Stiglitz are advocating in our conservative era, one in which even Democratic presidents have done little to reverse unconstrained finance, shrunken government, and deepening inequality. To embrace their wisdom would require something close to a political revolution. So two of our most lauded economists remain prophets with little power to change events. America would be a far healthier country if they broke through.