Stiglitz on pharmaceutical prices; and the four major causes of the worsening of the national debt

In this latest installment of Chris’ and my interview with Nobel economist Joe Stiglitz this past Sunday, August 28, 2011 in Paris, Stiglitz talks about the four major causes of the deficit.

STIGLITZ: I try to remind people that just ten years ago we had a very large surplus, 2% of GDP, so big that Greenspan said that if we didn’t do something about the surplus, we would entirely pay down the national debt, and it would be difficult for him to conduct monetary policy. An important reminder of why we should be skeptical of the Federal Reserve — that it is a political institution, not just an economic institution. It has a political agenda, or it had in the past.

Four things brought us from where we were then, huge surpluses, to where we are now. And those things were:

First, the tax cut for the rich that we couldn’t afford.

Two very expensive wars…. The budgetary cost so far have been around $2 trillion, but we were, in our book, underestimate the future cost, almost one out of 2 people coming back form Iraq and Afghanistan are disabled. And we’ve estimated that the cost of paying for health and disability for these may be approaching $1 trillion. So this is not even reflected in the official account, these are our estimates, corroborated by others, of what these future costs are likely to be.

The third is, a very good thing that we did, which was to provide prescription benefits under Medicare for the aged. But we made again a mistake, Bush made a mistake, and that was to say that even though the government is the largest buyer of prescription drugs, it could not negotiate with the drug companies, and that led to those high costs that you were referring to, estimated by some people over a period of ten years, about a trillion dollars extra given to the drug companies. That’s another major source of our deficit.

The banks were very good at making political investments, and the same thing was true of the drug industry. They’ve been very hard pressed to come up with new drugs, but the money they’re spending in Washington is yielding high dividends, and this is an example of those high dividends.

The final cause of the change of our framework from the surplus that we had ten years ago, just ten years ago, to where we are today, is the economic downturn. And that’s why the most important thing for dealing with the deficit is putting America back to work. And that’s where a stimulus package is absolutely essential. Proposals for more austerity cutbacks are going to make that even worse, and prospects of a real significant reduction in the deficit not very good.

Previous interview snipets:
Stiglitz: Probabilities of a double dip recession “certainly have increased significantly” (3:17 long)
Stiglitz: Obama administration and the Fed have demonstrated an “inability to make economic judgements.” (1:09 long)
Stiglitz: “The Fed is very good at creating problems, not so good at resolving them…. QE3 won’t help” (6:46 long)
Stiglitz: “The only thing that can be done (to help the economy in the near term) is fiscal stimulus, spending more money.” (1:01 long)
Stiglitz: We are bearing the consequences of Obama/Congress not pushing state/local aid in 1st stimulus. (2:05)

* Stiglitz on Dodd-Frank: “We are once again at risk of a freezing of the credit system” (4:04)

Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Instagram | Google+ | LinkedIn. John Aravosis is the Executive Editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown; and has worked in the US Senate, World Bank, Children's Defense Fund, the United Nations Development Programme, and as a stringer for the Economist. He is a frequent TV pundit, having appeared on the O'Reilly Factor, Hardball, World News Tonight, Nightline, AM Joy & Reliable Sources, among others. John lives in Washington, DC. .

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