Stiglitz Urges 'Powell Doctrine' to Fix Jobs Picture
Stiglitz, a professor at Columbia University in New York and a former White House adviser under President Bill Clinton, told the Joint Economic Committee that more government spending and tax cuts are needed to put Americans back to work.
“There is, in economics, something akin to the Powell doctrine in the military: One needs to attack the problem with overwhelming force,” Stiglitz testified, referring to former chairman of the Joint Chiefs of Staff Colin Powell. “As we approach the looming jobs problem, we should not repeat the mistakes we have continually made in responding to this crisis: too little, too late.”
President Barack Obama this week proposed additional spending on the nation’s transportation system, tax credits to spur hiring by small businesses and incentives to make homes more energy efficient in a second round of initiatives aimed at cutting the jobless rate.
Employers have cut more than 7.2 million jobs since the recession began in December 2007. The unemployment rate last month fell to 10 percent from a 26-year high of 10.2 percent in October. The rate will exceed 10 percent through the first half of next year, according to a Bloomberg News survey of economists taken Dec. 1-8.
“We should not be fooled” by the decline in the jobless rate, Stiglitz said. “Growth in private demand” will probably be “insufficient to restore employment to normal levels any time soon.”
Stiglitz said the $787 billion package of spending and tax cuts enacted in February “has been working” although it was too small.
“Unless action is taken, we risk facing a vicious cycle: unemployment contributing to a weak economy, more mortgage foreclosures, more bad debts, lower demand, and possibly more, but certainly not less, unemployment.”
Stiglitz said priorities for spending should include extending unemployment benefits, aiding states facing revenue shortfalls, giving tax credits for weatherizing homes, government jobs programs and research and technology initiatives.
The economist shared the Nobel Prize in 2001 for work on problems that may arise in markets when parties don’t have equal access to information.
Restructure Mortgage Debt
Stiglitz also said Congress should act to encourage mortgage debts be restructured to reflect lower home values.
He said banks and mortgage lenders have been discouraged from restructuring home loans because they are allowed to carry those loans at face value even though many of the mortgages are underwater and likely to result in a default.
“I call that marking to hope, not marking to market,” Stiglitz said.
He said Congress should pass a “homeowner’s Chapter 11” bankruptcy reorganization law to make it easier for people to force a restructuring of their mortgage debt.
“That would provide a legal backdrop to encourage restructuring,” Stiglitz said. “We need a homeowners Chapter 11 that treats homes at least as well as we treat corporations.”
Stiglitz, 66, also said the Federal Reserve contributed to the financial crisis by failing to supervise banks or stem the housing bubble. He questioned proposals to give the central bank more authority to supervise firms whose failure might threaten the financial system.
“Giving more power to an institution which has failed so miserably, with results that have imposed such costs on all of us, cannot be the right solution unless there are deep and fundamental reforms in the institution, of a kind that are beyond those currently being discussed,” he said.