The author of Freefall said Europe’s cutback culture could push it back into recession. He specifically criticised the Irish goal of returning to a deficit of 3% of GDP by 2014.
“I think that is a kind of short-sighted behaviour that makes no economic sense,” Joseph Stiglitz told listeners to Morning Ireland on RTÉ Radio 1 yesterday.
No business ever expresses its targets in terms of how much debt it has, or in terms of how much deficit it has. It looks at its balance sheet, its liabilities and its assets.
“In the US, had we just spent a little bit of money building those levees in New Orleans, we would have saved a couple of a hundred billion dollars. The internet was financed by the US government, the most important innovation in the latter part of the 20th century. Cutting back willy-nilly on high-return investments just to make the deficit picture look better is really foolish.”
Mr Stiglitz said it was important that governments spend wisely, but added that capital spending is vital to drive recovery. He said Ireland’s current cutbacks show a lack of vision on how to engineer recovery.
Mr Stiglitz said: “Your government allowed the economy to become totally distorted, with a real estate bubble and with a banking system that was under-regulated. I am very critical of what happened in the US, but there are other countries that also allowed things get out of hand, and Ireland and Iceland are among those, worse even than the US.
“To get things going again, you need to have a vision of where you want to go. You don’t just want to get yourself back to where you were in 2007. There was something fundamentally wrong with what we were doing in 2007 – a wrong view of the balance between the market and government, a wrong view of the direction of our society and our economy. Unless you have a vision of where you want to go, you will be back making the same mistakes that got us into this mess in the first place.”
He said the deficit target of 3% of GDP was an artificial number, which could lead Europe into a double-dip. “What we’re doing is setting ourselves for a longer-term Japanese-style malaise of weak growth for an extended period of time. It’s disturbing that people are talking about a new normal, with unemployment of 8%-10%, which would be devastating.”