Since the 2008 financial crash, our country has been reeling without getting its economic policy right. What we needed then, and need now, is a new kind of macroeconomics; one that aims for investment-led growth, not consumption-led growth. But investment-led growth can't be achieved by a temporary stimulus. It requires a very different kind of strategy and policy. Investment-led recovery requires a clear identification of our society's longer-term needs, needs that can be filled through complementary investments by the public and private sectors. Think of railroads and farms in the late 19th century; highways, cars, and suburbs in the 1950s; and information technology, smart grids, and low-carbon energy for our time. And it requires a set of public policies to spur those investments, in part by using smart public investments to help leverage a private-sector investment boom.
Therefore, it is very frustrating to read Paul Krugman again today write about our current stagnation with so little reflection on his part that his own preferred stimulus policies can't solve the problem. It's of course even worse to hear this from Larry Summers, who Krugman quotes favorably today. Summers was the architect of Obama's economic policies during the first term, and now he tells us that the administration's policies haven't worked.
Both Summers and Krugman subscribed to Keynesianism, the idea that larger budget deficits and short-term stimulus after 2008 would revive the economy. Neither of them reflected on how the macroeconomic policies after 2008 should respond to the causes of the crisis. If they had, they might have recommended a very different strategy. And the debt-to-GDP ratio might not have doubled in the meantime as a result of the reliance on Keynesian stimulus policies.
When the financial crisis broke out in the fall of 2008, I warned against the Keynesian approach to recovery. In 2009, I had this to say about the administration's economic plans:
The White House and Congress are attempting in every way they can -- through tax cuts, rebates on home buying, and cash for clunkers -- to boost total spending. The cash-for-clunkers epitomizes the shortsightedness of it all. We paid billions of dollars for individuals to trash their existing cars and buy new ones. In general, the neo-Keynesians think about "stimulus" -- that is, aggregate demand -- without thinking much about the various needs and uses of public and private spending, or about the longer-term consequences of budget policies... Yet none of this will work. The U.S. economy, and the world economy, cannot recover sustainably by propping up consumers for yet another binge.
Consumption-led recovery was the wrong way to go then and it still is now. The entire crisis of 2008 began with a debt-financed consumption and housing binge that went wrong. By 2009, consumers were broke and exhausted. Wages of median workers had not risen for decades (!). Did the administration and Krugman really believe that a two-year temporary demand stimulus would truly do the job? They sure acted that way. Krugman wanted an even larger stimulus, which would have caused an even greater surge in the debt-to-GDP ratio than we've had. But it would again have been at best a temporary salve, and most likely done little to spur a permanent recovery.
Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century. We are sitting on top of an information revolution and nanotechnology revolution that could positively reshape healthcare, education, transportation, low-carbon energy systems, green buildings, water conservation, and environmental safety.
What are we doing about it? Very little, alas. Just look at the paucity of actual investments being made. There is so little dynamism. The wondrous IT revolution, with its potential to remake our economy as a world leader in efficiency and quality of services, needs to be much more than new apps for smartphones and new ways to sell online advertising through social media.
Obama's political advisors were woefully shortsighted in 2009, and the president himself was badly misled by the simplicity of Keynesian stimulus, to the point of believing that "shovel-ready" projects would surge with just a little fiscal pump priming. How sad. What a lost opportunity. There were no such shovel-ready projects, as the president later acknowledged.
Large-scale investments remain impeded because the U.S. lacks basic strategies in all key sectors. We have no national energy strategy other than fracking; no modern transportation strategy; no coastal protection strategy; no jobs-training strategy. The list of "no strategies" goes on. The result is that we have little investment dynamism where we need it, and continue to hope for spending in the old standard-bearers: housing, cars, and consumption goods. In the meantime, competitors like China are shaping their economies for the technological advances of the 21st century.
We need, in short, a new macroeconomics that moves us beyond the tired debates over public debts and short-term stimulus. Here's what I wrote about such a new framework back in 2009:
Macroeconomists trained in the past 30 years believe that demand increases depend mainly on interest rates and deficit or tax levels. Yet increased spending on renewable or nuclear power plants, a robust power grid, carbon-capture and sequestration, wastewater treatment facilities, fast inter-city rail, higher education, urban co-generation of electricity and heat, green buildings, and countless other new sustainable technologies, will depend on establishing a policy framework that harmonizes regulations, land use, public financing, and private investment. Large-scale stimulus, in other words, requires the nitty-gritty of public-private planning, technology assessments, demonstration projects, and complex project financing.The new tools of macroeconomics, therefore, are quite different from the existing tools. The new tools begin with a medium-term (say, ten-year) budget framework, so that tax policies are not pulled out of thin air or campaign rhetoric, but reflect the calculated needs for public outlays; a medium-term set of income distributional goals and strategies, especially to break the back of child-poverty, rising school drop-out rates, and training for low-skilled workers; structural objectives regarding the rebuilding of infrastructure and the transition to a low-carbon economy; and a new set of institutions to carry out these policies. The new institutions might include a National Infrastructure Bank, as Obama mentioned during the campaign, to help finance public-private partnerships in energy, water, and transport. The Energy Department might be reconstituted as the Department of Energy and Climate Change, to bring the requisite expertise and financing for the low-carbon economy under one roof.
Many progressives will no doubt say that I'm being unfair to the Keynesians, and that they too would favor an investment strategy if the Republicans didn't block them. I hope that's true. Yet Keynesian stimulus repeatedly takes our eyes off the long term. We need a new approach to growth, not another quick fix. And if the time is not right politically for an investment-led approach, it will become right the more we prepare and advocate for it.
Follow Jeffrey Sachs on Twitter: www.twitter.com/JeffDSachs
8 comments:
This article talks about how the US uses short-term policies in order to try and revive the economy when in fact longer term policies would be more beneficial. The US policies in place are focused on fixing the economic crisis for the time being by creating short-term demand, rather than fixing what caused the crisis. The article states how both Summers and Krugman were in favor of Keynesian, the idea of a larger budget deficit and shorter term stimulus, but the deficit is already extremely large. Increasing the deficit any more without having any plans in place to start paying it off would jeopardize the entire economy even further. The increased debt that would come from the increase in the deficit would devalue the dollar since there would be nothing to back up the debt. In addition, the article also discusses how our competitor, China, has a better economy due to their focus on the technological advances of the 21st century. I agree with the fact that China’s education also outshines that of America’s. The Chinese have the drive to work hard to achieve their goals and earn the reward where Americans are now seen as “lazy”. Americans have had so much for several generations now that they freely give everything to their children who have become good at using the technology around them, but they now lack the drive to work hard for it as they are used to being given everything. When Obama put in place his idea of extending the unemployment benefits for the time being he too added to the economic crisis because he allowed people to continue receiving benefits for years. Though some people using the extensions actually were looking for jobs and needed the benefits there were many people that abused the system. This caused an increase in the deficit. In conclusion, it is now seen that the US economy needs longer term policies put into place because these short-term policies weren’t beneficial in the long run.
I agree with this article, the United States needs to start using the new technology at hand and benefit from it. With that in mind the US should alter some of its macroeconomics to coincide with the evolution of technology. Like the article stats the US needs to get away from the idea of Keynesian and focus more on long term growth. This way has helped the US in the past such as in the 1950s where highways and suburbs were created to keep up with the rising population of that era, the same must be done with the technological era. Like the article stats we must begin to invest in information technology, smart grids, and low carbon energy. The Chinese have started to adapt their economy to the modern age and so must we if we want to get out of this Recession. The US has already tried the short term methods of Keynesian and we have seen how bad that turned out. In the past the US has been great at investing long term in new modern capabilities, and it must do that again. It can't keep fooling itself to believe that these short term highly budgeted methods are going to spur the economy enough to get out of this debt. It must be done with a well thought out long term method of investing into the new technology.
The US should be think more updated when it comes to the economy. What worked years ago will certainly not work now. Demands and priorities have altered immensely. We already have the highest debt in history, we do not need any more debt. Our economy may collapse if it continues on the wrong path. We owe China trillions of dollars and a lot of Europe is in turmoil economically, not many countries could help us if need be. I agree with Matthew we do need to invest in low carbon energy and information technology, they are things that would benefit everyone. Short term fixes are not helpful, we need strategic and affordable plans to help us for the long run.
Marissa Cotroneo said.....
I agree with what the article is stating. Congress's idea of making consumers spend more money on products to bring the economy back up was illogical. Why would you want consumers to buy more products when they are already in deep debt; that is the whole reason why we were put into recession? Consumers were given loans for houses that they could not or ever afford. Going forth with that plan would just bring us back to square one. The only true solution to solving our economic crisis is to put an emphasis on education and technology. Just like the article stated we need to invest in carbon energy, information technology, and waste water treatment plants, faster in city rails, and green buildings. We need to focus less on the macroeconomics and more on the microeconomics. The only way to rebuild our economy is by training unskilled workers, putting an emphasis on small businesses, and using our technology wisely.
Jeffrey Sachs brought up in this article not only the economic issues the Unites States gained in 2008 and continues to struggle with to this day, but importantly he focuses on the different approaches and ideas economists contributed in economic recovery. The article states that the U.S. needs investment led growth as opposed to consumption led growth, the method that the White House and Congress has been using. Although investment led growth has been effective in being a quick fix, in the long run it's hurting our country economically and not aiding us in rising out of this recession but rather keeping us in the issue. With our ineffective methods, the United States lacks a national energy strategy other than fracting, has no modern transportation strategy, no coastal protection strategy, no jobs-training strategy and etc. and China is ahead of us, shaping their economies for technological advances rather than having little investment dynamism in the U.S. Economists like Larry Summers and Paul Krugman frustrate Americans in their views on the issue, especially due to the fact that they played a part in the downfall of the economy. Both encouraged the use of Keynesianism but failed to deal with the question of how it should respond to the causes of crisis. In the meantime, the debt-to-GDP doubled. Jeffrey Sachs believes that we need a new approach to growth not another quick fix and I agree. Relying on consumption of cars, houses and other needs/wants and inflation in order to gain money will not help America rise as a power economic nation. We should follow suit of the Chinese and focus more on advancing for the future rather than only trying to get by now. If we develop strategies as the article stated we clearly lack, we could work on slowly but surely bettering the country financially and building a base on which we could lean on so I the future we can have a strong economic rise. I do believe that the economy can get back to the way it was, it could even become better than it was but we must, as Sachs said, focus on creating a new approach.
I agree with this article, the US needs a new kind of economics. We are currently in a 17 trillion dollar deficit and it is projected to grow even more after 2015. The Keynesian policies behind Summers and Krugman need to change. The short term spending in housing, cars and consumer goods is not the answer to curing the economy. We need to make smarter long term investments. Yes it will take much longer and we will not see immediate results, but it is best for our economy in the long run. We are currently in a massive technological revolution. As Matt said we should be investing in information technology, smart grids, and low carbon energy that would benefit our nation for the future. As the article said, the US economy has no investment dynamism. We are investing in the same markets that are not effective. We need to distribute our money to newer growing markets that will help us in the future. Technology is the future and the US has to invest in the long run because the short term stimulus programs are not effective anymore.
The article provided a lot more than I expected. I do feel that the author was slightly one sided by using their own work to back up their writings, if there had been more information from sources other than the author it would have furthered their point. But overall I must say I do agree, a quick fix is just that a quick fix, along with the other problems that the author identifies, we truly need to reshape many capacities of our government so that the future is full of possibilities and we are not burdening any group of people or even tricking them into doing something just to gain a small step elsewhere. Instead we need to create a solid plan for the future, but the problem is that because there are so many groups of people involved, with so many different opinions of how the plans to fix anything should happen are different, a complete and well structured plan that everyone can agree on is a far off future that I do not see happening for quite some time.
Along with long term policies, the government needs to look at what we need and take aspects from other governments to aid them with the design. By creating training programs for people to access jobs that they otherwise would not have the chance at, we are improving the entire spectrum. Nothing is a single issue and they should combine issues of similar nature to create a more well rounded plan so that more issues are fixed with less time and money contributed to the plan itself.
-Beverly Levine
I agree with this article. It is very clear to many intelligent people that we need to rework the macroeconomy. Any "quick fix" will not be enough for America. China has been excelling and making us look bad for years. The Chinese make us look bad and there needs to be a permanent fix to get America back on top. The idea of a larger budget deficit and shorter term stimulus, Keynesian, is a smart idea to help us improve. The United States must start using the new technology at hand and surpass the numbers of other countries. We need to stop being naive by believing these short-term fixes are going to improve the economy. The worlds economy is constantly changing and what has worked in the past will not work anymore.
Katherine Haas
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