With a potential default less than one week away, Jeremy Siegel of the Wharton School and Robert Shiller of Yale debate the possibility of a U.S. financial crisis and what can be done to avert it.
Although I do not agree with all of Shiller’s political views, I have tremendous respect for the man and see him as a real economist, as opposed to many economists nowadays who seem to be completely blinded by their political biases. Shiller is not a perma-bear despite the claim of many people. Although he called the tech bubble as early as the mid 90s and the housing bubble early on, he has also been right on the bullish side. In an interview in late February 2009, Shiller stated that stocks were cheap for the first time in a very long time. Anyone who listened to that call made a lot of money.
Jeremy Siegel is a bit of a perma-bull, he seems to be always bullish on the market. However, his book Stocks for the Long Run is a phenomenal piece of work (although not required reading for Value Walk readers it is on the suggested list), which goes back as far as 1802 and shows that stocks are better as long term investments over other asset classes.
Jeremy Siegel thinks that Medicare is the biggest problem behind the current fiscal crisis, while social security is a minor problem compared to Medicare. Siegel thinks that spending is out of control and we need to think on a longer term basis, which must be addressed now. Siegel thinks Government is too big and does not think we have the money to do everything we do. Siegel thinks that we will come to an agreement before there is a default.
Shiller thinks that we are in a growth recession, and it looks like it will be a long one. He thinks cutting healthcare will is not a good idea. Shiller says his idea is political unpopular, but he thinks we should “tax and spend”. We have to raise taxes to not increase the debt, but cannot decrease spending in the current environment. Shiller quotes the late Paul Samuelson as proposing this after the WWII, and it worked. Shiller thinks there have been enough cutting especially on the state level. Shiller criticizes wasteful Government spending, but favors programs like the National Science Bureau where the Government is simply the intermediary. Also public works projects like the CCC which was instituted during the great depression to employ people in conservation and development of natural resources in rural lands.
Both men agree there will be a solution, and defaulting will be a catastrophe.
Below the two men, who are long time friends fight it out over the debt ceiling: