To the downsized or those with withered 401(k)s, the '90s were a golden age. But don't remember the Clinton years too fondly, says Nobel Prize-winning economist Joseph Stiglitz. In his new book, The Roaring Nineties, the ex-World Bank honcho argues that all the prosperity masked some troubling trends - like accounting tricks and the rise of the disposable employee - and left us with an overly volatile economy. So much for progress.
WIRED: Who deserves the most blame for the crash?
STIGLITZ: I identify three or four culprits. The deregulation movement went too far, too fast. Then I have to give some blame to the Fed. Greenspan gave the "irrational exuberance" speech but didn't do anything about it. And there was the bad accounting framework, which emphasized stock options and created a series of perverse incentives. Wall Street and Silicon Valley conspired to maintain those bad standards.
But that economic climate led to a lot of innovation, especially in the Valley.
The majority of innovation comes from public investment. Where did the Internet come from? The government. Radar? Jet engines? Publicly funded.
You come down hard on deregulation in your book, especially in the telecom sector. What about airline deregulation, which led to lower ticket prices?
I don't like the word deregulation. I like to say "finding the right regulatory structure." For example, you shouldn't have a regulation about where you can locate an ATM. But you have to think about the conflicts of interest that we saw in banking.
You claim too much R&D money was wasted on "useless software" and "unused fiber" in the '90s. Isn't it kind of early to know?
Over the long run, yes, those will be productive. The point is that market signals - like price - only work if you have the right information. We didn't have the right information because of the distortions caused by stock options.
Will doing away with stock options put an end to market volatility?
There's no way to eliminate volatility. In the '90s, though, we did things that made us more susceptible to it. Two of the most important economic stabilizers, unemployment insurance and welfare, have been reduced. Then there's a mentality that all that matters is the bottom line. That subjects us to a lot more volatility in a downturn.
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