The state of the union

Issue: 102

Jane Hardy

A review of Joseph Stiglitz, The Roaring Nineties: Seeds of Destruction (Penguin, 2003), £18.99 and Paul Krugman, The Great Unravelling: From Boom to Bust in Three Scandalous Years (Allen Lane, 2003), £18.99.

Joseph Stiglitz and Paul Krugman are both orthodox economists who have jumped ship to become the scourge of the US ruling class. In two recently published books they have both mounted sustained and vitriolic attacks on the economics, politics and foreign policy of the Bush administration, as well as global institutions such as the IMF and the World Bank that do their bidding. Joseph Stiglitz worked at the very heart of the beast, and was deeply involved in the economic policy decisions of the Clinton administration before going on to be chief economist and senior vice-president of the World Bank, as well as winner of the Nobel Prize for Economics in 2001. Paul Krugman, one of the most celebrated mainstream economists, received hate mail and death threats for vocal opposition to the war in Iraq, which he described as an ‘imperialist diversion from a sinking economy and devastated budget’. He further incurred the wrath of the ruling class by suggesting that the Bush administration had used 11 September for political gain, ‘wrapping itself in the flag’, while it sought to weaken environmental regulation, and cut taxes for the corporations and the rich.

Both Stiglitz and Krugman suggest that US foreign economic policy has contributed to instability and poverty in the global economy, and bred the conditions that brought about 11 September. Krugman has been the only voice in the US mass media to openly and repeatedly accuse Bush of bamboozlement and lying-first, about the impact of tax cuts, and then about taking the US into war without any evidence. He was hired to write for The New York Times at the height of the ‘new economy’ induced stockmarket bubble as a sort of ambulance chaser for capitalism, because of his expertise in the area of financial crisis. However, in the face of what he describes as ‘world class mendacity’ and lying of Orwellian proportions, he has strayed from his original brief on economics to become one of the most vociferous critics of the entire Bush administration project.

The two books cover slightly different time periods. Stiglitz looks at how the boom of the 1990s turned to bust, and the way in which the Clinton administration failed dismally to deliver on welfare and health, while cuts in social security and pensions were used to bankroll the rich. Krugman’s book is based on his columns in The New York Times and focuses on the period since Bush inveigled his way into office. This review looks at the remarkably similar themes that dominate both books—namely tales of crony capitalism, robbing the poor to give to the rich, the myth of the market and exporting neo-liberalism. The final section discusses their less than radical conclusions, which focus on the need to manage markets more efficiently and transparently.

Crony capitalism

Both Stiglitz and Krugman point to the hypocrisy of the Bush administration in lecturing East Asia on crony capitalism while developing it into a fine art themselves. They argue that the whole of US economic policy, as well as foreign policy, has been designed to enrich the interests of politicians and their friends in the big corporations. While the breadth and depth of crony capitalism under Bush has reached new proportions, this is not a new phenomenon—witness Clinton taking the US to the edge of a trade war with Europe on behalf of Chiquita. Even CBS MarketWatch (hardly a hostile witness) suggested that ‘a small group of business leaders exert enormous clout over Bush and his team in getting the rules changed for their benefit’.1 Despite the debacle of Enron, energy companies still managed to extract huge concessions from Bush. In January 2002 Bush signalled his intention to weaken pollution rules on power plants, and then announced a decision to store radioactive waste in Nevada. Each of these decisions was worth billions to companies with strong connections to Bush. In the words of CBS MarketWatch, ‘one group of major energy business political donors just hit the jackpot’.2 In another example, the Carlyle Group specialised in buying run-down defence contracts, and then reselling them when their fortunes miraculously improved after they received new government business. The company’s employees included Bush Sr, and among the investors, until October 2001, was the Bin Laden family.

Krugman and Stiglitz look at how Bush and his acolytes have systematically engaged in massaging the figures on a breathtaking scale to justify controversial policies that would protect profits and enrich big corporations. Krugman draws on examples from environmental policy to expose the fuzzy maths which underplayed the anti-environmental impacts of their policies. For example, in 2002 the Bush administration announced a policy to reduce ‘greenhouse gas intensity’ by 18 percent over ten years. This invented and spurious measure was calculated by dividing the volume of greenhouse gas emissions by GDP. As GDP is set to expand by 30 percent in the same period, it does not take rocket science to work out that this actually means a substantial increase in emissions. Similar obfuscation was used to justify their drill and burn policy in the Arctic National Wilderness, by fraudulently claiming that it would be a tiny enclave of development when in fact it will affect large swathes of the area.
Robbing the poor to give to the rich

One important theme in both books is the way in which there has been what Krugman describes as a tectonic shift in the distribution of income from ordinary families to the wealthy through tax cuts and slashing public expenditure. Krugman credits President Ronald Reagan with not disguising the fact that he was making tax cuts for the rich, but pillories Bush for trying to suggest that the rounds of tax cuts he has made are intended to benefit ordinary families. According to Bush these tax cuts are supposed to increase welfare for average workers both directly and through some sort of ‘trickledown effect’ from the wealthy. The reality is that 25 percent of tax cuts have gone to people making over $200,000 a year, while 40 percent have gone to the richest 1 percent of the population. Tax cuts, Krugman points out, benefit the ‘very, very affluent’ and have not touched the payroll taxes that four fifths of families pay. Between 1979 and 1997 the income of families in the middle of US income distribution increased by 9 percent, while the income of the families in the top 1 percent increased by 140 percent. Put another way, the income of families in the top 1 percent was ten times that of an average family in 1979, and 23 times that of one in 1997.

Both accounts are replete with facts about the widening gap between average wages and the bloated salaries and benefits that top managers have awarded themselves. During the 1990s senior executive pay rose by 442 percent in eight years from an average of $2 million to $10.6 million. In 2000 CEOs’ salaries were more than 500 times the wage of the average worker compared with 85 times at the beginning of the decade.

In order to finance these tax cuts the Social Security and Medicare budgets had been raided, and even the IMF has shown some disquiet over the scale of the pillaging of these funds. Therefore these handouts to the rich have resulted in slashing the already pathetic safety net for those on lower incomes. The failure to provide State Children’s Health Insurance in December 2002 meant 900,000 people losing health insurance over three years. Medicare payments are squeezed beyond their limits to the point that recipients cannot find doctors willing to take them.

Stiglitz looks at the way in which the financial security of ordinary people is increasingly threatened, not only through the reduction in Medicare and Social Security, but also the direct and indirect impacts the vagaries of the stockmarket have had on pensions. He focuses on the impact of the ‘bubble years’, when the stockmarket became hugely inflated on the promise of the new economy and then went into freefall. This meant that the value of people’s savings for retirement was slashed. At the same time corporations transferred funds out of their own pension funds. The astronomically high price of shares artificially inflated the value of pension funds, which corporations then proceeded to raid. By one estimate, 12 percent of the earnings growth of firms in 2000 came from pension income. The stockmarket bubble thus made profits look even bigger—reinforcing the bubble itself. This was a mirage, and with the stockmarket bust all of a sudden pension programmes were vastly underfunded. A study by Merrill Lynch showed that the scale of this was so massive for major companies such as Boeing, US Steel, General Motors and Ford, among others, that it threatened bankruptcy for the US’s major companies.

The myth of the market

Stiglitz and Krugman both point to the gaping void between the rhetoric and reality of the market in US economic policy. Adam Smith’s invisible hand is invoked to justify deregulation and to suggest that markets produce competition and benefit consumers. The reality has been that the large firms benefiting from privatisation have been busily engaged in making sure that markets do not work, or rather that they work in their interests. The Californian energy crisis (parodied by Krugman as ‘California screaming’) resulted from giving the market freer rein by deregulating and turned into an absolute disaster. California, a state with more wealth than many developing countries, had a series of protracted power cuts. The Federal Energy Regulation Commission concluded that efforts to manipulate electricity and natural gas by the newly privatised firms had been ‘epidemic’. It emerged that these companies had used strategies with nicknames such as ‘Death Star’ and ‘Get Shorty’ to withhold electricity by fabricating some technical problem that shut down its generators which then drove up prices and profits. One estimate is that consumers were overcharged by $6 billion in a ten-month period.

The story told about the telecommunications ‘gold rush’ in the wake of deregulation is much more a vindication of a Marxist analysis than that of conventional economics. The tale is one of an unseemly scramble to get a piece of action in the lucrative telecommunications market, leading to frenzied overinvestment creating excess capacity followed by the bubble bursting in the new economy. Stiglitz admits that he had underestimated the intensity of the drive for domination and notes that the US was left with a tremendous amount of excess network capacity, and a marketplace that was more concentrated than before. While Stiglitz sees this as policy failure, Marx would have explained this in terms of the anarchy of the market. This process of a clearing out of weak and less competitive firms resulting in increased centralisation is not simply the result of poor legislation, but a central element of the dynamic of capitalist economies.

Exporting neo-liberalism

While coming from different angles Stiglitz and Krugman are both highly critical of US foreign policy. In the case of Stiglitz he admits that during the beginning of his term with the World Bank he was lauding the success of trade liberalisation, but quickly came to see it as a new way in which the rich and powerful could exploit the weak and poor. He argues that the Uruguay Round (the round of trade negotiations which set up the WTO) pushed other countries to open up their markets to sectors where the US had strength. One of the glaring examples of double standards he cites is agriculture. Other countries have been forced to eliminate subsidies while American farmers are given massive handouts. This has the effect of forcing down global prices and reducing the income developing countries get from their crops. Stiglitz estimates that African countries in the 1990s lost 1 to 2 percent of their income. He gives the example of Mali, which received $37 million in aid while losing $43 million in depressed prices. In the case of intellectual property rights he argues that this was tantamount to ‘signing the death warrant for thousands in developing countries who would be deprived of life-saving drugs’.3

Similarly, Krugman is scathing about US foreign policy both for what it has foisted on the rest of the world, either unilaterally or through the IMF, and for its interference in the politics of other countries. For example, he defends Chavez of Venezuela, not on the basis of his economic policies, but because of his democratic mandate. Krugman argues that Latin America has been a disaster area. Per capita income is only slightly higher than in 1980, but because inequality has increased people are worse off than they were 20 years ago. The crisis in Argentina had ‘Made in Washington’ stamped all over it, because of the relentless insistence that they deregulated capital markets. Stiglitz suggests that the role of finance can be understood as a ‘new mantra which is what is good for Goldman Sachs, or Wall Street, is good for America and the World’.4 Further, when Argentina’s economy went into freefall it received no IMF assistance because of its lack of strategic value. In terms of aid Krugman describes the US as the ‘scrooge of the Western world’ ranking last behind Greece and Portugal, spending only 0.11 percent of GDP, with Canada and other European countries spending three times that amount.

Market management and enlightened economists

Both of these authors have drawn plenty of invective from the ruling class, including Alan Greenspan, chair of the federal reserve, who Krugman accused of being an ‘apologist for Bush’. However, despite the attacks mounted by Krugman and Stiglitz from within the system, and their manifest anger at the way in which the greed of the large corporations has impoverished ordinary people, their project is to knock the rough edges off the system and institute a benign capitalism. Opposed to triumphant capitalism, they both point to Sweden as an example of the ‘human face’ variety. They are opposed to what they term market fundamentalism rather than the market itself. Markets are seen as the centre of success, but as delicate mechanisms that are unable to work by themselves.

Stiglitz conceives of the battleground as between those who see a minimalist role for the state and those who see governments as able to correct market failure and steer markets towards social justice. Both authors argue for striking the correct balance between government intervention and private business, where the interests of consumers and workers can be safeguarded with an adequate safety net, where the environment is protected and where legal regulations and transparent accountancy can rein in big business which is currently out of control.

Despite his bombast Krugman is avowedly pro-globalisation and pro free trade and sharply differentiates himself from those critics of the WTO, whose views he claims are based on ‘leftist mythology’. Krugman is no socialist—support for the Democratic candidate Howard Dean (who opposes the war) puts him on the left of the Democrats. Further, he is highly critical of Ralph Nader for his hostility to corporations and corporate profit and for splitting the vote in the 2000 presidential election.

There is something of a contradiction running through both books. On the one hand both authors provide some privileged insights into the machinations of the US ruling class, but display a trenchant naivety about where power lies. Krugman, for example, cannot understand the failure of the media to expose the lies of Bush and its determination to ignore the large anti-war demonstrations in the US. In fact the answer is in his own writing when he exposes the so called pro-war demonstrations as having been orchestrated by a radio chain, Cumulus Media, whose management have a long history with Bush. Stiglitz’s experience in Clinton’s administration is one of him proposing a series of mild reforms that are jettisoned because they attack the privileges and profits of the US ruling class. Investment in health and education, at the centre of the Clinton platform, was completely abandoned. Big corporations could not simply be reined in by political will, and he admits having underestimated their drive for domination.

In the view of Stiglitz and Krugman the US political and economic system has been hijacked by a clique with an agenda of market mania and global economic domination. In their view economic policy should be put in the hands of enlightened and expert economists, as markets and capitalism itself need to be managed carefully. In their work there is no conception of a state, which persistently operates in the interests of a small group of people, irrespective of whether Republicans or Democrats are in government. Neither is there any notion that capitalism has an inexorable logic of pursuing profit, which means that big corporations do not play by the rules. Therefore we need to understand the breathtaking fraud of Enron and dozens of other companies, not simply in terms of greed or poor accounting, but as endemic to the system itself. Real profit was falling and therefore bosses had to go to any lengths to massage the figures.

A much more scholarly and detailed analysis of the post-war US economy is to be found in Robert Brenner’s The Boom and the Bubble.5 He places the rate of profit and overproduction at the centre of his analysis, and rescues the argument from conventional economists who view the problems of capitalism in terms of policy failure.

Notwithstanding these arguments I think both books are worth reading. In particular, both authors should be given credit for writing something about economics in a manner that is accessible, relevant and engaging—three qualities that are sadly lacking from the abstract and mathematical outpourings of most academic economists. Krugman’s book is current and accessible, while Stiglitz, in places, tends towards a post mortem of Clinton’s economic policy and is not as polemical or as interesting as his previous work, Globalization and its Discontents.6

These two books do an excellent job in producing insights into the greed, fraudulent activities and mendacity of the US ruling class. Krugman and Stiglitz are stimulating and insightful commentators—it is a pity that their rejection of the free market and its inequities does not lead them to the critique required by today’s anti-capitalist movement.

They reinforce the shortcomings of orthodox economics, which ultimately only offers sticking plasters for a deeply rotten system. It is the anti-capitalist movement, socialists and workers, who offer a real challenge to big corporations and the possibility of a better world.


1. P Krugman, The Great Unravelling: From Boom To Bust in Three Scandalous Years (Penguin, 2003), p103.

2. As above, p102.

3. J Stiglitz, The Roaring Nineties: Seeds of Destruction (Allen Lane, 2003), p209.

4. As above, p275.

5. R Brenner, The Boom and the Bubble: The US in the World Economy (Verso, 2002). Also see J Hardy, ‘Toil and Trouble: The Nature of the US Economy’, International Socialism 98 (Spring 2003) for a review.

6. J Stiglitz, Globalization and its Discontents (Allen Lane, 2002).