Economic Policy Beyond Gimmicks

It's hard to imagine a less satisfactory jobs report at this stage of President Obama's term. The economy is dead in the water. Obama has no plan but to wait for the upturn. Mitt Romney's plan to cut taxes would be disastrously worse, plunging us into a deep financial and social crisis.

It's long past time to face basic facts. America's economic problems are structural and will not be solved by more tax cuts, quantitative easing, or short-term stimulus. Neither party offers real solutions, though the Republicans' policies would drive us much faster to ruin.

The big mistake of Obama and his economic team from the start was to treat the downturn as a temporary recession, albeit a very big one. A temporary recession requires a temporary fix. A structural crisis requires long-term strategies. Here we are in 2012 without any long-term strategies except to wait out the crisis.

Real solutions require fresh strategies to break free of vested interests in energy, healthcare, education, and infrastructure. In other words, in today's political environment, real solutions won't happen any time soon. We are stuck.

All of this was reasonably clear at the start of the Obama Administration. In 2009 I argued against Washington's reliance on short-term Keynesian stimulus:

[T]he stimulus tools of standard macroeconomics are spent. Interest rates are near zero but debt-ridden, unemployed, and frightened households can no longer pick up the pace. Keynesians urge even greater budget deficits, though the $1.4 trillion hole in fiscal year 2009 must give pause. The federal budget gap is now so large that the deficit has itself become a major source of anxiety and uncertainty. Another tax cut would be more likely to frighten than stimulate the economy. Anybody who adds across budget columns will realize that the federal budget is at the breaking point, and needs higher rather than lower tax revenues. The Federal Government collects a mere 18 percent of GNP in revenues, which are fully swallowed up by spending on health and retirement, the military, and interest payments on the debt. The rest of government, including infrastructure, science, education, climate, energy, poverty reduction, and public administration, is financed by borrowing, with China the largest creditor.

The situation is worse today. The tax system has been so gutted by a series of "temporary" tax cuts, agreed by the White House and Congress, that revenues for fiscal year 2012 are below 16 percent of GDP, the lowest rate in forty years.

In the meantime, the job market is stuck. Today's unemployed and under-employed workers do not have the skills that businesses are seeking. Broadly speaking, those with a bachelor's degree are faring much better than those without. Employment for those with a bachelor's degree and above has increased by 1.75 million jobs during the past year (August 2011 to August 2012), while it has declined by 330 thousand jobs for those with at most a high-school diploma. Even many new college grads are having trouble finding work, since their college education did not give them marketable skills and since we have few school-to-work job training programs (as in countries like Germany where youth unemployment is at very low levels).

None of this is going to change any time soon. The lack of federal budget revenues means that there is no funding for education, job skills, training, apprenticeships, and public investments in infrastructure. Yes, President Obama repeatedly calls for all of these good things, but the Administration has no plans to fund them. Obama's plan to raise taxes on the top income earners is good policy but very small, resulting in less than one percent of GDP in revenues. The scary truth is that Obama's budget plans call for a continuing cut of civilian government programs relative to GDP through 2021. If Romney is elected, taxes will be gutted further, so that spending cuts will be far deeper, enough to cripple the economy and create massive social unrest.

A true recovery should be investment led rather than consumption led. We need long-term investments in human capital (skills) and in key infrastructure such as low-carbon energy systems, smart grids for cities, cutting-edge information and management systems for low-cost integrated healthcare delivery, and inter-city fast rail. These investments are inevitably a mix of private investments and public investments, with the mix differing according to the sector in question.

As I pointed out in 2009, the tools to promote such investment-led growth are not the Keynesian tools of short-run stimulus:

Macroeconomists trained in the past thirty 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.

We have wasted the past four years trying to revive the economy by turning macroeconomic dials without paying attention to the real economy. We have no serious strategies. Our energy strategy has become "Frack, Baby, Frack." We are going nowhere in advanced transport, renewable energy, or breakthroughs in lowering health care costs.

The question for America is how we are going to break free of this low-level trap. First, we will need a government that is not subservient to the status-quo corporate interests blocking innovation in key sectors such as health, transport, and energy. Second, we need a government that can strategize, not just improvise. Third, we need to end the nonsensical bluster against government. Our specialist scientific agencies are still doing amazing things right before our eyes this year: exploring Mars and unlocking the complex mysteries of the human genome. We could be doing a lot more to solve our social and economic problems and to re-establish our prosperity if we put our confidence back into science, technology, advanced training, and public-private partnerships.

 

 

 

Follow Jeffrey Sachs on Twitter: www.twitter.com/JeffDSachs

Comments

[wkaras]

09:17 PM on 09/11/2012

When you divide the cost of the stimulus by the number of jobs the administration states it created or saved, you get a 6-figure result. So perhaps the mediocre results of the stimulus result from its incompetent execution as well as its inability to fix long-term problems overnight. Is it unreasonable to think those who built new buildings during the real estate bubble are competent enough to contribute to the rebuilding of crumbling infrastructure? Credit markets will tolerate a few more years of US deficits if its clear there is a consensus to address the debt when the current crisis subsides. For example, the Congress should vote in, by a large margin, something like the Ryan plan for Medicare as a default fallback solution if no better way is found to keep the program solvent. Likewise with the Bush plan to handle potential insolvency of the Social Security Trust Fund. It's true that none of this substitutes for or eliminates the need for the public sector to play its indispensable part in training workers with the skills that the private sector desperately needs.

[MilesToGo]

05:19 PM on 09/11/2012

Sachs' suggestions are wise and appropriate. Thus, it's not likely they will be fully put to work. One doubts that all Americans are prepared to make the needed sacrifices to get the political economy moving forcefully in the right direction. But let's hope so.

FDR got business, labor and government to work smoothly together during World War Two, when America faced a dire external threat. Now we face an obvious and more serious internal threat. It's time to come together again and work in unison to get America back on track. Expanding of public-private investments is a practical and great strategy. It's begun in Denver and a few other places. It needs to happen across the country, in every state. Ongoing vilification of businesses and banks, unions and government must end. The synergy that can result from this tripartite dynamic can do a whole lot to continue the current weak recovery.

[ethels]

12:41 PM on 09/11/2012

Must we plunge even further before you and your fellow thinkers will be heard? I continue to feel that we can accomplish what you espouse. Are we witnessing the decline of the American Empire? If an estimated portion (2/3) of our electorate is low information and worse, where can support for your ideas gain attention? I keep saying that our salvation is dependent on an educated populace that accepts its responsibilty to elect good representatives and keep after them. Can you give me reason to hope?

[vidtrainer110]

11:09 PM on 09/10/2012

Sachs has some points. The stimulus could have been used to address some of these issues (and they did make some useful energy investments, Solyndra aside) Clearly the Obama administration misread the situation. We still need more stimulus and higher taxes and massive tax reform...and probably a VAT. We need to start favoring non financial investment (Wall Street won't like that) and address some of our problematic trade agreements. A better energy policy that embraces (and incents) conservation could be a game changer. Finally, serious changes are needed in education (it costs too much) and the transition to work.

[MilesToGo]

04:47 PM on 09/11/2012

A fairly good summary of Sachs' wise key suggestions...but Obama and his administration didn't so much misread the situation in 2009. Political realities severely limited and constrained many strategies that could have been helpful--the stimulus limits being most obvious; some wise advisors knew much more was needed, but this was not going to happen. Public-private entrepreneurial possibilities then were moribund. Corporate America and Wall Street were still stunned catatonic by the previous year. That was then and this is now. The mistakes and lassitude of the past need discarding. Actions such as Sachs has outlined and which you've added to here need to happen, and soon...or the downward spiral will just continue, gaining acceleration.

[vidtrainer110]

08:05 AM on 09/12/2012

Obama is a smart guy. Maybe he can do some of these things in a second term. My analogy would be that he at least stabilized the patient somewhat before doing major surgery.
The sooner we start addressing some of the issues Sachs is bringing up, the better, but politics is the art of the possible. We aren't even discussing many of these issues in a serious way and the politics of such obviously good policy as energy conservation is a mine field. It amazes me that energy conservation is even mildly controversial, but I can imagine the nasty conversation if it such a conservation policy was made the center of his energy policy. And that is just one issue (admittedly, a big one).
One of the great things about our economy is that it can adjust quickly once a new direction is set. I am still optimistic because we have a ton of natural and other resources, but I don't think we can be complacent.

[becky bradshaw]

09:33 PM on 09/10/2012

1. Obama did not treat the recession as a "temporary recession". It is the worst kind of Monday morning quarterbacking to second guess, policies that basically saved the world economy from collapse. We should not forget: the U.S. economy was LOSING 800,000 jobs per month when Bush Jr. retired. (1)

2. Obama has been President for about 40 months. Much of Obama's agenda will go into effect over the next three years. It took about 30 years of gross Washington and Wall Street mismanagement to get us into this hole. It will take 20+ years to get out of it. (2)

If the problems are structural, change the structure. Since 2001, when China was granted WTO status, the U.S. economy has lost more that 50,000 manufacturing jobs per month. (3)

Everyone knows the problem. But there is Good News! The number of mega yachts has increased by more than 400% in the last 15 years!

References:
1. http://www.dailykos.com/story/2011/08/28/1011405/-Three-Charts-To-Email-To-Your-Right-Wing-Brother-In-Law
2. http://www.motherjones.com/mojo/2012/05/ted-talk-income-inequality-charts
3. http://theeconomiccollapseblog.com/archives/how-can-america-create-wealth-if-our-industrial-base-is-destroyed-50000-manufacturing-jobs-have-been-lost-every-month-since-2001
4. http://www.msnbc.msn.com/id/25804188/ns/travel-luxury_travel/t/where-big-boys-go-berth/

[econ1]

07:05 PM on 09/10/2012

There was an excellent report on NPR with economists from all political persuasions and they all agreed that the tax code (for both individuals and corporations) was a significant drag on the economy and needed to be re-written....they even agreed on how. The 16,000 pages of accumulated credits, deductions and political payoffs is crushing the US economy by encouraging inefficient behavior (you can do better working on your taxes than on new products). Eliminate all the deductions and credits and lower the rates....raise the same amount of money as before. Then, say you have a policy that folks should have houses, send every homeowner a $5,000 check each year. Far fairer than the mortgage deduction worth 10x as much on a $1million house as a $100,000 one....and contribution to our over investment in big houses.

[becky bradshaw]

10:04 PM on 09/10/2012

Fine. Tweak the tax code. It happens every couple of years. But do not imply this is the solution.

The worse outcome of our current situation would be more superficial changes. We face structural challenges. 50,000 manufacturing jobs per month have been lost to China and India over the last 12 years. Any politician who offers the same discredited policies (see trickle down economics) is in over his head.

[econ1]

12:45 PM on 09/11/2012

That would not be a tweak (think reducing 16,000 pages to maybe 200). Just raising taxes on $200,000aires is a tweak. But not to worry, Congress isn't going to change a code they get to play with.

[sheila]

06:33 PM on 09/10/2012

Three words - FEED IN TARIFF

WE will make the investments in local, point of use clean energy systems, WE will benefit from the improved property values, the increased number of well-paid (non-outsourceable) jobs, cleaner air and fair returns on our investments and WE will democratize, clean and decentralize our energy economy and infrastructure. NO dead wilderness, GHG emissions, wasteful Big Solar/Big Wind boondoggles, dead raptors/bats and tortoises, no water waste, transmission (and transmission losses), no grid vulnerability from centralized power going offline. Just a SUSTAINABLE, DEMOCRATIC, RELIABLE, AFFORDABLE energy infrastructure that encourages conservation and costs taxpayers NOTHING.

When can we start? Over 40 countries are already fluorishing with this program...

[SantaMonican]

01:39 PM on 09/10/2012

Jeffrey, you must have selective amnesia.

It's easy to imagine a less satisfactory jobs report. Bush was losing hundreds of thousands of jobs a month at the end of his presidency, and we just achieved the 30th straight month of private sector job GROWTH.

Just imagine how much better the job situation would be if the minority in the senate hadn't been using record obstruction to block a recovery, something Bush never had to deal with.

[Wayne Caswell]

10:01 AM on 09/10/2012

"A structural crisis requires long-term strategies." But private companies have a short-term focus, measuring success in terms such as Profit, ROI, and Payback Period. Governments, on the other hand, can not only make longer-term investments, but they also measure success differently, and that's why government is BETTER positioned to take on many strategic initiatives than private enterprise. Better still are public/private partnerships, but they must be government driven and exploit the contrasting incentives of each sector.

[daybranch]

09:23 AM on 09/10/2012

First to imply that lowering short term interest rates and temporary stimulus are not part of any long term plan is ridiculous. This economist would continue short term fixes until the economy was back on track even as he made investments for the long term.
Second Keynesian economics supports long term improvements by removing the depths of recessions and allowing a quicker recovery.
Third President Obama is leveling with the American people in his plan and in his vision by telling them there are decades of problems and we will have a long journey to our goals of a prosperous and sustainable economy.
We democrats realize the road is hard and we glory in the fight as we move the country forward. George Bush woke us up, we know who is on the side of the people and we know if we keep supporting the people by electing democrats at all levels, the kinds of things the economist envisions will happen because we set the environment to make it happen.
This article was irresponsible because in trying to appear objective the writer asks us to believe economics are apolitical. There is nothing new here and we progressives know it. \We have to win tactical battles to win the strategic war. The writer although progressive but has a worse sense of fair and balanced than Faux News, lets the perfect be the enemy of the good, and forgets that politics is the art of the possible. Vote for President Obama.

[gutenmorgen]

09:10 AM on 09/10/2012

This is an excellent analysis except for one big blooper in the final segment. I quote: "The lack of federal budget revenues means that there is no funding for education, job skills, training, apprenticeships, and public investments in infrastructure".
These are crocodile tears. Some revenue is spent in Afghanistan/Pakistan and, more generally, in the monstrously bloated defense budget. If nothing is done on this then our grand armed forces will defend a nation in permanent depression. Why are you silent on this issue Mr. Sachs?

[Gary Tucker]

09:05 AM on 09/10/2012

Sachs likes to ride into countries on a white horse, throw the economy into chaos, sell everything in sight to the highest bidder, slash tariffs one way so the US can flood the countries with cheap US imports and ruin any local economic industries and then pick up the kudos from western media and ride off into the sunset. The then said countries are left with decades long social turmoil, class warfare, staggering loss of long term health and life spans and decimation of local industries. Russia, large parts of Eastern Europe and Bolivia have yet to recover. Thanks but no thanks.

[eyelashviper]

11:26 AM on 09/11/2012

Agree totally, Sachs has the audacity to lecture, when he was a big part of globalization, privatization, and the wrecking of economies throughout the world. Naomi Klein's "Shock Doctrine" is an excellent book, depicting these practices all over the globe, and Sachs was a big player.
fanned.

[Gary Tucker]

08:49 PM on 09/12/2012

I must admit I am all in favor of globalization, privatization and world trade. I just do not think it is done on a fair and two way street. I believe that their should be no boundaries to the movement of ideas, money and people. But again a level playing field which the US, in all its democratic bravado, is perhaps one of the worst abusers.

[frank1946]

09:03 AM on 09/10/2012

Sachs, there is no Business Confidence in the Obama Administration !

Private Sector is paranoid of DEMS and Taxes and USA Political Leaders.

Meanwhile, Federal Spending/GDP is 80 % in FY 2013.

America is heading into Monetary Default......................very ugly !

Tea Party is only group to even talk about it.

[den1953]

08:18 AM on 09/10/2012

What i don't understand is if this is suppose to be a middle class economy driven indicator then why if those consumers would complain to the retailers their just isn't enough made in America goods on the selves, one would think that could boost American industry if that demand was in the fore front of American consumption?

[joyce628]

08:07 AM on 09/10/2012

This nation is in a very bad way...We have a congress where all the republicans decided from the day President Obama was sworn into office to block all of his agenda, including all job creation measures to pull this nation out of its near total economic collapse after 8 years of republican rein. This is all to ensure that President Obama is a one term president and that the first black president will fail. It will be an up hill battle for President Obama to get anything down if he does not have the congress to work with him. At the state level in states that are controlled by republican legislators, they are carrying out the same tactic. This nation needs elected officials with vision and integrity and who are patriotic to move this nation forward to meet the challenges of the 21st century and to put this nation proudly on the map as a force to recon with. Rewarded corporations for outsourcing US jobs to China is not going to cut it… It’s like taking down your own nation from within.