Free-market proponents have recently held the upper hand in the debate over regulation of the economy. And their view has become prevalent enough for economist Joseph Stiglitz to term it the "Washington Consensus." In his new book, "The Roaring Nineties," Mr. Stiglitz counters that instead of providing the United States with an enviable economic engine, corporate America and Wall Street have failed us.
With this book, Stiglitz proves that he remains an important voice in decrying slavish devotion to the free market. Those who argue about the efficacy of free markets over government-led economies often talk about the waste that stems from having government take over too much decisionmaking. Yet, says Stiglitz, "[t]he scale of theft achieved by the ransacking of Enron, WorldCom and other corporations ... was in the billions of dollars - greater than the GDP of some nations."
Stiglitz says that is it more than coincidental that some of the industries with the greatest problems in the 1990s were the ones with the most deregulation: the investment bubble in telecommunications, the market manipulation in California in the electricity industry, the conflicts of interest that developed in the financial industry with the repeal of the Glass-Steagall Act, and the misinformation that arose about companies from lax accounting regulation.
These abuses arise from the thinking that free markets are infallible. Free-market proponents complain about government largess, Stiglitz says, but they turn a blind eye to the "corporate welfare" that we see in the guise of airline and agricultural subsidies, protectionism for the steel industry, and the bailing out of hedge fund Long-Term Capital Management. In these instances, free-market rhetoric seems "simply a façade for a political agenda that [includes] help for oil companies, lower taxes for the wealthy, and lower benefits for the poor."
Wall Street colluded with corporate America to bring about these debacles, says Stiglitz. Investment banks, which were "supposed to provide information" that would lead to "better allocation of resources," instead "trafficked in distorted or inaccurate information," and "participated in schemes that helped others distort the information they provided and enriched others at shareholders' expense."
Stiglitz admits that the Clinton administration was complicit in the excesses of the 1990s, for instance, in pushing deregulation of telecommunications too far. Yet he reserves his sharpest barbs for the new Bush administration, even though his book focuses on the period when the Clinton administration held power. Stiglitz was a member of the Clinton administration, ultimately serving as chairman of the Council of Economic Advisers from 1993 to 1997. He later served as chief economist at the World Bank until 2000.
Stiglitz places most of the blame on the Federal Reserve and the US Treasury. His criticism of those institutions is not without merit. One of Stiglitz's greatest concerns is how the institutions' ideology is colored by the fact they draw their ranks "from the financial markets, and secondarily from business, with the voices of workers or consumers barely audible." Those institutions worry more about inflation and capital markets than unemployment and poverty, despite the fact that the Fed's "charter obligates it not only to maintain price stability but to promote growth and employment." Stiglitz says the idea that low unemployment necessarily leads to inflation is a myth.
At times, Stiglitz becomes strident - for instance, when he blames Bush's energy policy for filling the coffers of the Middle Eastern countries that fund terrorism. Additionally, in his quest to document the supposed sins of free-market supporters, the book sometimes loses coherence, most notably when Stiglitz proclaims the need for what he calls "Democratic Idealism."
While he effectively points out where free markets have failed to bring greater prosperity for a wide swath of people, he does not do much to really explore the "legitimate areas [for government] - from education to the promotion of technology to social protection for the aged and the disadvantaged."
Stiglitz does, however, make a compelling case for the proper incentives and a regulatory framework for America's corporations and Wall Street firms. Where regulations are problematic, America needs "reformed regulation," not deregulation, he says. "Often the invisible hand is invisible simply because it isn't there. Unfettered markets, rampant with conflicts of interest, can lead to inefficiency."
• Wayne E. Yang works for a Connecticut-based private-equity firm.