The Boom: What Went Wrong


A New History of the World's Most Prosperous Decade

By Joseph E. Stiglitz

W.W. Norton -- 416 pages -- $24.95

Joseph E. Stiglitz whacked a hornets' nest in 2002 with the publication of Globalization and Its Discontents. Drawing on his years inside the Clinton White House and as chief economist at the World Bank, the Nobel laureate argued that globalization had been hijacked by moneyed interests and free-market ideologues. He blamed the austerity policies of the American-influenced International Monetary Fund for bringing misery to the people of Indonesia, Thailand, Latin America, and elsewhere.

The response was vociferous. Kenneth S. Rogoff, then chief economist of the IMF, accused Stiglitz in a 2002 debate of "sniping at the paramedics as they tended the wounded." He said the expansionary policies Stiglitz advocated would have worsened inflation in developing economies, "hurting the entire populace, but especially the indigent." Rogoff got a lot off his chest. He said Stiglitz was living in "the gamma quadrant," accused him of slandering Fund officials, and said: "I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real-world problem."

Rogoff got at least one thing right: Stiglitz is sure of himself. The Columbia University economist proves it by snapping back from the public dressing-down with a new book, The Roaring Nineties, that broadens his attack. Wall Street, big business, and free-market economists didn't just screw up globalization, he says. They also messed up on electricity deregulation, stock options, pension reform, accounting scandals, the merger of commercial and investment banking, and the budget deficit. He dismisses the '90s boom as "hyperactivity" that was based mainly on false hopes and lies.

Stiglitz says he joined the Clinton Administration as a member and later chairman of the President's Council of Economic Advisers with the mission of "putting people first" -- the slogan of Bill Clinton's first campaign. "Perhaps never has a group of such intelligence and dedication been assembled," he writes. He says the Clinton forces did achieve some of their goals, such as reducing the poverty rate and increasing funding for Head Start.

But, argues Stiglitz, the liberal Clintonites allowed themselves to be steamrolled by Republicans and by Democrats with a Wall Street agenda. His bête noire on this point, as in Globalization and Its Discontents, is Robert E. Rubin, who was co-chairman of Goldman, Sachs & Co. before becoming Treasury Secretary. Stiglitz says that there's no evidence that deficit reduction was the cause of the '90s boom. And he argues that a fetish for surpluses caused the Clinton team to abandon important but costly goals, such as strengthening schools.

On deregulation, too, Stiglitz argues that liberal Democrats "conceded the battle" without putting up a fight. He decries Rubin's support for the successful campaign to repeal the Glass-Steagall Act, which separated commercial from investment banking. "I worried about the conflicts of interest, about the effect on competition," he writes, "but these worries were quickly shunted aside."

Stiglitz repeatedly returns to the theme that "we didn't stand up for our principles." But it's clear from the context that the "we" does not include the author, who portrays himself as a sometimes lonely warrior for the truth.

Not that Stiglitz reserves all his criticism for fellow Democrats. He's even harder on the Bush family. "Looking at what preceded the Clinton Administration, and especially what followed it, the [Clinton] grades become almost glowing," he writes. The title of his epilogue on President George W. Bush says it all: "Further Lessons on How to Mismanage the Economy." Stiglitz also takes Federal Reserve Chairman Alan Greenspan to task for, as he sees it, inflating a bubble in the stock market. He says Greenspan should have backed up his "irrational exuberance" musings with action: raising the margin requirements on loans to buy stocks.

Stiglitz is persuasive when he deals with topics that are closest to his field of expertise -- particularly regulatory issues. Stiglitz, after all, is a serious economist -- like another left-leaning critic, Princeton University's Paul Krugman. Even Rogoff, who clearly despises Stiglitz, called him "a towering genius" as an academic. Stiglitz shared the Nobel in 2001 for analyzing cases where information is imperfect or "asymmetric" -- that is, when some people know more than others. He demonstrated the ways markets can cease to function if, for example, buyers feel they can't trust what they're told by sellers.

It's intriguing, then, to see through Stiglitz' eyes how many of the disasters of the late 1990s and early 2000s can be construed as stemming from imperfections or asymmetries of information -- from the Enron Corp. scandal to the cheerleading on Wall Street that contributed to the stock market bubble. It's no surprise that one of his few heroes -- aside from himself -- is Arthur Levitt Jr., the Securities & Exchange Commission chairman who crusaded for better accounting and disclosure of corporate information. Stiglitz makes a persuasive argument that in case after case, misregulation and underregulation of markets opened the door to abuse.

But The Roaring Nineties doesn't live up to the billing of its subtitle as "a new history of the world's most prosperous decade." There is little here about prosperity and much about stupid or craven governance. While Stiglitz says "the New Economy is real," he immediately goes on to say "its significance has been exaggerated." From the start, he makes his bottom line clear: "[T]oward the end of the decade, what seemed to be the dawn of a new era began to look more and more like one of those short bursts of economic activity, or hyperactivity, inevitably followed by a bust, which had marked capitalism for two hundred years."

But Stiglitz' cynical assessment of the 1990s doesn't square well with the record. Even skeptical economists have begun to acknowledge that around 1995, the U.S. economy made an abrupt change for the better, propelled by the Internet and by the effective use of information technology. After two decades of weakness, productivity -- the output per hour of work, which is ultimately what determines living standards -- began to grow at rates approaching those of the "golden era" from the end of World War II through 1973.

Moreover, productivity continued to rise strongly despite the bust, the 2001 recession, and the slow recovery that followed. The implication is that the productivity boom was real, rather than just a side-effect of a 1990s bubble. And the stock market seems to know it: The S&P 500 has more than doubled since the end of 1994, before the boom-bust cycle started.

Stiglitz devotes all of one paragraph (on page 321) to the role of technology and education in lifting productivity and the economy's sustainable growth rate. Although he has done important academic work on what makes economies grow, in this book it appears that he's less interested in how to grow turkeys than in how to carve them up. Because he devotes so little attention to the sources of growth, The Roaring Nineties winds up being primarily a catalog of screwups by people in Washington.

The Roaring Nineties has other flaws. There are no flesh-and-blood people in the book. Bill Clinton, who would naturally be its central character, is a cipher. Also lacking is any sense of what things were actually like inside the White House when controversial decisions were made. And readers aren't likely to be perked up by Stiglitz' predictable agenda, laid out in a leaden chapter called "Toward a New Democratic Idealism: Visions and Values."

But those are minor criticisms next to the bigger problem, which is his failure to grapple with the nature of the '90s boom. While Stiglitz argues that "the Roaring Nineties may not have been the fabulous decade that it appeared at the time," he fails to prove his case.

By Peter Coy

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