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Friday, Oct 10, 2008
Nobel Prize-winning economist Joseph Stiglitz talks about the corporate looting spree and Bush's woeful mismanagement of the economy.
Jul 3, 2002 | Joseph Stiglitz began explaining why markets fail long before Enron and WorldCom rose, exploded and crashed. But not many people wanted to listen during the boom-boom '90s; Stiglitz was even fired from his position as chief economist at the World Bank after he repeatedly criticized the organization's free-market obsessions.
Today, Stiglitz's lifetime of work is suddenly all too relevant. Consider, for example, his theory of "asymmetric information." Stiglitz spent years demonstrating that one party in a transaction -- say, the owner of a factory -- often possesses more information than the other about that transaction, and thus has an advantage that allows for market inefficiencies, and potentially, human suffering. His work won Stiglitz the 2001 Nobel Prize in economics, but more to the point, it handily explains why Enron and other companies successfully hid their accounting tricks for so long. Because executives have the power to determine how to arrange their profit-and-loss numbers, the theory holds, they'll always have a leg up on detectives and accountants who are trying to uncover misdoings.
From 1993 to 1997, Stiglitz served as a member and then as the chairman of President Clinton's Council of Economic Advisers. He then went on to become chief economist at the World Bank, where he stayed until 2000. At each step of his career, Stiglitz advocated for a critical look at what he calls "the Washington Consensus" -- the conventional wisdom that holds that everything bad in the economy can be laid at the government's door while everything good stems from the market.
Filled with accessible, on-the-ground examples from Ethiopia, Indonesia, Russia and elsewhere, Stiglitz's new book, "Globalization and Its Discontents," witheringly dismantles that consensus. The villains, Stiglitz argues, are obvious: The International Monetary Fund, Clinton Treasury Secretary Lawrence Summers and Wall Street all come off badly, more concerned with ideology and their own bottom lines than with the facts.
Salon sat down with Stiglitz in New York and discussed accounting trickery, why government is necessary and the present state of the world economy.
The American economy is engulfed in a wave of corporate scandal. WorldCom, Enron, Adelphia, ImClone -- the failures and frauds keep piling up. What's going on?
I think the most important, significant thing that [the scandals] bring home is the importance of regulation. You can't have markets work without good information, and it is not necessarily the case that people have an incentive to provide accurate information; [but] they do have an incentive if there are penalties for providing fraudulent information. So the government plays an absolutely essential role in enabling the markets to work.
Now there were some big mistakes made in the mid-'90s. When I was at the Council of Economic Advisers, FASB -- the Financial Accounting Standards Board -- proposed a change in the way stock options for executives would be treated. The Council of Economic Advisers supported the change, on the grounds that it would improve the quality of [corporate] information. Wall Street and Silicon Valley united to put political pressure to oppose this change. The U.S. Treasury gave in to this political pressure and put pressure on FASB, and FASB backed off.
The reasons it was so important were severalfold. First, the principle that accounting standards ought to be kept out of politics -- that principle was compromised. Secondly, it compromised the quality of information. Thirdly, it provided further incentives for the use of stock options. And that has contributed to the whole problem we're seeing.
Why? Because with stock options, executives have an incentive to get the value of their company up as fast as possible. They found that they'll make more money if you give inaccurate or distorted information rather than honest information. One of the things I've always argued as an economist is that incentives matter, and one of the things we did there was provide incentives to provide stock options, which provided incentives to provide dishonest information.
Is that the root cause of all these accounting irregularities and alleged frauds?
That's right. There are many factors; the go-go atmosphere, the attitude that anything goes. But if there is a single thing that you can say is the root cause, it is that -- the stock option decision and the mania to which it gave rise.
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