The elephant in the room

Seems to me Joseph Stiglitz's critics are ignoring the elephant in the room.

Stiglitz, as Bill Bonner noted on Monday and I mentioned last week in the context of William F. Buckley Jr's death (by all means, read to see the connection), is out with an updated study estimating the costs of the wars in Iraq and Afghanistan at $3 trillion.

Most of the criticism to date has picked nits with how Stiglitz and coauthor Linda Bilmes arrived at that $3 trillion figure.  But the critics conveniently overlook a wider argument Stiglitz and Bilmes make — one that comports with Austrian economic theory.  Simply put, the war fueled the monetary expansion that's brought us to our current pitiful state of affairs.  As reported by Reuters:

Asked if the war has contributed to the U.S. slowdown,
Stiglitz said, "Very much so."

"To offset that depressing effect, the Fed has flooded the
economy with liquidity and the regulators looked the other way
when very imprudent lending was going up," Stiglitz said. "We
were living on borrowed money and borrowed time and eventually
a day of reckoning had to come, and it has now come."

The war has also altered how the United States has reacted
to its current economic troubles, he said.

"When America's financial institutions had a problem, they
had to turn to the sovereign wealth funds in the Middle East
for recapitalization, for the bailout," he said.

That last part, by the way, jibes with what Warren Buffett said this week.  (I can't wait for this point of view about SWFs to start getting shouted down as "blame America first" — you just know it's gonna happen.)

Of course, Stiglitz is no Austrian.  And yet, get this:

"It used to be thought that wars are good for the economy.
No economist really believes that anymore," Stiglitz said.

"No economist?"  I wish it were so; I wish mainstream economists stopped buying into the broken-window fallacy .  Alas, days before Stiglitz made that assertion, Paul Krugman already disproved it.