Stiglitz was wrong on government wastes

Comments on “Troubles ahead for world economy”, an interview of Joseph Stiglitz by Kerry O’Brien, ABC’s 7.30 Report program, 27/07/2010, http://www.abc.net.au/7.30/content/2010/s2965891.htm
Joseph Stiglitz is a Nobel Prize winner and well known and respected American economist. He has made outstanding contributions to public economics. He commands my highest regard and respect.

I agree with most of what he said during that interview. However, I found a particular point a bit hard to agree to, when he was answering the following question:

“There's been a lot of criticism of waste in the way some of Australia's stimulus money was spent. Is it inevitable if you're going to spend a great deal of government money quickly that there will be some waste and can you ever justify wasting taxpayers' money?”

His answer:

“If you hadn't spent the money, there would have been waste. The waste would have been the fact that the economy would have been weak, there would have been a gap between what the economy could have produced and what it actually produced - that's waste. You would have had high unemployment, you would have had capital assets not fully utilised - that's waste. So your choice was one form of waste verses another form of waste. And so it's a judgment of what is the way to minimise the waste. No perfection here. And what your government did was exactly right. So, Australia had the shortest and shallowest of the downturns of the advanced industrial countries. And, ah, your recovery actually preceded the - in some sense, China. So there was a sense in which you can't just say Australia recovered because of China. Your preventive action, you might say pre-emptive action, prevented the downturn while things got turned around in Asia, and they still have not gotten turned around in Europe and America.”

The issue I have is that it is not an issue of binary waste as Stiglitz put it, unless he meant the waste associated with government expenditure is any deadweight loss in its normal understanding. But Kerry O’Brien’s question was clearly about different wastes.

Stiglitz either missed the point of the question or he was defending the wrong thing, that is, avoidable wastes in Australian government’s expenditures in its stimulus packages.

Some wastes may have not been completely avoidable, but clearly some of the wastes could have been avoidable if the government had done properly and/or responded quickly when reports raised issues of wastes and rip offs in those programs, such as the building the education revolutions program – the often labelled school halls program.

Government has a duty to be diligent in spending taxpayers’ money and ensure “value for money” in any expenditure. Government must be prudent.

Managing the economy including emergency responses to financial or economic crisis is not green light for waste and should never justify reckless spending and wastes.

Stiglitz’s misunderstanding of those wastes implied in that question and framing it as an unavoidable trade off with waste of alternative economic recession was unfortunate.

It is not the binary or bipolar case of extremes, either this or that. Successful governments can and should use fiscal policy prudently to achieve both economic and budgtary goals.