Nobel Prize winner and former White House economist Joseph E. Stiglitz said that "underlying forces" indicate that the U.S. economy will continue on a "downward trajectory" for 2009 and that grim trend will have grave consequences for the global economy.
"America’s economy had been supercharged by excessive leveraging; now comes the painful process of de-leveraging," Stiglitz, who was chairman of the White House Council of Economic Advisors during the Clinton administration, wrote in his syndicated column.
"Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. After all, when banks don’t know their own balance sheets, they aren’t about to trust others."
The Bush administration and the Democratic Congress didn’t see these problems coming; did not initially think that they were problems when they arrived; then downplayed their significance, and, in the end, panicked, Stiglitz charged.
What action has been taken by the government has been aimed at bolstering the global financial system.
"But the financial crisis is only one of several crises facing the country: the underlying macroeconomic problem has been made worse by the sinking fortunes of the bottom half of the population," Stiglitz wrote.
Those who would spend don’t have the money, and those with the money aren’t spending, he added.
"The point of reciting these challenges facing the world is to suggest that, even if Obama and other world leaders do everything right, the U.S. and the global economy are in for a difficult period. The question is not only how long the recession will last, but what the economy will look like when it emerges."
Will it return to robust growth, or will we have a sclerotic recovery, as did Japan in the 1990s?
"Right now, I cast my vote for the latter, especially since the huge debt legacy is likely to dampen enthusiasm for the big stimulus that is required," Stiglitz warned.
Not everyone shares this dour outlook, however. Senate Republicans have been pushing for a massive tax cut, in addition to the stimulus, and Obama has embraced the idea of a $300 billion tax cut.
"Our energized economy cannot occur without lower marginal tax rates," notes Larry Kudlow, a conservative economist and CNBC talk show host, in his weekly column.
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