Cutting Taxes Won't Help Recovery: Joseph Stiglitz

The US government should stimulate investment in order to ensure solid and sustainable economic growth, not cut taxes, Nobel Prize-winning economist Joseph Stiglitz told CNBC Wednesday.

Franco Origlia | Getty Images Joseph Stiglitz

Stiglitz, who earlier this month accused the Federal Reserve and the European Central Bank of throwing the world into "chaos" with their money-printing, said the first round of the stimulus did work for the US economy and that without it unemployment would have peaked at 12 percent or even 13 percent.

But the government has underestimated the severity of the downturn and did not design the stimulus as well as it could, he added.

"Before the crisis we were very profligate, we consumed. The question is not spending, but how you spend," Stiglitz said.

"If we spend it on investment… we will grow today and we will grow in the future," he added.

If the economy continues to remain weak, the US will be "wasting human capital" because a lot of people will be long-term unemployed, he said.

Investment by the government in the internet "really transformed the economy" and, on average, returns on education, health and infrastructure have been good in the US, according to Stiglitz.

Increasing spending and not cutting taxes is the best way to boost the economy, he said.

"When you have households with an overhang of debt, homeowners owing more on their mortgage than the value of the homes, tax cuts are not going to stimulate the economy," Stiglitz said. "What we need now is to stimulate investment."