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Further lessons on how to mismanage the economy

D. Murali

BOOM. That's what a book of economic synonyms, if there were one such, would show for `US'. No boom, but it was simply artificial, argues Joseph Stiglitz in The Roaring Nineties (www.penguin.com) .

The obesity was "fuelled by excessive deregulation, by perverse `incentivising' of CEOs, and conflicts of interest that ran out of control," states the blurb, switching over to a morality plank: "Greed is not good — for companies, individuals, or societies — and if left unchecked it leads to deceptions, distortions and disasters."

You can't put the book away, because the author is a Nobel laureate who "took on the IMF and is now turning his guns on the American President."

If that doesn't impress you enough, he adds, "this isn't just good morality, but good economics too."

The first chapter is `Boom and bust: Seeds of destruction'; thereafter, the book moves on to `miracle-workers', `Fed and its role in inflating the bubble', `globalisation' and `deregulation'. There is a chapter each on `creative accounting' and `Enron'.

Banks and tax cuts too are discussed, before the author goes about `debunking the myths' and lays down `a new democratic idealism'.

He doesn't say bye yet, because the epilogue has `further lessons on how to mismanage the economy.' A 15-page preface and a 10-page acknowledgement have a good sprinkling of the author's admiration for Clinton.

If you were to tell an analyst that he is no different from a shoe-seller, he might look for his shoe to bash you with, but the author draws a parallel from his first job at a shoe store in Indiana: "If the shoe was too tight, we explained how leather breathed and would soon loosen up. And if it was too loose, we talked about the advantages of comfort, and how the shoe would soon take the shape of the foot. The object was to sell the shoe — to earn the commission."

Useful tip if one were to land in such alternative occupation, but Stiglitz adds that customers really weren't relying that much on what the salesmen told them.

"But when it came to the IPO market, investors wanted to believe the stories they were told by the analysts even when they made no sense — when they pushed companies that had no reasonable business plans or, even worse, had business plans that were almost guaranteed to fail." Only when the markets failed would the investors know where the shoe pinched.

When there is good competition, and free market is at its peak, one could anticipate idealistically that information is perfect and that there would be minimal fee for transactions. But that doesn't happen, points out the author. Why?

"The economics of information provides a part of the rationale. Surveys show that most Americans do not even know the difference between bonds and stocks; how are they then supposed to make well-informed decisions about which stocks to buy, or even which brokers to choose?"

The book discusses how Enron's project in India was economically viable — for Enron, but not for India, which was to guarantee the big `E' high electricity prices.

"Long before Enron's reputation became tarnished at home, it was looked at askance abroad," writes Stiglitz.

"Enron's power project in India was one of the largest foreign direct investments in that country's history, and in India and elsewhere, Enron became the symbol of everything that had gone wrong with globalisation."

He asks why the Indian government signed a contract when it could get electricity at better terms elsewhere, and answers it in part: "Direct pressure was put on India by the American ambassador."

Two pages later, you would read how the American ambassador to India was appointed to the Enron board, after he left office; likewise, Robert Rubin's Citi was "one of the banks that was engaged in Enron's many nefarious activities".

Perhaps, if Enron were still around here, bleeding us white, we should have been content with lower GDP growth rates than what we are happy about.

Here are some of the myths that the book debunks. Cutting deficits will bring back prosperity is a sign of wrong thinking because that could make economic downturns worse, reinforcing the ideology of fiscal conservatism.

Then, there is the myth that wars are good for the economy; if you were to factor in the depressing effect of war uncertainty and the crowding out of other expenditures, war is not good, both in the short and long terms.

Don't look for economic heroes to cook up prosperity; policies are more important. There is no invisible hand to lead unfettered markets.

"What is good for Wall Street may or may not be good for the rest of the society; and financial markets are shortsighted".

Lower taxes would not unleash huge increases in savings and work effort. Global capitalism is a myth again, though the US pushed other countries "toward a market fundamentalist version of capitalism" which it had itself rejected.

In the epilogue, the author argues for democratisation of globalisation, "so that the voices of the developing countries are heard more clearly." Provided, of course, they find their voices to speak rather than engage in a travesty of mimicry.

Economics@thehindu.co.in

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