|Time to plan for post-Keynesian era
By Jeffrey Sachs
Mainstream Keynesian economics is facing its last hurrah. The global
fiscal stimulus championed last year by the Obama administration is
coming undone, repudiated by the same Group of 20 that endorsed it
last year. Now, against a backdrop of a widening sovereign debt
crisis, we need to abandon short-term thinking in favour of the
long-term investments needed for sustained recovery.
Keynesian stimulus was premised on four dubious propositions: that it
was needed to prevent a global depression; that a short-run fiscal
boost would jump-start the economy; that “shovel-ready projects” could
combine short-term cyclical and long-term structural agendas; and,
last, that the rapid rise of public debt occasioned by stimulus need
not be a concern. That these ideas were so widely accepted was a
testament to the perennial political attractiveness of tax cuts and
In fact, the ubiquitous references last year to the Great Depression
were glib; the policymakers had panicked. Adroit central banking could
and would prevent depression. The hastily assembled stimulus packages
were a throwback to naive Keynesianism. The relevant fact was that the
US, UK, Ireland, Spain, Greece and others had over-borrowed for a
decade, so a decline in consumption after 2007 was not an anomaly to
be fought but an adjustment to be accepted.
Certain counter-cyclical spending is vital on social grounds. But
stimulus measures such as temporary tax cuts for households or car
scrappage schemes were dispiriting wastes of scarce time and money.
They reflected a hope that a temporary fiscal bridge would carry us
back to consumption and housing-led growth – a dubious proposition
since the old “normal” had been financially unsustainable.
The talk of a green recovery, in which the fall in consumer spending
would be offset by investments in sustainable energy, made sense and
still does. Yet it was quickly undermined by the politicians’
insistence on “shovel-ready” projects. The shift to sustainable energy
systems is a vital but long-term task. It could never be a short-term
jobs programme. Maybe in China there are shovel-ready projects of
sufficient scale, but not in the US.
Taking office in January 2009, President Barack Obama inherited the
largest peacetime budget deficit in US history. By increasing it
further, he made it his rather than his predecessor’s. He and his
advisers ignored one of the key insights of modern macroeconomics:
that the result of fiscal policy depends not only on current taxes and
spending but also on their expected trajectories in the future.
The US was not in a credible position to raise an already enormous
deficit “temporarily” because the prospect for future deficit cutting
was and remains extremely clouded. America has absolutely no consensus
on how to restore budget balance, as it is trapped between a federal
government that provides too few public investments and services and a
public [all of it??] that is almost maniacal in its opposition to tax
rises. One cannot build a credible long-term fiscal policy by starting
off in the wrong direction, with larger rather than smaller deficits.
Now we face a world economy with weak aggregate demand in the US and
Europe, bulging budget deficits, sovereign debt downgrading and
consumers unwilling to borrow. Governments are fighting for market
credibility via draconian cuts in spending. This too is the wrong
approach. We should avoid a simplistic austerity to follow the
simplistic stimulus of last year. Here are some suggested guidelines.
First, governments should work within a medium-term budget framework
of five years, and within a decade-long strategy on economic
transformation. Deficit cutting should start now, not later, to
achieve manageable debt-to-GDP ratios before 2015.
Second, governments should explain, and the public should learn, that
there is little that economic policy can do to create high-quality
jobs in the short term. Good jobs result from good education,
cutting-edge technology, reliable infrastructure and adequate outlays
of private capital, and thus are the outcome of years of sustained
public and private investments. Governments need actively to promote
Third, governments must of course also ensure social safety nets:
income support for the poor, universal access to basic healthcare and
education, a scaling up of job training programmes and promotion of
Fourth, governments should steer their economies towards needed
long-term structural transformation. External-deficit countries such
as the US and UK will need to promote exports over the next few years,
while all countries must promote clean energy and new transport
Fifth, governments and the public should insist that the rich pay more
in income and wealth taxes – indeed, a lot more. The upward
re-distribution of the past 25 years has made our economies into
extravagant playgrounds for the super-wealthy. Politicians of both the
mainstream left and right in the US and UK have fawned over those who
pay their campaign bills in return for low taxation. Even playgrounds
should collect tolls – when it is billionaires in the sandpit.
We need, in sum, to reset our macroeconomic timetables. There are no
short-term miracles, only the threat of more bubbles if we pursue
economic illusions. To rebuild our economies, the watchword must be
investment rather than stimulus.
The writer is director of The Earth Institute at Columbia University