The Most Misunderstood Man in America

That would be John Maynard Keynes, the great 20th-century economist who rocketed to international renown in late 1919 when he published The Economic Consequences of the Peace. In his book, Keynes warned that the draconian penalties imposed on Germany after World War I would lead to political disaster. No one listened. The disaster he predicted turned out to be World War II. Like Stiglitz, Keynes was not a favorite at the White House. Keynes also believed that markets were imperfect: he invented modern macroeconomics—which calls for major government intervention to help ailing economies—in response to the Great Depression. But after meeting Keynes for the first time in 1934, FDR dismissed him as too abstract and intellectual, according to Robert Skidelsky, Keynes's biographer. Keynes himself fretted that Roosevelt was not spending enough.

To his critics—and there are many—Stiglitz is a self-aggrandizing rock-thrower. Even some of his intellectual allies note that while Stiglitz is often right on the substance of issues, he tends to leap to the conclusion that government can make things better. Harvard economist Rogoff has called him intolerably arrogant—though he added that Stiglitz is a "towering genius." In a letter to -Stiglitz published in 2002, Rogoff recalled a moment when the two of them were teaching at Princeton and former Fed chairman Paul Volcker's name came up for tenure. "You turned to me and said, 'Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?' I responded something to the effect of 'Well, he was arguably the greatest Federal Reserve chairman of the 20th century.' To which you replied, 'But is he smart like us?'" (Stiglitz says he can't remember the comment, but adds that he might have been referring to whether Volcker was an abstract thinker.)

Stiglitz's defenders say one possible explanation for his outsider status in Washington is his ongoing rivalry with Summers. While they are both devotees of Keynes, Summers often has supported deregulation of financial markets—or at least he did before last year—while Stiglitz has made a career of mistrusting markets. Since the early '90s, when Summers was a senior Treasury official and Stiglitz was on the Council of Economic Advisers, the two have engaged in fierce policy debates. The first fight was over the Clinton admin-is-tration's efforts to pry open emerging financial markets, such as South Korea's. Stiglitz argued there wasn't good evidence that liberalizing poorly regulated Third World markets would make any one more prosperous; Summers wanted them open to U.S. firms.

The differences between them grew bitter in the late 1990s, when Stiglitz was chief economist for the World Bank and took issue with the way Treasury Secretary Robert Rubin, and Summers, who was then deputy secretary, were handling the Asian "contagion" financial collapse. After World Bank president James Wolfensohn declined to reappoint him in 1999, Stiglitz became convinced that Summers was behind the slight. Summers denies this, and maintains that no rivalry exists between them. Summers's deputy Jason Furman says that Summers now "talks to [Stiglitz] a lot." "A lot" is an exaggeration, Stiglitz responds. "We've talked one or two times," he says.

Despite the Obama team's occasional efforts to reach out to him, Stiglitz remains deeply unhappy about the administration's approach to the financial crisis. Rather than breaking up or restructuring the big banks that failed, "the Obama administration has actually expanded the notion of 'too big to fail,' " he says. In a veiled poke at his dubious standing in Washington, Stiglitz adds: "In Britain there is a more open discussion of these issues." A senior White House official, responding to this critique, says that the Obama administration is most often criticized these days for intervening too much in the economy, not too little.

In other respects, Obama is embracing some of Stiglitz's views, suggests Peter Orszag, director of the Office of Management and Budget—and a former Stiglitz protégé (he worked for Stiglitz during the Clinton administration). One example: Obama's new idea for reforming health care by creating a government-run program to compete with private-sector insurers. "There is an intellectual paradigm in health care that says you should move to purely private markets," says Orszag. "Joe's perspective would suggest major difficulties [with that]. That led to the thought that we need a mix: there is an important government role."

Today, settled as a professor at Columbia, Stiglitz occasionally finds himself welcomed in the nation's capital, though usually at the other end of Pennsylvania Avenue, to testify before Congress. While he had no great desire to go back into government, friends say he was deeply disappointed when an offer didn't come from Obama last fall. Not surprisingly, Stiglitz believes his old rival was behind it, though Summers denies this. As for the invitation to dinner at the White House, there were a few theories kicked around the spacious Stiglitz household on Manhattan's Upper West Side as to why it came at the last minute: one was that Obama, in an interview posted online that week by The New York Times, had cited Stiglitz as one of the critics he listens to, so it would have seemed strange if he hadn't been invited to the dinner. While Stiglitz was flattered by the discussion over a dinner of roast beef and Michelle Obama's homegrown lettuce, he can't stop himself from complaining that an occasional meal with dissidents is not the best way for the president to formulate policy. "Some of the most difficult debates and judgments can't really be hammered out in an hour-and-a-half meeting covering lots of topics," he says. Stiglitz may a prophet without much honor in Washington, but he seems to be determined to keep the prophecies coming.

© 2009