The Most Misunderstood Man in America

Anya Stiglitz was in the middle of a Pilates class in Central Park on an April morning when her cell phone rang. Glancing down, she saw "202" pop up—no number attached—and knew it was the White House. An aide to Larry Summers was on the line, looking for her husband, the Nobel Prize–winning economist Joseph Stiglitz. Anya said she'd pass on the message to Joe—then went back to work on her abs. No big deal, she thought. People often call her when they want to talk to Joe, because even though he's spent four decades figuring out how the global economy works, he hasn't quite gotten the hang of voice mail. "He doesn't listen to his messages, so if you want to talk to him, keep calling," Anya says on his cell-phone recording.

Anya figured Summers, Obama's chief economic adviser, was probably just calling to gripe about Joe's latest op-ed in The New York Times. Joe Stiglitz and Larry Summers, two towering intellects with egos to match, are not each other's favorite economist. "They respect each other, but they hate each other like poison," says Bruce Greenwald, Stiglitz's friend and academic collaborator at Columbia. ("I've got huge admiration for Joe as an economic thinker," Summers told NEWSWEEK.) Stiglitz had been hammering at Obama's economic team for its handling of the financial crisis. He wrote that the stimulus program was too small to be effective—a criticism that has since swelled into a chorus, though Obama says he's not adding more money. Stiglitz also had called the administration's bailout plan a giveaway to Wall Street, an "ersatz capitalism" that would save the banks' investors and creditors and screw the taxpayers. "I thought, Larry—he's just going to yell at Joe," Anya recalls.

But Summers's aide soon called back, and this time he said it was urgent: could Professor Stiglitz come to Washington for a dinner hosted by the president—that same night? Anya patched him through to Joe's office at Columbia University; Stiglitz accepted, and jumped on an early train. He was a little miffed: the other eminent economists attending the dinner, like Princeton's Alan Blinder and Harvard's Kenneth Rogoff, had been invited the week before. Stiglitz, a former chairman of Bill Clinton's Council of Economic Advisers, had supported Barack Obama as a candidate as early as 2007. But until that day, four months into the administration, he had heard barely a word from the White House. Even now, when the president was making an effort to hear a range of economic voices, Stiglitz seemed to be an afterthought. (A White House spokesman said only that the president wished to include Stiglitz.)

Such is the lot of Joe Stiglitz. Even in the contentious world of economics, he is considered somewhat prickly. And while he may be a Nobel laureate, in Washington he's seen as just another economic critic—and not always a welcome one. Few Americans recognize his name, and fewer still would recognize the man, who is short and stocky and bears a faint resemblance to Mel Brooks. Yet Stiglitz's work is cited by more economists than anyone else's in the world, according to data compiled by the University of Connecticut. And when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle. "In Asia they treat him like a god," says Robert Johnson, a former chief economist for the Senate banking committee who has traveled with him. "People walk up to him on the streets."

Stiglitz has won fans in China and other emerging G20 nations by arguing that the global economic system is stacked against poor nations, and by standing up to the World Bank and International Monetary Fund. He is also the most prominent American economist to propose a long-term solution to the imbalances in capital flows that have wreaked havoc, from the Asian contagion of the late '90s to the subprime-investment craze. Beijing has more or less endorsed Stiglitz's idea for a new global reserve system to replace the U.S. dollar as the world currency. Chinese Prime Minister Wen Jiabao has been influenced by Stiglitz's work, especially when "he talks about the economics of poor people," says Fang Xinghai, the head of Shanghai's financial-services office. But his stature is huge in Europe as well: French President Nicolas Sarkozy recently featured him at a conference on rethinking globalization. And earlier this month, while traveling to Europe and South Africa, Stiglitz received a call from British Prime Minister Gordon Brown's office: could he return through London and help the P.M. get ready for the G20 meeting in Pittsburgh?

Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."

Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. Stiglitz remembers realizing as a small boy that something was wrong with our system. The Stiglitzes, like many middle-class families, had an African-American maid. She was from the South and had little education. "I remember thinking, why do we still have people in America who have a sixth-grade education?" he says.

Those early experiences in Gary gave Stiglitz a social conscience—as a college student, he attended Martin Luther King's "I Have a Dream" speech—and led him to probe the reasons why markets failed. While studying at MIT, he says he realized that if Smith's "invisible hand" always guided behavior correctly, the kind of unemployment and poverty he had witnessed in Gary shouldn't exist. "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001. In the same speech he declared that the invisible hand "might not exist at all." The solution, Stiglitz says, is to move beyond ideology and to develop a balance between market-driven economies—which he favors—and government oversight.

Stiglitz has warned for years that pro-market zeal would cause a global financial meltdown very much like the one that gripped the world last year. In the early '90s, as a member of Clinton's Council of Economic Advisers, Stiglitz argued (unsuccessfully) against opening up capital flows too rapidly to developing countries, saying those markets weren't ready to handle "hot money" from Wall Street. Later in the decade, he spoke out (without results) against repealing the Glass-Steagall Act, which regulated financial institutions and separated commercial from investment banking. Since at least 1990, Stiglitz has talked about the risks of securitizing mortgages, questioning whether markets and authorities would grow careless "about the importance of screening loan applicants." Malaysian economist Andrew Sheng says, "I think Stiglitz is the nearest thing there is to Keynes in this crisis."